The Relationship between Trade and FDI

Within the early theories of FDI and multinational firms, FDI and foreign trade were considered to be substitutes. New international trade theories emphasize, however the complementary relationship between FDI and foreign trade.This is the result of introducing new aspects in the models like increasing returns to scale, product differentiation and technology-differences among nations.This paper studies empirically the impact of foreign trade on FDI, using data on inward FDI to EU, ASEAN, ECO and D8 member from 1996 through 2005. The results show that there is a complementary relationship between trade and FDI. Beside trade, GDP, Exchange rate and some convergences variable are influences on FDI.