The economics of foreign direct investment and trade with an application to the US food processing industry

This article investigates the determinants of foreign direct investment and its relationship to trade in the U.S. food industry. A multinational corpo ration maximizes profits by choosing between production at home, which is, exported, and production in a host country. This introduces the possibility that foreign affiliate sales can substitute and/or complement exports. The empirical framework consists of a four-equations system with foreign affil iate sales, exports, affiliate employment, and FDI as endogenous variables. The results confirm small substitution between foreign sales and exports, and that the host country's protection policies affect the decision to inve st abroad.