International Trade and Factor Mobility: An Empirical Investigation

Linda S. Goldberg, Michael W. Klein

NBER Working Paper No. 7196
Issued in June 1999
NBER Program(s):   IFM   ITI

Foreign Direct Investment (FDI) has been growing rapidly, at a pace far exceeding the growth in international trade. Thus, a full understanding of the relationship between trade in goods and FDI is important for obtaining a complete picture of the extent and sources of international linkages. We investigate whether FDI serves as a complement to trade or a substitute for trade based on the effects identified by the Rybczynski theorem whereby an increase in a factor of production used intensively in one sector affects production both in that sector and in other sectors. Using detailed data on bilateral capital and trade flows between the United States and individual Latin American countries, we examine the linkages between FDI into particular sectors of Latin American economies and the net exports of those and other manufacturing sectors. We find that FDI from the United States can lead to significant, and varied, shifts in the composition of activity in many Latin American countries and across many manufacturing industries.

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Published: Festschrift in Honor of Robert Mundell, Calvo, G., R. Dornbusch, and M. Obstfeld, eds., Cambridge: MIT Press, 2000.

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