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FDI and the Two Margins of International Trade: Evidence from Korea

The attempt to examine the relationship between FDI and trade has a long history in international trade. There is little corresponding empirical research examining the impact of FDI flows on the two margins. FDI may expand trade through two channels, the extensive margin (the range of existing products that countries export) or the intensive margin (higher volume in each product). We separate the effect of FDI on trade into the extensive and intensive margins of trade. Using Korean outward FDI and export data spanning the period from 1988-2006, this paper finds evidence that the outward FDI flows promote both the extensive and intensive margins of Korean exports, and the FDI effects work mainly through the intensive margin, rather than the extensive margin. The findings imply that governments promoting FDI in order to increase trade should take into account that FDI leads to a complementary effect through the two channels that stimulate the demand for varieties or the volume.