# The Indirect Effects of FDI on Trade: A Network Perspective

## TL;DR

This paper investigates how foreign direct investment influences international trade through direct and indirect channels using a network approach, revealing positive effects especially in manufacturing sectors and regions with trade agreements.

## Contribution

It introduces a novel network-based methodology to quantify indirect FDI effects on trade using corporate control networks and provides empirical evidence of these effects.

## Key findings

- Corporate control positively impacts trade directly and indirectly.
- Indirect effects are stronger in manufacturing sectors.
- Regional factors like trade agreements influence the FDI-trade relationship.

## Abstract

The relationship between international trade and foreign direct investment (FDI) is one of the main features of globalization. In this paper we investigate the effects of FDI on trade from a network perspective, since FDI takes not only direct but also indirect channels from origin to destination countries because of firms' incentive to reduce tax burden, to minimize coordination costs, and to break barriers to market entry. We use a unique data set of international corporate control as a measure of stock FDI to construct a corporate control network (CCN) where the nodes are the countries and the edges are the corporate control relationships. Based on the CCN, the network measures, i.e., the shortest path length and the communicability, are computed to capture the indirect channel of FDI. Empirically we find that corporate control has a positive effect on trade both directly and indirectly. The result is robust with different specifications and estimation strategies. Hence, our paper provides strong empirical evidence of the indirect effects of FDI on trade. Moreover, we identify a number of interplaying factors such as regional trade agreements and the region of Asia. We also find that the indirect effects are more pronounced for manufacturing sectors than for primary sectors such as oil extraction and agriculture.