Foreign Direct Investment and Trade in the Asia-Pacific Region

Foreign Direct Investment and Trade in the Asia-Pacific Region: Complementarity, Distance and Regional Economic Integration

This paper investigates the relationship between FDI and trade in the Asia-Pacific economies by examining the bilateral flows of trade and FDI in a cross-sectional study. The estimation results based on the gravity model show a significant and positive relationship between trade and FDI, implying a complementary relationship. Estimated coefficients also imply that trade has a larger impact on FDI flows than such investment has on bilateral trade flows. It is evident that the distance between the home country and the host country is a significant resistance factor for trade, but not for FDI. The estimation results also suggest that the formation of APEC in 1989 has enhanced economic inter-dependence in trade, though not FDI yet, in the Asia-Pacific region.