International Trade and Foreign Direct Investment: A Focus on the Free Trade Area of the Americas 1
Mary A. Marchant, Tigran Manukyan and Won Koo
Trade and foreign direct investment (FDI) are principal strategies to access foreign markets. As the world becomes increasingly interdependent, the linkages between these two strategies become increasingly important. Processed foods are the fastest growing market for U.S. agricultural exports and foreign affiliate sales have grown even faster than exports. A key question regarding U.S. competitiveness is whether FDI displaces or enhances exports? The overall objective of this research is to model the relationship between U.S. FDI and exports for processed food products in FTAA countries and to determine whether these market access strategies are substitutes or complements. Empirical results indicate a complementary relationship between FDI and exports; thus U.S. agribusinesses should use both strategies to access FTAA markets.
International trade in processed foods has been the most rapidly growing portion of world
food and agricultural trade (Henderson, Handy, and Neff). Historically, bulk commodities
accounted for the majority of U.S. agricultural exports. In 1991, U.S. processed foods surpassed
bulk goods in export value. Additionally, USDA trade forecasts indicate that the composition of
trade will continue to shift toward processed products (USDA-ERS, 1997). Thus, processed
food products are the growth market for U.S. exports and this study will focus on them for
Another facet in the evolution of international trade is the way agribusinesses access
foreign markets (Figure 1). Historically, the export market was the primary means of accessing
foreign markets. Foreign direct investment by U.S. agribusinesses provides a market access
alternative that can be viewed as “tariff jumping.” Foreign affiliate sales that stem from FDI are
not subject to import tariffs or other trade barriers, in contrast to U.S. exports of similar products.
In 2000, FDI sales of U.S. processed food was five times the amount of U.S. exports--$150
billion versus $30 billion (Bolling and Somwaru 2001). 1