Foreign Direct Investments and Foreign Trade: Substitutability or Complementarity? The Case of Ireland and Spain

Abstract :

Since globalization became a worldwide phenomenon, a relationship between trade and foreign direct investments (FDI) has attracted economists’ and policy-makers’ attention. In the aftermath of the last financial crisis, this interest increased as both trade and foreign capital played a pivotal role in the rebalancing of countries’ external positions. Despite widespread post-crisis deleveraging and adjustment processes, some euro area countries, including Ireland and Portugal, continue to have large negative net international investment positions, which are well below prudential thresholds. This paper explores, using ARDL models, the influence of the FDI liabilities on demand for exports and imports of goods and services for Ireland and Portugal. The results point to substitute relationships between trade and FDI in both of these countries.