| Many empirical studies have investigated the relationship between foreign direct investment (FDI) and trade policy, including protectionist threats. However, the literature's focus has mainly been on the influence that trade policy has on a foreign firm's FDI decision and usually not on the possibility that higher FDI might reduce the level of trade protection in the host country. This dissertation consists of two empirical studies that address the above shortcomings of past literature through analysis of two different sets of data. The first essay uses a cross-sectional data set of total U.S. inward FDI for 1988 and the second one uses a panel data set of Korean FDI in the U.S. from 1982 through 1998. Both essays test whether tariff-jumping FDI theory and quid pro quo FDI theory hold in these different settings. In addition, the second paper investigates what factors made Korean FDI possible in the U.S., contrary to the general perception that developing countries usually invest in poorer countries rather than in developed countries.; Neither analysis finds evidence of tariff-jumping FDI, but the cross-sectional analysis supports the quid pro quo theory by showing that increases in FDI lead to a reduction in tariffs. In the panel study, the FDI of Korean firms is shown to respond positively to protectionist threats represented by the probability of protection and the U.S. trade deficit. In sum, this dissertation suggests that the relationship between foreign direct investment and trade policy is inherently simultaneous. |
