The Indirect Effects of FDI on Trade: A Network Perspective

Metulini, Rodolfo and Riccaboni, Massimo and Sgrignoli, Paolo and Zhu, Zhen The Indirect Effects of FDI on Trade: A Network Perspective. EIC working paper series #4/2017 IMT School for Advanced Studies Lucca ISSN 2279-6894.

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Abstract

The relationship between international trade and foreign direct invest- ment (FDI) is one of the main features of globalization. In this paper we investigate the effects of FDI on trade from a network perspective, since FDI takes not only direct but also indirect channels from origin to destination countries because of firms' incentive to reduce tax burden, to minimize coordination costs, and to break barriers to market entry. We use a unique data set of international corporate control as a measure of stock FDI to construct a corporate control network (CCN) where the nodes are the countries and the edges are the corporate control relation- ships. Based on the CCN, the network measures, i.e., the shortest path length and the communicability, are computed to capture the indirect channel of FDI. Empirically we find that corporate control has a positive effect on trade both directly and indirectly. The result is robust with dif- ferent specifications and estimation strategies. Hence, our paper provides strong empirical evidence of the indirect effects of FDI on trade. More- over, we identify a number of interplaying factors such as regional trade agreements and the region of Asia. We also find that the indirect effects are more pronounced for manufacturing sectors than for primary sectors such as oil extraction and agriculture.

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