Trade & applied econometrics

Abstract

This is the study of the relationship between FDI and trade flows from the perspective of inward and outward FDI for Vietnam in the 2001-2003 periods by applying a gravity model to panel data on the Vietnamese bilateral trade flows . The results of the study generally support the hypothesis of a weak complementary relationship between bilateral trade flows and FDI , while the impact of FDI on the trade balance is not as clear-cut . The results also confirm that FDI has different impacts on trade in various product groups according to their

br economic purpose 1 . INTRODUCTION

In several recent theoretical and empirical studies , it emphasizes that foreign direct investment (FDI ) has significantly influenced the trade patterns of host and investing countries in the last few decades . The activities of multinational enterprises (MNEs ) involving FDI and intra-firm trade affect the trade patterns of countries both directly and indirectly through the various effects FDI has on capital formation technology and managerial skill transfer , changes in competition etc Central and Eastern Asian countries (CEECs ) have experienced an increasing share in world trade and direct investment stimulated by the progress they have made in the transition process , trade and capital liberalization and regional economic integration . Vietnamese outward and inward FDl stock has been increasing at an average annual growth rate of approximately 10 , with outward FDI growth rates slightly exceeding those of inward FDI . In the same period , Vietnam has been facing a slow but persistent change in its trade structure , in terms of regional direction and product specialization according to economic purpose accompanied by relatively large and persistent trade deficits

International trade theories had examined the relationship and interaction between trade and FDI and these broad groups of theories were developed and applied separately but have been converging ever since Vernon 's (1966 ) theory of the product cycle addressed the dynamic aspect of the trade-FDI relationship . Within theories and analysis of the impacts of FDI the economy , capital stocks is adjusted through general-equilibrium mechanisms resulting in changes in production and consumption and , finally , in changing trade patterns . It is only when the concept of MNE was included in the models of international trade in the 1980s (Helpman and Krugman , 1986 Markusen , 1984 etc ) could the relationship between trade and FDI be studied explicitly within the framework of international trade theories (see section 2 . FDI 's impacts on trade depend to a certain extent on the motives and organization of international business activities . Trade and FDI arc traditionally regarded as alternative strategies used by MNEs to service foreign markets and thus , as a starting point , assume a substitution relationship between exports and local production . Yet empirical studies show that the partial substitution of local sales for previous imports from an investing company , which is expected in the case of horizontal 'market-seeking ' FDl , is often more than offset by the increase seen in imports of intermediate and investment goods and as well complementary final products from the parent company located in the investing country...