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The relationship between foreign direct investment and international trade. Substitution or complementarity? A survey

Rosa Forte ()

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: Theoretically, the explanatory approaches of foreign direct investment (FDI), as for example, the internalization theory and the eclectic paradigm, and general equilibrium trade models that incorporate horizontal multinational firms (MNEs), sustain the existence of a substitution relationship between FDI and international trade. Models of vertical FDI and considerations concerning demand, for their part, support a complementarity relationship. Empirically, however, it is difficult to find substitution between the two variables. This work presents a review of the existing theoretical and empirical literature, highlighting the reasons that underlie the apparent incongruity between theory and empirical works, and drawing attention to gaps that should be corrected in future works.

Keywords: Foreign direct investment; multinational firms; international trade. (search for similar items in EconPapers)
JEL-codes: F12 F14 F23 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2004-03
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