A multivariate cointegrated model testing for temporal causality between exports and outward foreign investment: the Spanish case

Historically, outward foreign direct investment has been contemplated as an alternative way of firms' internationalization. In this line, a relational substitution between exports and foreign direct investment would be expected. However, this seems to contrast with recent developments in the ‘new trade theory’ which show that the volume of trade and the emergence of multinational firms may be positively related one to the other. This paper investigates if some empirical evidence exists either supporting a substitution or a complementary relationship between both forms of internationalization. With this aim, an aggregate time series approach was adopted using quarterly aggregate data (seasonal adjusted) from the Spanish economy covering the period 1970.I–1992.III. A vector autoregressive model was employed for both multivariate cointegration analysis and Granger temporal causality testing. The strength and direction of causal relationships are shown through the dynamic variance decomposition and the impulse response technique. Once controlling for relative market size and prices, the results provide evidence of a positive long-term Granger causality going from foreign direct investment to exports, although not in the opposite direction.