FDI and trade—Two-way linkages?

We investigate the intertemporal linkages between foreign direct investment and disaggregated measures of international trade. We outline a model exemplifying these linkages, describe methods for investigating two-way feedbacks between various categories of trade, and apply them to recent data. We find that the strongest feedback between the sub-accounts is between FDI and manufacturing trade. For the first time, we decompose causality using Geweke's Geweke, J. (1982). Measurement of linear dependence and feedback between multiple time series. Journal of the American Statistical Association 77(378), 304–313] decomposition method. We find that most of the linear feedback between trade and FDI can be accounted for by Granger-causality from FDI gross flows to trade openness (50%) and from trade to FDI (31%).