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N° 1997 - 17 |
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| December |
| How Foreign Direct Investment Affects International
Trade and Competitivness : an Empirical Assesment |
Lionel Fontagné
Michael Pajot |
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The analysis of microeconomic agents' internationalisation
choices generally refers to trade and Foreign Direct Investment (FDI) as alternative
strategies. This substitution can nevertheless be called into doubt when the necessity
to compete on multiple foreign markets or under uncertainty is taken into account.
Concerning the theory of international trade, Mundell's classical conclusion has
been challenged on the basis of imperfect competition. Moreover, macroeconomic
series of trade and FDI highlight that these two modes of internationalisation
are clearly complements.
This debate has shed light on issues related to competitiveness: if FDI displaces trade, exports will be at least replaced by local sales on foreign markets, detrimental to the domestic industry of the investor. On the contrary, if trade and FDI are confirmed as complements, investing abroad might lead to greater competitiveness in foreign markets, which is beneficial to exports from the investing country and thus to its industry. In order to clarify these relationships, a bilateral and sectoral empirical approach is proposed based on a matching of trade and FDI data authorising a break down by industryand partner country. It permits to control for joint determinants of trade and FDI such as market size, per capita income or regional integration, or conversely for economies of scale having an opposite impact on both forms of internationalisation. Estimates are based on data of different, even though coherent, levels of disaggregation for France, the US, Sweden, the EU12, Japan, Italy and the Netherlands.
Using the most disaggregated data (French data), the diagnosis of complementarity between trade and FDI flows is validated for a panel of 19 industries. Outward FDI is associated additional exports and imports, in the industry considered, vis-à-vis the country of investment. But since the former increase more than the latter, investment abroad is associated with a trade surplus. Conversely, inward investment is associated with a trade deficit of the host country. Spillovers between industries are sizeable. The impact of FDI on trade is much higher when these spillovers are accounted for, even if the global trade surplus remains comparable with the one estimated at the "industry of investment" level. We conclude that a large share of the complementarity between trade and FDI at the macroeconomic level can be explained by large spillovers between industries. A comparison between France and the US highlights that the net trade surplus is roughly identical, even if US investment abroad has much stronger complementarity effects. As expected, the impact on trade is much weaker when inward FDI into the US is accounted for, given the difference in domestic market sizes. Results for the Swedish industry taken as a whole are unsatisfactory.
Turning to FDI taken as a whole: the complementarity is confirmed, but these complementarity effects are much smoother than for France or the US. Pooling the data for 14 declaring countries facing 15 partners, in one sector over 1984-1993, the asymmetry between the trade surplus associated with outward FDI flows and the trade deficit associated with inward FDI vanishes: the symmetry in parameter estimates is magnified by the enlargement of the country coverage. In addition, estimates have been made for French and US FDI stocks. Concerning France, outward FDI is clearly a complement for bilateral exports, but a substitute for imports. In contrast, inward FDI is a complement for both French exports and imports. Thus, French assets abroad boost bilateral exports and are associated with depressed French bilateral imports. The net impact on competitiveness is therefore clearly positive. Symmetrically, inward FDI is associated with a net trade deficit. Turning to the US, the complementarity between outward FDI stocks and bilateral trade is confirmed: what is striking is the fact that US imports are boosted as a result of relocation of activities abroad. Thus, in contrast to France, US foreign assets are associated with a net trade deficit. In contrast, foreign assets in the US are substitutive to trade, potentially due to previous tariff jumping strategies of foreign companies.
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