How FDI Reshapes Host Market's Trade Profile and Politics

Abstract

Global value chains have knit foreign direct investment (FDI) and trade together as firms’ engagement in one activity inextricably depends on the other. However, existing studies often overlook such simultaneous considerations at the firm-product level, where the interdependencies manifest. We present an integrated theory explaining how firms’ FDI reshapes host markets’ trade profiles at the product level, empowering new political coalitions in trade liberalization. Analyzing the impact of new greenfield FDI projects globally from 2003, we reveal that host countries saw an average increase of over 45 unique export products the following year. To overcome the challenges of studying firm-product level effects, we link the FDI data with unique Vietnamese customs records. We find that Vietnamese export (import) volumes of FDI-related products increased by 90% (30%) within four years of initial investments. Consistent with our theory, these products also benefited from more substantial tariff cuts in bilateral Free Trade Agreements.