The effects of foreign direct investment on international trade: Empirical evidence from Germany, Japan and the United States

This thesis seeks to examine the relationship between foreign direct investment (FDI) and international trade. Specifically, two questions are raised: (i) Does outward FDI of a country complement or substitute international trade; that is, is FDI trade creating or trade replacing, and (ii) Do trade creating/replacing effects of FDI vary significantly across countries.; Past theoretical and empirical studies have shown that FDI tends to replace trade, but more recent evidence suggests the opposite, that is, FDI creates and complements trade. Most existing studies, however, do not specifically address the influence of specific interaction between home and host counties that may lead to either trade creation or trade replacement.; Trade creating effects of FDI were analyzed for major investing countries of Germany, Japan, and the United States (US). A gravity-like model is used to conduct this analysis using panel data from 1996 to 1999 and covering approximately 30 destination countries.; The results indicate that trade creating effects dominate on the whole, with outward FDI and trade of Germany, Japan, and the US showing a positive relationship. Moreover, the trade-creating effect varies significantly across host countries. All three countries investigated here show high trade affinities with high-income industrialized countries. However, trade affinities due to other factors like proximity, cultural ties, regional trade agreements, and policies adopted by home and host countries, tend to vary amongst the three countries.