chapter  6
15 Pages

INTERNATIONAL TRADE AND FOREIGN INVESTMENT: SUBSTITUTES OR COMPLEMENTS?

Recently, there has been some discussion about whether foreign investment ‘substitutes’ for or ‘complements’ international trade. First, Robert Mundell1 showed that both are substitutes for each other under the assumption of identical production functions for two countries within the framework of the ordinary Heckscher-Ohlin-Samuelson theory of trade (section 2). Second, Andrew Schmitz and Peter Helmberger,2 and especially Douglas D.Purvis,3 demonstrated that foreign investment may be a complement to international trade if production functions vary in the two countries (section 3). The necessary and sufficient conditions for substitute or complementary cases have not been established by these writers.