Archived — Perspectives on North American Free Trade: Paper Number 2: Modelling Links between Canadian Trade and Foreign Direct Investment

by Walid Hejazi and A. Edward Safarian, University of Toronto, April 1999

Executive Summary

A common view is that increases in outward foreign direct investment (FDI) substitute for domestic exports. Similarly, increases in inward FDI result in lower imports. However, recent evidence implies that FDI and trade may not in fact be substitutes for one another, but rather complementary. Using bilateral trade and FDI data between Canada and 35 other countries over the period 1970–1996, this paper establishes that trade and FDI are complementary. This is done within a gravity model framework. The analysis is extended to the industry level (SIC-C 1980) for which bilateral FDI data are available. The authors show that the links between trade and FDI vary substantially across industries.

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