Friday, November 10, 2006

Are FDI and trade substitutes or complements?

An interesting article titled “FDI and trade go hand in hand” by Majoj Pant, Professor of JNU. Read it fully here.

Traditionally FDI and trade have been seen as substitutes for one another. According to this view FDI tends to increase when a country imposes high tariff barriers. The reverse (that is trade increases) when tariff barriers are reduced.

He questions this traditional view and says that in the current international economic scenario, it is not easy to view FDI and trade as mutually exclusive categories. The distinction between inward and outward FDI becomes quite meaningless in terms of preference for one or other. Firms prefer FDI vehicle to internalize technological and marketing superiority.