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The objective of this paper is to examine the relationship between international trade and Foreign Direct Investment (FDI) empirically. It analyses whether the reduction of trade barriers over time has increased FDI for the particular case of the European Union (EU) during the period from 1995 to 2009. To analyze this issue the authors estimate in first place the European Border Effect by means of a gravity equation. Once the border effect is obtained we test whether there is a positive (complementary) or negative (substitution) relationship between this border effect and the FDI within the European countries. A gravity model for trade and FDI is estimated using the Poisson pseudo-maximum likelihood. The results suggest that there is a positive and decreasing border effect up to 2007 while it turns upward for 2008 and 2009, offsetting the previous decline. For the particular case of the EU, commercial integration and FDI reinforce each other, thus being complements rather than substitutes. In addition to trade integration measures, this paper also analyzes the potential role of other traditional determinants of FDI, as the market size of the host country and the cost differential among home-host economies. Cost differentials are not as relevant as the possibility of gaining market share which leads us to conclude that in the EU the FDI pattern follows a market-seeking strategy rather than a cost-efficient model.

This Perspective explores the importance of attracting FDI in trade, transport and tourism for improving GDP growth. The successful experiences of Hong Kong, Singapore and Dubai in benefiting from that nexus can be transferred to other small economies to assist them in capitalizing upon that connection.

AbstractThis article empirically investigates whether the link between foreign direct investment (FDI) and income inequality varies with financial development. Using a smooth transition regression model to a panel of developing and advanced countries over the period of 1976–2005, the results indicate that financial development indeed defines the relationship between FDI and inequality. FDI raises income inequality and the effect becomes stronger in magnitude with financial sophistication. The results also indicate a large variation in the FDI effect across countries and over time, contingent on financial development. (JEL C23, F40, O15)

PurposeThis paper analyzes the direct effect of financial development and the mediating impact of financial development through foreign direct investment (FDI), foreign aid and trade on economic growth for all Asian countries.Design/methodology/approachA fixed-effect model with Driscoll–Kraay panel corrected estimators was employed to find the direct and mediating impact of financial developments on growth for all 47 Asian economies from 1980 to 2020. The bootstrapped panel-quantile regression (BPQR) model is used to check how this effect varies for different income groups of countries.FindingsThe results demonstrated that financial development positively impacts countries' economic growth. The interaction effect of financial development with FDI, foreign aid and foreign trade negatively impacts economic growth. The BPQR results showed that FDI and foreign aid help in the growth of lower quantile economies; however, the impact is negative for middle- and upper-income countries. Trade impacts growth positively for all the quantiles of economies.Research limitations/implicationsThe results suggest that the Asian economies must continue to provide thrust on the financial development of their own countries to achieve better growth. It also implied that the dependence on external finance is good for low-income countries and not advisable for middle- and upper-income countries.Originality/valueTo the best of the authors' knowledge, the current study is the first to provide empirical evidence on analyzing both the direct and interaction effect of financial development on economic growth by considering all the Asian economies.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-09-2022-0587

Most of the existing literature in the FDI-political risk nexus has focused on the creation of economic models to assess foreign investment decisions in the presence of political risk. This is entirely legitimate and valuable as foreign investors are interested in assessing the political risk climate of their investment location. However, not much research has been done to assess how FDI could affect political risk. Globalization implies an increasing amount of cross-border investment and trade flows. For some countries, FDI is a huge component of their GDP. Since FDI is a composite bundle of capital stock, knowledge and technology (Balasubramanyam et al, 1996) and represents "International investment made with the objective of obtaining a lasting interest, by a resident entity in one economy in an enterprise resident in another economy" (OECD, 2000), we postulate that because of this stakeholder commitment, FDI could affect a country's political risk level. The management literature has it that political risk measures the stability of individual countries based on factors grounded in government, society, security, and the economy (Bremmer, 2005). We expand on this notion to investigate whether, and if so, how FDI affects political risk? We believe that the contribution of our study is specifically in examining this reverse relationship running from FDI to political risk. In this preliminary paper we test this hypothesis for a sample of thirty countries in various stages of economic development and regime types over the 1984-2012 period. Preliminary results indicate that countries with increased FDI inflows demonstrate decreased levels of political risk. Although there are variations across countries, country groups that are considered developed and full democracies tend to exhibit the lowest levels of political risk. Our ongoing research is examining a sample of 140 countries using both time series and panel data techniques.

Preferential trade agreements (PTAs) increasingly feature a variety of provisions related to economic and social rights (ESR), environmental protection (EP), and civil and political rights (CPR). In this paper we estimate the effect of the degree of legalization of PTAs in these non-trade provisions on the flow of bilateral greenfield FDI. We explore this relation in a structural gravity setting and find that all three types of non-trade provisions affect the flow of FDI negatively. This effect is driven by investments directed to middle- and low-income countries, in particular for more directly economically relevant (ESR and EP) provisions. These latter are also found to have a larger negative impact on FDI between origin-destination country-pairs which differ the most in their commitment on non-trade issues in PTAs with third parties.