DP3492 Investment Liberalization and International Trade

Author(s): Mary Amiti , Katharine Wakelin

Publication Date: August 2002

Keyword(s): exports , foreign direct investment , international trade , investment costs , investment liberalization

JEL(s): F12 , F14 , F23

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP3492.asp

This Paper estimates the cross-price elasticity of exports with respect to investment costs for bilateral relations between 36 countries. We show that the effect of reducing foreign direct investment costs on exports depends on country characteristics and trade costs as predicted by the Markusen (1997, 2002) model. When countries differ in relative factor endowments and trade costs are low, investment liberalization stimulates exports, whereas when countries are similar in terms of relative factor endowments and size, and trade costs are moderate to high, investment liberalization reduces exports.