FDI And Trade: Complements And Substitutes

Topics:
Foreign Direct Investment
Tags:
Currency & Foreign Exchange,
Finance,
Foreign Direct Investment,
Foreign Direct Investment (FDI),
Investment
Source:
Technical University of Lisbon

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Overview: The theory of location of firms that engage in Foreign Direct Investment (FDI) presents two opposing views on the relationship between FDI and trade. On the one hand, horizontal FDI displaces trade: instead of exporting, the firm sets up a subsidiary in the foreign country, trading off lower trade costs against higher fixed costs. This paper presents a non-monotonic relationship between foreign direct investment and trade based on the idea that, although FDI eliminates trade costs on the final good, the investing firm has to bear increased trade costs on an intermediate good.

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Format: PDF | Size: 129KB | Date: Oct 2005 | Pages: 8

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