The Spatial Relationship of Complex Foreign Direct Investment and the Effects of Foreign Direct Investment and Trade on Income

This paper assesses the implications of spatial dependence of outward FDI flows toclarify the importance and prominence of complex foreign direct investment bymultinational enterprises, which are neither purely horizontal nor vertical integrationstrategies. Empirical tests compare the ordinary least squares, fixed effects, and spatialautoregression techniques for two different models to identify and estimate complexforeign direct investment. The spatial autoregression method directly address spatialcorrelated residuals while the fixed effect estimation procedure and a fully specifiedordinary least squares produce similar regression coefficients. Both models indicate thepresence of export platform multinationals while each model has limitations. Then amodified gravity model first assesses the empirical evidence for complementaritybetween FDI and trade then indicates the predominance of multinational organizationstrategy. The asymmetric impacts of exports and imports on foreign direct investmentare examined, then the effects of both FDI and trade on long-run growth are used toestimate for the effectiveness of trade to increase income. The direct investment channelis found to be a strong and growing channel of importance for development. Finally, theregional impacts of trade on long-run growth indicates that the spatial advantages of thegravity model can be further exploited using innovations such as an economically-weighteddistance variable and regional sub-samples. The findings support broader usesof geographic specifications beginning with a re-estimation of the effect of trade onincome. The model is relatively more robust for intra-region trade—underscoring therole of competition in limiting globalization and producing varying effects for theestimates of trade on income.