A Panel Data Analysis on FDI and Exports

This paper investigates the link between exports and FDI using a panel of industries and countries for the period 1973-2004. In particular, we use the panel data causality testing method developed by Holtz-Eakin, Newey and Rosen (1988) and estimate by applying system GMM technique. Estimates using system GMM estimators show that exports cause FDI but not vice versa. The long-run elasticity of the outward FDI stock with respect to exports is 0.78 and highly significant. Disaggregation by destination country yields the same result that exports cause outward FDI but the effect is only significant for the EU-15 countries and other developed countries. JEL Classification: F10, F2