Vertical Trade, Trade Costs and FDI

Sébastien Miroudot and Alexandros Ragoussis
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Alexandros Ragoussis: OECD

No 89, OECD Trade Policy Papers from OECD Publishing

Abstract: Firms find advantages in sourcing inputs from abroad and in fragmenting their production process. On average, vertical trade represents about one third of total trade among OECD countries. This report describes and illustrates new firm strategies of vertical specialisation and explores the policy implications of new patterns of trade and FDI. It is in services industries that vertical trade has increased the most in recent years. While vertical trade seems to respond to the same determinants as the rest of exports and imports, distance-related trade costs play a more important role in explaining the volume of bilateral trade flows resulting from vertical specialisation. Distance-related costs have a lower impact on foreign direct investment and sales of foreign affiliates but there is a complementary relationship between trade and FDI. Vertical specialisation networks have created new challenges for trade policymakers. In particular, growth of bilateral exchanges between countries depends increasingly on barriers to trade and investment in the rest of the world. Moreover, the impact of a country’s own trade barriers on domestic firms is significant in the context of vertical specialisation. The analysis stresses the importance of multilateral negotiations for trade and investment liberalisation.

Keywords: distance; export platform; FDI; firm strategy; MNEs; trade costs; trade liberalisation; vertical specialization; vertical trade (search for similar items in EconPapers)
Date: 2009-07-28
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (31)

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