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International Trade and Foreign Direct Investment: Substitutes or Complements?

Published online by Cambridge University Press:  28 April 2015

Mary A. Marchant ,
Dyana N. Cornell  and
Won Koo
Mary A. Marchant
Affiliation:
Department of Agricultural Economics, University of Kentucky, Lexington
Dyana N. Cornell
Affiliation:
Department of Agricultural Economics, University of Kentucky, Lexington
Won Koo
Affiliation:
Department of Agribusiness and Applied Economics, North Dakota State University, Fargo
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Abstract

International agricultural trade has evolved over time. Processed foods and developing countries have become major growth markets for U.S. agricultural exports, and foreign direct investment (FDI) has become even more important than exports as a means of accessing foreign markets. The critical question is whether FDI is a substitute for or a complement of exports. This research builds upon an existing theoretical FDI model and contributes to the literature through the development of a simultaneous equation system for FDI and exports, which is estimated using two-stage least squares. Empirical analyses were used to examine the relationship between U.S. FDI and exports of processed foods into East Asian countries-China, Japan, Singapore, South Korea, and Taiwan-from 1989 to 1998. The results indicated a complementary relationship between FDI and exports. Additionally, these results indicated that interest rates, exchange rates, gross domestic product (GDP), and compensation rates are important variables that influence U.S. FDI in East Asian countries, while GDP, exchange rates, and export prices are important export determinants.

Keywords

East Asiaexportsforeign direct investmentinternational tradeprocessed foodsF47Q17C3F17
Type
Invited Paper Sessions
Information
Journal of Agricultural and Applied Economics , Volume 34 , Issue 2 , August 2002 , pp. 289 - 302
Copyright
Copyright © Southern Agricultural Economics Association 2002

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