The Linkage Between FDI And Trade

This Study aims to find the FDI-Trade linkage between host and home countries, focusing especially on the effects of FDI on trade flows and their contribution to regional integration.According to Chapter2, the Northeast Asian region has not been as active in FDI as it has been in regional trade. In particular, the intensity index from Japan to China was less than unity every year in the 1990s.Chapter 3 tries to answer the following questions: Does FDI facilitate or restrict international trade? To what extent does FDI (production and affiliates' sale in a foreign market) replace or increase exports to the same market? In chapter 3, based on a survey of independent firms on the procurement and sales patterns of Korea's affiliates in China and Japan's affiliates in Korea, the effect of FDI on trade is understood through the economic activities of affiliates in host countries from the firm-level perspective. The key components of these are the intra-firm and intra-regional procurement of intermediate goods and parts as well as intra-firm and intra-regional sales of final goods of affiliates in host countries.In the case of Korean affiliates in China, the main results are as follows. First, procurement share of intermediate goods from home country(C) is about 44 percent. Second, export sales share (B') is very high. In particular, export sales to third countries (B'-C) constitute a large share of total sales, amounting to 50.5 percent. Considering the patterns of procurement and sales of foreign affiliates of Japanese and Korean firm, we find a strong, positive relationship between Japanese (Korea) FDI into China and trade with China. Japan's (Korea's) FDI in China tends to stimulate Japan's (Korea's) exports significantly, and this positive effect appears consistently. It is also argued thatthese procurement and sales activities of Korean affiliates in China contribute to China's integration into the world economy.Based on these findings, this paper asserts that Northeast Asia has not been as active in FDI as it has been in regional trade, even though FDI can have a positive effect on trade and economic integration in the region. Thus, we argue that an increase in interregional FDI is essential to advancing economic integration in Northeast Asia. In this regard FDI facilitation is the most important means of strengthening economic ties in the region.