The relationship between foreign direct investment and foreign trade

The literature review on this topic is not univocal. Contributions of economists such as (Mundell, 1957) show that Foreign Direct Investment has a negative influence on foreign trade. Starting from hecksher – Ohlin-Samuelson (HOS) ‘s traditional theoretical framework, this model highlights that differences in productivity across countries are not the only explanation for comparative advantage. Yet, according to this model, a comparative advantage can be explained by other factors, such as site, labor and capital. Through this model, the authors are trying to show the both the benefits of free trade and specialization. Therefore, as there is perfect substitutability between both Foreign Direct Investment and trade flows, imports of capital intensive goods are replaced by capital inflows. If there is complete mobility of foreign capital, the transfer of capital will weed out the countrys comparative advantages and its international trade.(Help man and Krugman, 1985) in developing the Mundell model, add that since the return on capital is higher in the country that is the least well capitalized, there is a movement of capital from the country which holds relatively where it is rare. The latter will then produce more capital intensive goods, goods that it previously imported. FDI thus substitutes for imports and the relative endowments in factors of production are close to each other.

However, the assumptions of this theory are far too restrictive and the abandonment of one of them has led to different conclusions with other much more recent work. Thus, (Kojima, 1978), by releasing the identical production function assumption, shows that the mobility of foreign capital can increase international trade if domestic firms invest in sectors for which the country of origin has comparative advantages. (Markusen, 1984) argues that the substitution relationship between foreign capital flows and flows of goods is the exception and complementarity the rule.Markusen, 1984) completes this analysis and introduces the imperfection of markets. In its model, a multinational firm decides to enter the target market through a subsidiary rather than exporting if the additional fixed costs of a new plant in the host country are lower than those of a new company. In this model, firms move abroad to avoid transport costs or tariff barriers. (Brainard, 1997) enriches this model by highlighting the notions of proximity and concentration of production. The decision to export or set up in a foreign market will then depend on the comparison between the profits generated if the company approaches foreign consumers (proximity to local demand) and the profits related to the concentration of production. in one good in order to enjoy economies of scale. If the endowments of countries are similar and transport costs, especially tariff barriers are high, multinational firms are therefore more profitable than the operation of a single production site.Thus, if the benefits of proximity are greater than the benefits of concentration of production, there is a substitution relationship between FDI and foreign trade.

The choice between foreign location and export will therefore depend on many factors such as transport costs, relative factor endowments and relative country sizes (Markusen and Venables, 1995).Finally, horizontal models suggest that FDI is a substitute for trade when countries are similar in size, technology and factor endowments. However, the behavior of firms is not limited to the choice between exporting or serving foreign markets by setting up a subsidiary.They can also exploit the diversity of comparative advantages to gain competitiveness and thus fragment the production process: it is the vertical FDI that has a positive influence on foreign trade.On the other hand, researches show that the production process can be divided into several stages and that the relationship between FDI and foreign trade is no longer a substitution relationship, but rather a complementarity relationship since FDI and exports of intermediate goods increase simultaneously (Svensson, 1996). For example, the presence of a firm in a foreign market with a single product can increase total demand for the full range of products (Linsey and Weiss, 1984).

Theories developed by (Helpman and Krugman, 1985) show that the choice of location of production facilities is motivated by relative factor costs and natural resource endowments. When there is no transaction cost, the vertical FDI will create complementary business flows of finished goods from the subsidiaries to the parent company (Chiappini, 2012).(Rhee and Belot, 1990) add that these complementary trade flows are more likely to occur between developed and developing countries.As a result, these firms often relocate part of their production to countries where production costs are low. This suggests an intra-firm trade that gives rise to an export industry in some developing countries that host these FDI.Similarly, (Aitken et al., 1999) show that the presence of multinational firms in the domestic market not only stimulates competition, but also encourages domestic firms to export and improve their efficiency.(Fontagné and Pajot, 1999) by showing that FDI improves the efficiency of enterprises located on the domestic market of the receiving country and that they have a positive impact on foreign trade, especially on exports, add that these FDI lead to also positive externalities through the effects of outsourcing and exploiting technological progress.(Hugon, 1996) by highlighting a country’s reasons for engaging in international trade shows that FDI also provides economies of scale and international specialization.

In this regard, (Alaya et al., 2004) indicate that Multinational Firms can be very useful for a receiving country, since the main activity of a multinational firm is to integrate markets across national borders. They also show that: Multinational enterprises can strengthen the export character of the national economy through assets that include: the excellent quality of their products, the recognition of the brand and their access to global markets, their ability to remove barriers to the use of the factor endowment of the host economy and their long-term impact on the international competitiveness of the business sector of the host country “.In the same way as theoretically, several empirical studies have also highlighted the influence of foreign direct investment on foreign trade. Indeed, (Kojima, 1978) analyzing the link between FDI and foreign trade relies on Japanese FDI in developing countries to emphasize the complementary aspect of FDI and international merchandise trade (positive effect of FDI on foreign trade), introducing a difference in technology between countries.(Chédor and Mucchielli, 1998) in a study on the relationship between FDI and international trade for French companies show that globally and in all zones, the creation of subsidiaries in the countries to which the companies export has a positive effect on exports. This is how, for these economists, the complementarity effect between FDI and international trade would therefore be greater than the substitution effect (which reflects a negative effect of FDI on foreign trade).

(Fontagné and Pajot, 1999) also established over the period 1984-1994 that every time France invested a dollar abroad, this FDI led to nearly 55 cents of export and 24 centimes of imports in the industry. (Madariaga, 2010) updated these results by studying the relationship between FDI and foreign trade in France over the period 2002-2008. It highlights that the link of complementarity between outgoing FDI and imports is confirmed, but is very strongly attenuated compared to that identified by Fontagné and Pajot over the period 1984-1994. In fact, it shows that the complementarity between inward FDI and trade flows is much greater and that this positive link is slightly larger for imports than for exports.(Ainzeman and Noy, 2005) in a study of the causal links between FDI and trade use a sample of 81 countries, of which 21 developed and 60 in development for the  period 1982-1998. Applying the Granger method, they find that the link between FDI and foreign trade is positive and significant at the 1% level for the sample of developing countries and positive but not significant for industrialized countries. Applying the decomposition method to Geweke these economists find that most of the linear feedback between FDI and foreign trade (81%) is attributable to the Granger causality of FDI to trade (50%) and trade to FDI (31%). The remaining 19% is explained by instant feedback between the two series. In addition, they conclude that positive feedbacks between FDI and foreign trade are stronger in developing countries than in industrialized countries given the different nature of investors’ motives: the geographical fragmentation of production and the diversion of trade barriers respectively. In the light of all this literature, we note that no study has been done to date on the impact of FDI on Morocco’s foreign trade. The present article thus fills this void.

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