Complements or Substitutes? New Theoretical Considerations and Empirical Evidence on the Imports and FDI Relationship

Central and Eastern European countries with the liberalisation process and the recent accession to the EU are, nowadays, well engaged in trade with partner countries and at the same time receive significant and increasing interest from foreign investors. Trade and Foreign Direct Investment can potentially enhance economic growth and development as widely evidenced in the literature; hence their relationship may be of particular interest for the region especially in the context of an enlarged EU. This paper addresses the imperative need to understand the relationship of FDI and trade as well as international investors' behaviour by developing a new theoretical approach and providing empirical evidence. We use the most expanded data span in the current literature, from the early stages of transition in 1992 to 2006 and an enriched dataset of countries, sectors and location factors. In regards to the inward FDI vs. imports relationship, results comply with our theoretical formulation and strongly indicate an overall complementarity with each other. In the case of FDI we find strong locational characteristics such as the large market size, the gradual improvement of the macro-environment and finally the quality of labour force to play a positive role.