Impact of trade liberalization on foreign direct investment in producer services

Abstract

This paper examines the effect of trade liberalization on foreign direct investment (FDI) in nontradable, producer services which play a supporting role in the production, trade, and distribution of final tradables goods.. It shows both theoretically and empirically that trade liberalization can have a positive effect on FDI inflows into producer services due to derived demand effects from the tradables sectors. The main policy conclusion of this paper is that foreign investment policy in supporting service sectors must be mutually consistent with overall trade policy to reap the desired benefits from trade liberalization.