Why FDI and Trade Politics Should Be Studied Together


Global value chains (GVCs) have knit foreign direct investment (FDI) and trade together as firms’ engagement in one activity inextricably depends on the other. Yet, existing political economy research often fails to consider the two simultaneously at the firm-product level where the actual interdependencies occur. We offer an integrated theory that explains how FDI changes countries’ product-level trade profiles, creating new political cleavages along the lines of GVCs in trade politics. To test our theory, we first examine the effect of firms’ new greenfield FDI projects globally since 2003 and find their presence is associated with over 45 more products exported from host countries in the subsequent year. To overcome the empirical challenges of evaluating our theory at the firm-product level, we then manually link our FDI data with unique Vietnamese customs data. We find that Vietnamese export (import) volumes of FDI-related products increased by 100% (30%) within four years of initial investments. Notably, these products also received substantial tariff reductions in the 2015 Vietnam-Korea Free Trade Agreement, indicating a direct link between firms’ FDI activities and trade policymaking.

In Song Kim
Associate Professor of Political Science
Steven Liao
Steven Liao
Assistant Professor of Political Science
Sayumi Miyano
Ph.D. Candidate, Department of Politics