Relationships between Trade and Fdi Flows within Two Panels of Us and French Industries

Abstract

Are trade and FDI flows complements or substitutes? The type of relationship obtained is highly dependent of the type of data used. We demonstrate why, and how much, trade and FDI are complements at the macro economic level. Spillovers between firms, within industries, and between industries, within the manufacturing sector, are a key issue. Biased estimates when models do not control for the fact that competitive industries export and invest more abroad are also an important concern. Having controlled for such events, we conclude that investing abroad is beneficial, ceteris paribus, to the competitiveness of the French industries. In the US case, outward FDI flows complement trade flows; investing abroad, however, is detrimental to the sectoral trade balance, or at best only slightly beneficial, depending on the combination of specific effects. For both countries inward FDI is detrimental to the trade balance in the industry considered. Lastly, we demonstrate why, and how much, trade and FDI are complements at the macro economic level. This is also partially due to spillovers between firms within industries and between industries within the manufacturing sector. This also partially due to biased estimates when models do not control for the fact that trade and FDI are the two faces of the same coin: the competitiveness of industries. JEL Classification: 421 441 Acknowledgements: We acknowledge for OECD-DSTI support to this research programme since 1996. The French Ministry of Finance and the CEPII have also provided support at different stages.

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