Fdi In International Trade

FDI leading to fragmentation of the production process over the world has almost completely

changed the form or problem of international trade the world facing since it started

globalization. That is main reason why the result comes out about the replacement of the

traditional inter-industry trade with intra-industry and intra-product trade. After studying which

are determinants for foreign direct investment through theoretical literature, it can be assumed

that either export or import of a foreign market establish production facilities in the country. By

empirical study, it prove that trade and FDI are complementary to each other. In many study

and research, it has predicted that there is a double way linkage between trade volume and

Blonigen (2001) found that the effect of substitution and complementary between

production and export of Japanese auto parts for the U.S. market. Joshua, Noy, Ilan , Aizenman,

(2005) explain the two kinds of feedbacks between many fields of trade and have proven that

there are both positive and negative relationship between FDI and trade. They analyze how FDI

impacts on trade for different countries.

Other studies and literature about the impact between FDI and Trade (such as Hortsmann and

Markusen (1992) and Helpman (1984)) say two different opposite ways of the relationship

between them. They are horizontal and vertical FDI. For horizontal FDI (two countries have

similar endowments) , Trade and investment behave as substitutes to each other as in such a

case instead of exporting its products, the Multi- National Enterprise (MNE) would produce

those products in the host country by setting up a production unit there. This would be

If a firm can produce a product with low cost in the host country than

in its home country, it would produce in new plant and then import the goods produced. That is

why vertical FDI should increase both exports and imports between the two countries.

Although FDI is a kind of firms in the nations from which fleeing from their high-cost

domestic production sites and relocating production in low labour cost countries. It can be true

to a large extent, it is advantageous to the country generally as well as this cost minimizing

behaviour of the firm would result in a higher degree of specialisation. Trade theory suggests that

International Trade (which is always welfare improving) is a result of higher degree of

specialization becouse this case occurs due to the increased FDI in the labour abundant country.

Edward M. Graham say Foreign Direct Investment operates rather than displacing trade. FDI

lets a firm to establish a larger area for distribution and not only produce a larger number of

commodities but also increase the number of products sold in the foreign