Trade and FDI: Substitutability vs. Complementarity Revisited

Policy Paper No. 29

Author(s): Pehr-Johan Norbäck and Dieter UrbanPages: 80Published: September 24, 2009

Trade and FDI: Substitutability vs. Complementarity Revisited Pehr-Johan Norbäck and Dieter Urban

This study examines how Foreign Direct Investments (FDI) and international trade are related, examining the impact of a growing and increasingly integrated world economy on Swedish exports and the foreign affiliate production of Swedish multinational firms.

The findings are used to discuss in what way, if any, outward FDI by Swedish multinational enterprises may have contributed to the decline in the market share of Swedish exports in world merchandise trade. The analysis is based on a three-country model of FDI with heterogeneous firms, which is estimated on firm-level data on Swedish multinational firms.

We show that a growing world economy increases Swedish exports as well as foreign direct investments. However, world income growth pro-motes FDI more than exports from Sweden, by increasing both affiliate production directed towards the local market and affiliate exports.We further show that the steady decline in trade barriers that has oc-curred during the last few decades does not only increase the exports of Swedish firms but also export platform FDI. However, these two effects neutralize each other.

Since world income growth then causes a decline in exports from Sweden as a share of firms’ foreign sales, we would expect a similar declining trend in both the Swedish share of world merchandise exports and the Swedish share of world income.Such a process is likely since not only MNEs will expand in growing markets, there will also be entry by indigenous firms, thereby increasing the competition on international markets.

Pehr-Johan Norbäck


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