production by foreign affiliates of one product may increase total demand for its entire product
line, making FDI and exports complementary.
Empirical results appear mixed (Connor; Overend, Connor, and Salin; and Pagoulatos).
However, viewing empirical studies from a developed versus developing country perspective
indicates that the relationship between FDI and exports tends to be substitutive between
developed countries (Gopinath, Pick, and Vasavada; and Munirathinam, Marchant, and Reed)
and complementary from developed to developing countries (Bolling and Somwaru 2000;
Malanoski, Handy, and Henderson; Carter and Yilmaz; Marchant, Saghaian, and Vickner; and
Marchant, Cornell, and Koo).
The following methodology is used to model the relationship between U.S. FDI and
exports for processed foods into FTAA countries where a system of simultaneous equations is
used to capture the interaction of exports and FDI strategies used in FTAA countries. Based on
the empirical findings in the literature review, the theoretical econometric system of
simultaneous equations is given by
FDIti = f ( Xti , IRt, ERti, GDPti,, Cti) +
Xti = g ( FDIti, ERti, GDPti, XPRICEti) +
where t represents years and i represents each FTAA country. FDI is U.S. foreign direct
investment in food processing industries for FTAA countries. Similarly, X is U.S. exports of
processed foods to FTAA countries; IR is the U.S. lending interest rate; ER is the exchange rate
measured in each respective FTAA foreign currency per U.S. dollar; GDP is the gross domestic
product for each FTAA country; and C is foreign compensation rates in the food processing
sector; XPRICE is the price of U.S. exports; and 1ti and 2ti are stochastic errors. The functions