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N°9 |
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| Summer 1998 |
| Is Foreign Direct Investment a Substitute
for Trade? |
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Traditional theory suggests that trade and
foreign direct investment (FDI) are substitutes. Recent theoretical and empirical
analysis indicates that this relationship is far more complicated. Indeed, there
is good evidence to show that FDI may actually stimulate exports. But, depending
on the country in question, such investment can also increase imports to the home
country, suggesting that FDI is used not only to enter foreign markets but is
part of production relocation strategies as well. Hence, the net trade effects
of FDI are varied.
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