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 and empirical studies in the past have shown that FDI tends to replace trade, but more recent evidence suggests the opposite, that is, FDI creates and complements trade. We analyse the outward investment of Japan and the United States to 29 and 32 countries respectively for the period 1996 to 1999. Our analysis indicates that trade creating effect dominates on the whole, and that this effect also varies significantly across countries.