RIETI Discussion Paper Series 07-E-064 Foreign Direct Investment, Intra-Regional Trade and Production Sharing in East Asia

The aim of this paper is twofold. First, it examines the trend and nature of East Asian trade. The United Nations BEC classification is utilized to categorize total trade into trade in semi-finished goods, trade in components and parts, trade in capital goods as well as trade in final consumption goods. It shows that the increasing importance of East Asia as a trading region is due at least partially to the rising trade in components and parts. Next, it tries to find out if foreign direct investment plays a role in the import and export behavior of East Asian intra-regional trade. Using a gravity model, it evidences that in general FDI is important in explaining imports and exports of intra-East Asian trade. In particular, FDI is especially important in explaining trade in components and parts, followed by trade in capital goods. This helps confirm that FDI and trade associated with production fragmentation in East Asia are complementary.