Working Paper: NBER ID: w23757
Authors: James E. Anderson; Mario Larch; Yoto V. Yotov
Abstract: We develop a dynamic multi-country trade model with foreign direct investment (FDI) in the form of non-rival technology capital. The model nests structural gravity sub-systems for FDI and trade, with accumulation/decumulation of phyisical and technology capital in transition to the steady state. The empirical importance of the FDI channel is demonstrated comparing actual aggregate cross-section data for 89 countries in 2011 to a hypothetical world without FDI. The gains from FDI amount to 9\\% of world's welfare and to 11% of world's trade, unevenly distributed among winners and losers. Net exports of FDI substitute for export trade in the results.
Keywords: Foreign Direct Investment; Trade; Welfare; Dynamic Models
JEL Codes: F10; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FDI (F23) | global welfare (I30) |
| FDI (F23) | global trade (F19) |
| FDI (F23) | trade flows (F10) |
| FDI (F23) | domestic investment (E22) |
| trade costs (F19) | FDI (F23) |
| FDI (F23) | net exports (F29) |
| removal of FDI (F23) | decline in exports for net FDI importers (F21) |
| FDI (F23) | heterogeneous effects across countries (F29) |
| removal of FDI (F23) | negative impacts on welfare in Luxembourg and Ireland (F69) |
| FDI (F23) | larger welfare without FDI in Ethiopia and Azerbaijan (F69) |