Outward Foreign Direct Iinvestments and Merchandise Exports: The European OECD Countries

This paper tests whether outward foreign direct investments (FDI) serve as complements or substitutes to merchandise exports. A direct link between outward FDI and country-level merchandise bilateral exports between the European Organisation for Economic Cooperation and Development (OECD) countries is tested using a gravity model and four different econometric approaches with panel data analysis for the period 2004-2008. The model is specified with traditional gravity variables for gross domestic product and distance, and the variables of specific interest for outward FDI and related characteristics of countries and country pairs. We find that outward FDI reduces merchandise exports as there is a direct, negative outward FDI effect on the increase in bilateral merchandise exports. Internationalization of enterprises and economies through outward FDI serves as the merchandise exports substitutes likely causing home country regional production and employment.