Investment Liberalisation and International Trade

This paper estimates the cross-price elasticity of exports with respect to investment costs for bilateral relations between the US and 35 partner countries. We show that the relationship depends on country characteristics as predicted by the Markusen et al. (1996) model. When countries differ in relative factor endowments and trade costs are low, investment liberalisation stimulates exports, whereas when countries are similar in terms of relative factor endowments and size, and trade costs are moderate to high, investment liberalisation reduces exports