FDI and trade : two way linkages?

Abstract

The purpose of this paper is to investigate the intertemporal linkages between FDI and disaggregated measures of international trade. A model exemplifying some of these linkages is outlined, describing several methods for investigating two-way feedbacks between various categories of trade, and applying them to the recent experience of developing countries. After controlling for other macroeconomic and institutional effects, the strongest feedback between the sub-accounts is between FDI and manufacturing trade. More precisely, applying Geweke (1982)'s decomposition method, most of the linear feedback between trade and FDI (81%) can be accounted for by Granger-causality from FDI gross flows to trade openness (50%) and from trade to FDI (31%). The rest of the total linear feedback is attributable to simultaneous correlation between the two annual series.