The Impact Of China’s Outward Foreign Direct Investment On The Bilateral Trade With Belt And Road Countries – The Case Of Central And Eastern European Countries (2005-2023) [védés előtt]

Abstract

With the deepening of economic globalization, multinational companies have gradually become the main protagonists of economic activities globally. The literature of international trade classifies the FDI behaviors of MNCs into three categories: Horizontal FDI (HFDI), Vertical FDI (VFDI), and the Knowledge-Capital (KC) model that combines HFDI and VFDI. The first literature on HFDI began with Markusen (1984), which indicates that firms conducting HFDI typically set up production in countries close to consumers to avoid high trade costs (Markusen, 1984). These MNCs must trade-off between achieving economies of scale and avoiding tariffs. If they locate the headquarters and all productions in the home country, the firms will gain economies of scale but face high marginal costs from exporting; Conversely, if they locate production in the host country, they will save on trade costs but pay high fixed costs (Markusen, 1984). Therefore, HFDI is also known as the “Proximity-Concentration Hypothesis”. This hypothesis was first empirically tested and supported by Brainard (1997) using data on U.S. multinationals and developed by Helpman, Melitz & Yeaple (2004) within the framework of heterogeneous firm trade theory (Brainard, 1997) (Helpman, Melitz & Yeaple, 2004). The main factors affecting HFDI are the host country’s market size and trade costs. When HFDI occurs, substitution between FDI and exports occurs. Helpman (1984) pioneered the study of VFDI. Differences in comparative advantages between countries induce some firms to split production into different stages and allocate production to firms in different countries (Helpman, 1984). For example, allocating labor-intensive and technology-intensive production activities to labor-rich and capital-rich countries, respectively, takes advantage of local comparative advantages and effectively reduces production costs. Yeaple (2003) examines the determinants of OFDI in the United States and confirms the role of comparative advantage, supporting the prediction of VFDI (Yeaple, 2003). The main factors affecting VFDI are the cost of trade and the difference in factor endowments between home and host countries. In addition, Keller & Yeaple (2013) include the cost of knowledge transfer in the analysis of vertical specialization of MNCs and argue that this cost is also one of the determinants of VFDI by MNCs (Keller & Yeaple, 2013). The emergence of VFDI will induce MNCs to engage in intra-firm trade and intermediate product trade, thus triggering the complementarity of FDI and trade.