Academic journal article Journal of Agricultural and Applied Economics

International Trade and Foreign Direct Investment: Substitutes or Complements?

Academic journal article Journal of Agricultural and Applied Economics

International Trade and Foreign Direct Investment: Substitutes or Complements?

Article excerpt

International agricultural trade has evolved over time. Processed foods and developing countries have become major growth markets for U.S. agricultural exports, and foreign direct investment (FDI) has become even more important than exports as a means of accessing foreign markets. The critical question is whether FDI is a substitute for or a complement of exports. This research builds upon an existing theoretical FDI model and contributes to the literature through the development of a simultaneous equation system for FDI and exports, which is estimated using two-stage least squares. Empirical analyses were used to examine the relationship between U.S. FDI and exports of processed foods into East Asian countries-- China, Japan, Singapore, South Korea, and Taiwan-from 1989 to 1998. The results indicated a complementary relationship between FDI and exports. Additionally, these results indicated that interest rates, exchange rates, gross domestic product (GDP), and compensation rates are important variables that influence U.S. FDI in East Asian countries, while GDP, exchange rates, and export prices are important export determinants.

Key Words: East Asia, exports, foreign direct investment, international trade, processed foods

JEL Classifications: F47, Q17, C3, F17

The evolution of international agricultural trade encompasses many facets. From a product perspective, processed foods have become the major growth market for U.S. exports. From a country perspective, developing countries, particularly East Asian countries, are the major growth markets for U.S. exports. From a market access perspective, foreign direct investment (FDI) has become even more important than exports as a means of accessing foreign markets. Thus, to increase U.S. competitiveness in entering foreign markets, it is important to examine the relationship between exports and FDI. The critical question is whether FDI is a substitute for or a complement of exports. Does an increase in FDI lead to an increase in exports? Alternatively, does an increase in FDI lead to a decrease in exports? This article begins by presenting the evolution of agricultural trade and then focuses on the determinants of and relationship between U.S. exports and FDI through a literature review, model development, and empirical estimation of a simultaneous equation system.

Recent Trends in Exports and FDI

U.S. agriculture has become more dependent on the export market. As shown in Figure 1, the volume and value of U.S. agricultural exports has dramatically risen. In 1998, over 30% of U.S. agricultural output was exported, accounting for 25% of U.S. farm income (Penson, Capps, and Rosson). For certain commodities, the export market is even more important (e.g., rice, cotton, and wheat, for which over 40% of production is exported).

Historically, bulk commodities have accounted for most of the United States's agricultural exports. Now bulk commodities have become less important in global trade in terms of export value (Figure 2). For example, bulk commodities accounted for nearly 70% of total U.S. agricultural exports in 1980 but declined to 40% in 1998 (Regmi and Gehlhar). According to the U.S. Department of Commerce, the food-processing industry is the largest manufacturing sector in the U.S. economy, accounting for about 14% of total U.S. manufacturing output (Henderson, Handy, and Neff). In 2000, U.S. exports of processed foods and beverages totaled $30 billion, up 4% following 2 years of small declines (Edmondson and Jones).

International trade has historically occurred between developed (high-income) countries. However, developing countries have become key participants in world trade. According to the International Monetary Fund (IMF) (2001), developing countries now account for 33% of world trade, up from 25% in the 1970s. Developing countries are the major growth market for U.S. agricultural products, having purchased 51% of all U. …

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