Intertwined: FDI in Manufacturing and Trade in Services

This study analyses the complex relationship between manufacturing FDI and trade in services. An examination of how recent developments in the economic landscape have resulted in changes in the industrial organisation as well the structure of multinational enterprises is presented. This analysis serves as the foundation for a discussion of fragmentation—and the increased use of traded services in the fragmentation process—in four different manufacturing value chains (apparel, automobiles, semiconductors, and wood furniture). To complement the value chain assessments, the results of empirical work examining the relationship between the liberalisation of services and manufacturing FDI are included. Finally, the study outlines several policy implications that draw upon the analysis. In sum, this study highlights how the increasingly international nature of fragmentation, in part the result of services liberalisation, has redefined the way in which many manufacturing firms use services, interact with service suppliers, and make foreign direct investments.