How FDI Reshapes Host Market's Trade Profile and Politics

Abstract

A fast-growing literature indicates that firms’ engagement in foreign direct investment (FDI) and trade is key to understanding deepening global value chains and their political implications. However, existing studies have mainly focused on the ramifications for FDI home countries while often overlooking the firm-product-level interactions between FDI and trade, where their interdependencies manifest. This study examines how firms’ FDI reshapes host countries’ trade profiles at this level, empowering new political coalitions for trade liberalization. Analyzing greenfield FDI projects globally since 2003, we find that hosts experienced an average increase of over 45 export products in the following year. To overcome the challenges of connecting firms to products, we link FDI data with Vietnamese customs records. We find that Vietnamese export (import) volumes of FDI-related products increased by 90% (30%) within four years of initial investments. Importantly, these products also benefited from more substantial tariff cuts in bilateral Free Trade Agreements.