The relation between trade and foreign direct investment in Brazil in the period 2001-2012

Abstract

This paper aims to evaluate the impact of Brazilian inward foreign direct investment (FDI) flows on international trade, examining whether the direct investment is complementary or substitute to trade. The gravity model commonly used to determine the flow of trade between countries is estimated with the addition of an explanatory variable for FDI, through static and dynamic panels. The data sample includes statistics from twenty countries with which Brazil imports the most, during the period from 2001 to 2012. The results with a static panel data obtained from Brazil’s sample do not corroborate the empirical evidence, since the foreign direct investment inflows do not impact positively on the imports, but only exports. Analyzing the results of the estimated parameters for the FDI variable in a dynamic architecture, it is noticed that they became opposed to those estimated by fixed effects and what the literature is suggesting. Thus, FDI ceases to have a positive impact on contemporary imports and starts to have a negative effect on the period t-1, suggesting that FDI and imports are substitutes. However, FDI stimulates exports in the contemporary period, but have a negative effect on the first lag.