Working Paper: NBER ID: w7154
Authors: Bruce A. Blonigen
Abstract: Are foreign production and exports substitutes or complements? The continuing globalization of production makes the question of the relationship between trade and foreign direct investment ever more important. Standard theory of the multinational corporation (MNC) assumes substitution, while previous empirical work examining the relationship has generally found strong evidence of complementarity. This study examines product-level data, which more closely fits the assumption of a single-product firm often used in MNC theory, and finds substantial evidence for both a substitution and a complementarity effect between affiliate production and exports with Japanese automobile parts for the U.S. market. I also test for and find evidence of substitution using product-level data on a set of Japanese-produced final consumer goods. Thus, product-level data allows one to separately identify substitution from complementarity effects (here from vertical production relationships), rather than try to infer them from estimates using more aggregate data. In this sense, the paper highlights the importance of matching the level of data aggregation with the hypotheses being tested. This is particularly true at a time when there is an increasing proliferation of available microeconomic data in the field of international economics.
Keywords: foreign production; exports; substitution; complementarity; multinational corporations
JEL Codes: F21; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased U.S. production of Japanese automobile parts (L62) | Decreased exports of those parts (F69) |
| Increased U.S. automobile production (L62) | Increased exports of parts (F10) |
| Increased U.S. production of Japanese automobile parts (L62) | Increased exports of parts (F10) |
| Increased U.S. production of Japanese automobile parts (L62) | Increased U.S. automobile production (L62) |
| Local production of Japanese-produced final consumer goods (L23) | Decreased exports of those goods (F69) |