Foreign Direct Investment and Intra-Industry Trade - the Case of the United States

The possible link between intra-industry trade (IIT) and foreign direct investment (FDI) has attracted a great deal attention from some economists, but there has been little empirical research on the subject. There are two schools of thought on how FDI might cause IIT. One theory is that MNEs mostly produce differentiated goods, while the second theory posits that most intra-industry trade is intra-firm trade from MNEs. This paper uses data on US firms from the US Department of Commerce to examine the link between FDI and IIT. The data shows that US intra-firm trade is growing hand in hand with US FDI, and suggests that there may be a causal linkage. By using Spearman’s correlation analysis, this paper shows that the direct linkage between US FDI and IIT seems positive and strong. However, the theory that intra-firm trade is causing a link between FDI and IIT does not seem to be supported by a regional breakdown of the data.