An Empirical Assessment of a Tradeoff Between FDI and Exports

Author: 
Hongshik Lee, Joon Hyung Lee
JEL codes: 
Description: 
KIEP Working Paper 07-05
Abstract: 

The relation between exports and FDI could be complementary or
substitutable depending on the types of FDI. Overseas investment to
displace exports must have a substitution relation while FDI for
vertical fragmentation between countries would boost the home export.
Empirical studies have generally found a positive relation and finding
a substitution relation is relatively recent. We investigate the relation
between those two variables using detailed information of Korean
multinational firms and their foreign affiliates from 1999 to 2004. In so
doing, unlike previous studies, we consider the host countrys income
level and various activities of each affiliate, whether it serves the host
country or exports outside in particular. The complementary relation is
found by simply following previous studies. Once we consider the
host countrys income level and various activities of each affiliate,
however, different results are produced. Our empirical results show
substitution if the affiliates are located in a developed country and
mainly serve the host country, while complementarity if the affiliates
export their products outside of the host country. Moreover, the
complementary effect is strengthened if they are located in a less
developed country.