The purpose of this paper is to analyze the relationship between U.S. FDI and exports.
Specifically, we (1) identify the determinants of U.S. exports and FDI for processed food
industry into FTAA countries and (2) investigate the relationship between U.S. exports and FDI
for the processed food industry in the FTAA; that is, whether they are substitutes or
complements. Empirical analyses examined the relationship between U.S. FDI and exports of
processed foods into several FTAA countries–Canada, Mexico, and Brazil.
Exports and FDI Models–Substitutes or Complements?
Two possible relationships describe FDI and exports: (1) substitutes, and (2) complements. A
substitutive relationship indicates that an increase in FDI will decrease exports to foreign
countries or vice versa. In contrast, a complementary relationship indicates that FDI and exports
move in the same direction.
Seminal work by Robert Mundell introduced a substitutive relationship between FDI and
international trade. This originated from the neoclassical Heckscher-Ohlin-Samuelson
assumptions, where international trade is driven by differences in factor endowments and factor
prices for homogenous products. These differences become smaller when international factors
become mobile between countries and international trade flows decrease. Thus, Mundell
concludes that capital movements, driven by FDI, are the perfect substitute for exports. Mundell
also stated that import tariffs reduce exports and encourage foreign direct investment.
Alternatively, Kojima described FDI as complementary to trade if FDI capital outflows create or
expand the opportunity to export products. Lipsey and Weiss and Rugman stated that the