How FDI reshapes host markets’ trade profile and politics

Abstract

A fast-growing literature indicates that firms’ engagement in foreign directinvestment (FDI) and trade is key to understanding deepening global valuechains and their political implications. However, existing studies have mainlyfocused on the ramifications for FDI home countries while often overlookingthe firm-product level interactions between FDI and trade, where their inter-dependencies manifest. This study examines how firms’ FDI reshapes hostcountries’ trade profiles at this level, empowering new political coalitions fortrade liberalization. Analyzing greenfield FDI projects globally since 2003, wefind that hosts experienced an average increase of over 45 export products inthe following year. To overcome the challenges of connecting firms to prod-ucts, we link FDI data with Vietnamese customs records. We find that Viet-namese export (import) volumes of FDI-related products increased by 90%(30%) within 4 years of initial investments. Importantly, these products alsobenefited from more substantial tariff cuts in bilateral Free Trade Agreements.