Export performance and and the role of foreign direct investment

This paper explores the relationship between the location of production and the trade performance of 11 OECD countries since 1971. The paper augments a standard export demand model, which includes relative prices, market size and measures of relative innovation, with indicators of both inward and outward investment levels. Common long-run parameters are accepted for market size, relative prices and relative patenting, but not for the direct investment effects. The sign and magnitude of the direct investment effects vary by country. Outward investment has a generally negative impact on trade shares, while inward investment has a generally positive one.