Does Following-Leader Investment Substitute Export or Complement?

Abstract

A central issue in international economics is the relationship between foreign direct investment (FDI) and trade. However, less attention has been paid to the following-leader investment � suppliers‟ investment following their customers‟ investment abroad. The intuition is that exporting and the investment are alternative ways to supply to their specific customers therefore the investment seems to substitute intermediate exports from home. Considering the case of Toyota Motors, this paper aims to explore the relationship between the following-leader investments of its parts suppliers and auto parts exports from Japan. Examining the product-level data covering 44 auto parts and 32 countries for the period 2002 and 2008, I find that these two variables are complements and the complementarity is larger in the case of developing country. This paper infers that the underdeveloped nature of supporting industries in host countries might facilitate sub-parts from home. Show more