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The Indirect Effects of FDI on Trade: A Network Perspective

Rodolfo Metulini (), Massimo Riccaboni (), Paolo Sgrignoli and Zhen Zhu ()
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Zhen Zhu: IMT School for advanced studies

No 04/2017, Working Papers from IMT Institute for Advanced Studies Lucca

Abstract: The relationship between international trade and foreign direct investment (FDI) is one of the main features of globalization. In this paper we investigate the effects of FDI on trade from a network perspective, since FDI takes not only direct but also indirect channels from origin to destination countries because of firms' incentive to reduce tax burden, to minimize coordination costs, and to break barriers to market entry. We use a unique data set of international corporate control as a measure of stock FDI to construct a corporate control network (CCN) where the nodes are the countries and the edges are the corporate control relation ships. Based on the CCN, the network measures, i.e., the shortest path length and the communicability, are computed to capture the indirect channel of FDI. Empirically we find that corporate control has a positive effect on trade both directly and indirectly. The result is robust with different specifications and estimation strategies. Hence, our paper provides strong empirical evidence of the indirect effects of FDI on trade. Moreover, we identify a number of interplaying factors such as regional trade agreements and the region of Asia. We also find that the indirect effects are more pronounced for manufacturing sectors than for primary sectors such as oil extraction and agriculture.

Keywords: Networks; Foreign direct investment; Corporate control (search for similar items in EconPapers)
JEL-codes: C21 F10 F14 F23 L22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int, nep-sea and nep-tid
Date: 2017-03, Revised 2017-03
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Published in EIC working paper series

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http://eprints.imtlucca.it/3660/1/EIC_WP_4_2017.pdf First version, 2017

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