The world’s largest economies favour outbound FDI when it comes to overseas investment but remain split on trade. By Naomi Davies, Investment Monitor
The relationship between foreign direct investment (FDI) and international trade is central to globalisation. Both transactions play different economic roles but often complement each other.
Research from the OECD suggests that, until the mid-1980s, increased international trade led to higher levels of direct investment between countries. After this, however, the roles appeared to reverse, with data suggesting that FDI trends were heavily impacting trade.
For instance, inward FDI is widely considered to boost a country’s exports due to the transfer of technology and new products for export to international markets. In addition, FDI can provide its destination market with intangible resources that trade cannot, such as technological knowledge, skills and training.
Research also suggests that foreign investment is likely to increase imports into a destination country in the short term. For example, when a company establishes an overseas manufacturing facility, it may ship machinery and equipment when setting up the plant.
Both international trade and FDI face increasing criticism as a result of growing protectionism globally. In theory, inward FDI has the potential to harm a country’s export levels if the project involves the transfer of low-level technologies, solely targets the domestic market or hampers the growth of local exporting companies. Despite this, most experts agree that FDI and international trade align positively.
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