Foreign direct investment and international trade: evidence from the US and Japan

This paper examines the question of whether foreign direct investment(FDI) creates or replaces international trade. Theoretical andempirical studies in the past have shown that FDI tends to replacetrade, but more recent evidence suggests the opposite, thatis, FDI creates and complements trade. We analyse the outwardinvestment of Japan and the United States to 29 and 32 countriesrespectively for the period 1996 to 1999. Our analysis indicatesthat trade creating effect dominates on the whole, and thatthis effect also varies significantly across countries.