The interaction between Export and FDI: Central-Eastern Europe and EU15

Historically, FDIs have long been considered as an alternative means for firms to internationalize. According to this line of thought, a substitution relationship between exports and FDIs would be expected. However, recent developments in new trade theory, emphasize that exports and FDIs can be positively correlated. On the home country side, the relevant question is whether national share of exports towards destination markets has been affected by FDIs undertaken in the same, in other words whether outward FDI raises or lowers home country exports. Taking into account that the prevalent type of FDI seems to be horizontal, we would expect that a substitution relationship prevails in empirical findings. This study adds to previous work presenting a review of the existing theoretical and empirical studies and underlining the discrepancy between the two. Finally, it tests the relationship between FDI and exports bilateral flows from EU15 towards CEEC countries using an extended gravity approach that includes labour costs. The results support the complementarity' hypothesis.