My first choice for a paper topic is the relationship between FDI and trade. I want to see if increases in FDI will lead to an increase in trade between the countries involved, a reduction in trade, or no change. It will be interesting to see how FDI and trade respond to each other since they are two of the most important ways that nations can interact with each other in the global economy. If one reduces the other, it may cause policy makers to reevaluate their economic policies. Also, since many developing nations aggressively court FDI, the relationship between FDI and trade could have a large impact on how they grow.
One paper by Joshua Aizenman and Ilan Noy suggests that FDI’s relationship with trade depends on the type of FDI. Horizontal FDI occurs when foreign companies “jump trade barriers by replicating similar plants in different markets.” This happens when foreign firms feel that it will be more efficient to replicate the entire production process in a foreign nation instead of one part of it. Conversely, vertical FDI is when a firm decides to locate one stage of the production process in a foreign nation. The authors believe that horizontal FDI is a substitute for trade while vertical FDI is a complement. They also note that horizontal trade is more common between developed nations while vertical FDI is more common when one of the nations is developed and the other is developing. Thus, for developing nations, FDI usually leads to trade.
Another paper by Bruce Blonigen states that the relationship between FDI and trade depends on what types of products are exported. His data has product level trade and FDI information for Japanese 10 digit HS products in the United States. Blonigen finds that FDI outflows from Japan to the United States increased exports of related intermediate goods, but decreased exports of related final goods.
One alternate topic that I could research is how a country’s trade behavior differs with their largest trade partners relative to everyone else. In other words, does the top export location of a particular country get a better price than everyone else, a worse price, or no difference?
Paper Sources
Aizenman, Joshua, and Ilan Noy. “FDI and trade—Two-Way Linkages?” The Quarterly Review of Economics and Finance, Real and Financial Aspects of Financial IntegrationPapers drawn from the 3rd INFINITI conference on International Financial Integration, held at the Institute for International Integration Studies, Trinity College, Dublin, June 2005The 3rd INFINITI conference on International Financial Integration, 46, no. 3 (July 2006): 317–37. doi:10.1016/j.qref.2006.02.004.
Blonigen, Bruce A. “In Search of Substitution Between Foreign Production and Exports.” NBER Working Paper. National Bureau of Economic Research, Inc, 1999. https://ideas.repec.org/p/nbr/nberwo/7154.html.