Why FDI and Trade Politics Should Be Studied Together

Abstract

Global value chains have knit trade and foreign direct investment (FDI) together as firms’ engagement in one activity inextricably depends on the other. Yet, most IPE scholarship fails to consider the two simultaneously. We offer an integrated theory that explains why trade’s distributional consequences depend on firms’ strategic decisions about FDI. Combining customs data on Vietnamese firm exports and FDI data on MNCs’ greenfield projects in Vietnam since 2003, we find that FDI alters the host country’s subsequent trade profiles. Specifically, Vietnamese exports of products related to FDI increased by 200% compared to other similar products within four years of initial investments. We also find that these products enjoyed deeper tariff cuts in the recent bilateral trade agreement between Vietnam and South Korea. These findings suggest that multinational firms not only affect the composition of trade but also create new political cleavages in trade politics that go beyond country borders.