Investment liberalization and international trade

This paper estimates the cross-price elasticity of exports with respect to investment costs for bilateral relations between 36 countries. We show that the effect of reducing foreign direct investment costs on exports depends on country characteristics and trade costs as predicted by the Markusen (1997, 2002) model. When countries differ in relative factor endowments and trade costs are low, investment liberalization stimulates exports, whereas when countries are similar in terms of relative factor endowments and size, and trade costs are moderate to high, investment liberalization reduces exports. (C) 2002 Elsevier B.V. All rights reserved.