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2004) claims that the impact of openness on FDI depends on the type of investment. If the investments are market-seeking oriented, trade restrictions (and therefore less openness) could have an impact on FDI. The reason stems from the “tariff jumping” hypothesis, which argues that foreign firms that seek to serve local markets may decide to set up subsidiaries in the host country if it is difficult to import their products into the country. 

In distinction, multinational firms involved in export-oriented investments may choose to invest in a more liberal economy since increased imperfections that accompany trade protection generally imply higher transaction costs associated with exporting. Wheeler and Mody (1992) observe a strong positive support for this theory in the manufacturing sector, but a weak negative link in the electronic sector. Kravis and Lipsey (1982), Culem (1988), Edwards (1990) find a strong positive effect of openness on FDI and Schmitz and Bieri (1972) obtain a weak positive link. Trade openness generally has a positive influence on the export-oriented FDI inflow into an economy (Edwards (1990), Gastanaga et al. (1998), Housmann and Fernandez-arias (2000), Asidu (2001)). 

In general, the empirical literature reveals that one of the important factors for attracting FDI is trade policy reform in the host country. Theoretical literature has explored the trade openness or the restrictiveness of trade policies (Bhagwati, 1973; 1994; Brecher and Diaz-Alejandro, 1977; Brecher and Findley; 1983). Investors in general prefer big markets to invest in and they like countries that have regional trade integration, as well as countries with greater investment provisions in their trade agreements. Theory does not give any clear-cut answer to the question how trade barriers affect the level of FDI flows. “Horizontal” FDI tends to replace exports if the costs of market access through exports are higher than the net costs of setting up a local plant and doing business in a foreign environment. Traditionally, governments have used trade barriers to induce “tariff-jumping FDI”, i.e. horizontal FDI that takes place to circumvent trade barriers. On the other hand, “vertical” FDI relies on a constant flow of intermediate products in and out of the host country and therefore benefits from a liberal trade environment. In that case, trade barriers should encourage “horizontal FDI” and discourage “vertical FDI” and its effect on the aggregate level of FDI depends on which type of FDI dominates. 

Empirical studies, however, support a positive effect of openness on FDI. Chakrabarti (2001) finds the sum of imports and exports as a share of GDP to be the variable most likely to be positively correlated with FDI besides market size in an extreme bounds analysis. Braga Nonnenberg and Cardoso de Mendonca (2004) and Addison and Heshemati (2003) also find this variable to be positively correlated with FDI. The problem with using trade as a share of GDP as a measure of trade policies is that it reveals a trade policy outcome, rather than trade guidelines. The openness of a market is clearly linked with the policy regulations of the potential market. Pärletun (2008) finds that trade openness is positive but statistically significant from zero. Moosa (2002)本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。