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Research Objectives

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.

Literature Review

Exports and FDI ModelsSubstitutes 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

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