Extended abtract
FDI and exports from Spain: A heterogeneous panel causality approach
Authorsand e-mail:
Paula Gutiérrez-Portilla (e-mail: )
Adolfo Maza (e-mail: )
José Villaverde (e-mail: )
Department: Economics
University: Cantabria
Subject area: International trade, foreign direct investment and interregional flows
Keywords:Foreign direct investment, exports, Spain
JEL codes: F21; F40
Abstract:
Over the past decades, international trade and capital flows have experienced unprecedented growth. Indeed, globalization has allowed the internationalization of production thanks to the removal of tariff barriers and the reduction in transport costs.
In this setting, the relationship between foreign direct investment (FDI) and trade has long been a relevant issue for policymakers concerned about potential adverse effects of outward FDI on the balance of payments and employment. Additionally, whether outward FDI and exports are substitutes or complements has yielded a vast literature since the 1970s.
The theoretical literature on horizontal FDI predicts that a substitution relationship between FDI and trade prevails over complementarity. According to Markusen (1984), a multinational enterprise (MNE) chooses to serve foreign markets through FDI instead of exporting if the additional fixed cost of establishing a new plant in the foreign country is less than the fixed cost of a new firm. Another reason to engage in horizontal FDI is to avoid trade costs such as tariffs and transport costs. As pointed out in Brainard (1997), firms face the proximity-concentration trade-off: they have to decide between maximizing proximity to local markets and avoiding transport costs, and concentrating production to achieve economies of scale. When proximity outweighs concentration advantages, there is a substitution effect between FDI and trade.
The theoretical literature on vertical FDI predicts, however, a complementarity relationship between FDI and trade. In the models developed by Helpman (1984) and Helpman and Krugman (1985), the choice of an MNE about the location of its production depends on the differences in relative factor costs and resource endowments. Vertical FDI, which implies the splitting-up of the production process across different locations to take advantage of lower factor prices, will create more bilateral trade in intermediate goods between the home company and its foreign affiliates, thus boosting trade flows of final goods products too.
Recent studies developed byCarr et al. (2001) and Markusen (2002) have made attempts to combine both horizontal and vertical motives for FDI using what is known as the knowledge-capital (KK) model. This model predicts different combinations of horizontal and vertical MNEs depending on the home and host country characteristics(size, trade costs, factor endowments and so forth). Horizontal FDI prevails in countries with similar factor endowments and high trade costs whereas vertical FDI is prevalent when there are differences in the factor endowments of countries and trade costs are low. Thus, the KK model suggests that FDI and tradeare likely tosubstitute between developed countries while FDI and trade tend to complement between developed and developing countries.
More recent studies underline the importance of third countries in the relationship between FDI and trade. In this regard, Yeaple (2003) and Ekholm et al. (2007) develop models of export-platform FDI, where MNEs invest in a host country to serve third markets through exports of final goods from their affiliates in the host country. In contrast, Baltagi et al. (2007) develop a model of complex vertical FDI, where MNEs set up their vertical chain of the production process across multiple countries to benefit from their comparative advantages; this type of FDI is linked to exports of intermediate inputs from affiliates to third markets for the final processing.
Despite the theoretical reasons for both substitution and complementarity relationship between FDI and trade, no conclusions can be drawn by relying only on theoretical arguments. From an empirical point of view, the majority of existing studies predict a positive relationship between FDI and trade.However, some empirical studies find evidence of substitution.
Eaton and Tamura (1994) analyze the relationship between outward FDI and exports flows between Japan and the US during the period 1985-1990. Their results show that outward FDI increases exports for both countries.Similarly, Fontagné and Pajot (1997) find evidence in favor of complementarity between trade and FDI flows for France during the period 1984-1993, and to a lesser extent for the entire pool of countries considered. Alternatively, Pain and Wakelin (1998), examining 11 OECD countries over the period 1971-1995, conclude that outward FDI has an overall negative effect on trade. Clausing (2000) finds evidence of FDI boosting trade using data on the operations of the US MNEs in 29 host countries from 1977 to 1994. Similarly, Hejazi and Safarian (2001) find that outward FDI leads to an increase in exports using trade and FDI stock data between the US and 51 countries during the period 1982-1994. Pantulu and Poon (2003) analyze outward FDI of Japan and the US to 29 and 32 countries for the period 1996 to 1999. Their results indicate that trade-creating effect dominates on the whole.Using cointegration tests, Camarero and Tamarit (2004) find a complementarity relationship between trade and FDI in a panel of 13 OECD countries for the period 1981-1998. Türkcan (2007) use data on outward FDI stocks and final and intermediate goods exports in the US over the period 1989-2003. His results point to a complementary relation between FDI and intermediate goods exports while weak substitution effects between FDI and final goods exports.
Other country-level studies employ Granger-causality tests to examine the interaction between FDI and trade. For example, Pfaffermayr (1994), using data for Austria from 1961 to 1991, finds a significant bidirectional causality between outward FDI and exports. Chiappini (2011) concludes that the causal relationship from exports to FDI is heterogeneous in a sample of 11 European countries over the period 1996-2008. Similarly, Dritsaki and Dritsaki (2012) investigate the heterogeneous Granger causality between exports and FDI for 12 European countries from 1995 to 2010 and find a bilateral causal relationship in the long and short run.
Focusing our attention on the Spanish economy, the results are mixed. A complementarity relationship between outward FDI and exports has been found in Alguacil and Orts (2002), Bajo-Rubio and Montero-Muñoz (2001) and Martínez-Martín (2010). In particular, Bajo-Rubio and Montero-Muñoz (2001) find evidence of Granger causality during the period 1977-1998 running in the short run from outward FDI to exports, and bilateral Granger causality in the long run. Alguacil and Orts (2002) find a positive long-run Granger causality going from FDI to exports over the period 1970-1992, although not in the opposite direction.Besides, Martínez-Martín (2010) find, for the period 1993-2008, a positive causality relationship from FDI to exports of goods and services in the long-run, while in the short run only goods exports are positively affected by FDI. On the contrary, Caballero et al. (1989) find evidence of a substitution relationship.Therefore, analyzing the interaction between Spanish outward FDI and exports is a relevant issue to be addressed.
In order to do so, this paper follows a heterogeneous panel causality approach, where we allow for heterogeneity in the slope coefficients across the recipient countries. It is important to keep in mind that imposing homogeneity assumptions in the econometric modeling when countries are in fact heterogeneous may lead to misleading results.
For data availability reasons, we examine the period 1995-2016.As regards data sources, we employ DataInvex and DataComex databases, from the Spanish Ministry of Economy, Industry and Competitiveness to obtain information on outward FDI and exports.
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