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The interaction between trade and FDI: The CEECs experience

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Abstract

Inside the EU, the commercial integration of the CEE countries has gained remarkable momentum before the crisis appearance, but it has slightly slowed down afterwards. Consequently, the interest in identifying the factors supporting the commercial integration process is high. Recent findings in the new trade theory suggest that FDI influence the trade intensity but the studies approaching this relationship for the CEE countries present mixed evidence, and investigate the commercial integration of CEE countries with the old EU members. Against this background, the purpose of this paper is to assess the CEE countries’ intra-integration, focusing on the Czech Republic, Hungary, Poland and the Slovak Republic. For each country we employ a panel gravitational model for the bilateral trade and FDI, considering its interactions with the other three countries in the sample on the one hand, and with the three EU main commercial partners on the other hand. We investigate different facets of the trade – FDI nexus, resorting to a fixed effects model, a random effects model, as well as to an instrumental variable estimator, over the period 2000–2013. Our results suggest that outward FDI sustains the CEE countries’ commercial integration, while inward FDI has no significant effect. In all the cases a complementarity effect between trade and FDI is documented, which is stronger for the CEE countries’ historical trade partners. Consequently, these findings show that CEE countries’ policymakers are interested in encouraging the outward FDI toward their neighbour countries to increase the commercial integration.

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Notes

  1. Indeed, alternative databases such as United Nations Conference on Trade and Development (UNCTAD, 2015) are richer in bilateral FDI statistics. Nevertheless, there is a large heterogeneity between the CEE countries regarding the data availability, and for a large number of countries data are provided only after 2007.

  2. CEE-3 denotes the other three CEE countries acting as partners. For example, the CEE-3 in the case of the Czech Republic, are Hungary, Poland and the Slovak Republic.

  3. The three main commercial partners of the CEE-4, based on the trade volume (UNCTAD data).

  4. For example, there are noticeable differences between the bilateral inward FDI reported by one country and the bilateral outward FDI reported by the partner country. At the same time, the exports reported by one country differ from the imports reported by the partner country. These discrepancies can be explained by different methodologies used. The exports are registered as FOB (free on board), while the imports as CIF (cost, insurance, freight). Another explanation regarding the statistical discrepancies is related to the exchange rate differential between the domestic currencies and the international currency used for transactions.

  5. The substitution effect is traditionally advanced by the international trade theory. As Pain and Wakelin (1998) show, in the conventional trade models based on the Heckscher-Ohlin-Samuelson (H-O-S) framework, the equalisation of factor prices across countries can be achieved either through the international trade, or through the international mobility of factors. In the latter case, factor mobility may be a substitute for trade if the production functions are identical (Mundell 1957).

  6. The theory of multinational companies shows that through direct investments, these companies exploit natural resources which are not available in the home country. These investments are then more likely to create trade, by raising exports of capital equipment and factor services from the home country and exports of resource-based products from the host economy. Therefore, the trade and FDI are considered alternative means for entering foreign markets, underlying their complementarity (Caves 1982).

  7. The trade – FDI nexus is also influenced by the effect of FDI on the economic activity and welfare in general. There are numerous benefits and costs associated with the FDI entrance (Markusen and Venables, 1999). While the benefits are associated with technological externalities, knowledge spillover and demonstration effects which may foster the trade, the costs are associated with the interaction between multinational companies and fixed distortions in the economy, and with additional competition. If for example the import tariff exceeds its optimal level because of the “tariff-hopping” FDI, the quantity of imports decreases.

  8. For the Slovak Republic, the FDI data for 2013 were extracted from the Investment Climate Statements 2014 (Bureau of Budget and Planning, US Department of State), as they were not available in the OCDE statistics. For the Czech Republic, the FDI data for 2002 are not available (we use linear interpolation to avoid broken panel problems). In line with most of previous works we use stock data (see the related arguments in the Literature review section).

  9. The correlation matrix, computed for each panel, can be provided by the authors, under request.

  10. As Rault et al. (2007) state, the standard cross-section estimates tend to ignore the unobservable characteristics of bilateral trade relationships (historical, cultural and linguistic links).

  11. In its simplest form, the gravity equation states that the volume of trade between any two countries is positively correlated with the economic size of these countries and negatively correlated with the geographic distance between them (Martínez et al. 2012).

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Acknowledgements

This work was supported by a grant of the Romanian National Authority for Scientific Research and Innovation, CNCS –UEFISCDI, project number PN-III-P1-1.1-TE-2016-0142.

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Authors and Affiliations

  1. Management Department, Politehnica University of Timisoara, P-ta. Victoriei, No. 2, 300006, Timisoara, Romania

    Claudiu Tiberiu Albulescu

  2. CRIEF, University of Poitiers, 2, rue Jean Carbonnier, 86022, Poitiers Cedex, France

    Daniel Goyeau

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  1. Claudiu Tiberiu Albulescu
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Correspondence to Claudiu Tiberiu Albulescu.

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Appendices

Appendix 1. FDI statistics

Fig. 2
figure 2

Bilateral inward and outward FDI between each CEE-4 country and the CEE-3 (mil. US dollars). Source: own calculations based on the OECD statistics

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Appendix 2. Explanatory variables

Table 7 Explanatory variables description
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Albulescu, C.T., Goyeau, D. The interaction between trade and FDI: The CEECs experience. Int Econ Econ Policy 16, 489–509 (2019). https://doi.org/10.1007/s10368-019-00438-1

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