GEP Research Paper 98/05

Intra-industry FDI and Trade Flows: New Measures of Globalisation of Production

David Greenaway, Peter Lloyd and Chris Milner

This paper was subsequently published in Economics Letters , Vol.73 (2001), pp.57-63.

Abstract

Cross-border supply can take two forms: arms-length trade and direct production by a foreign affiliate. Moreover, the two forms of supply may be related: depending on a range of circumstances, trade and foreign direct investment could be substitutes or complements. Irrespective of whether they are substitutes or complements, one can only properly assess the consequences of globalisation when the two are aggregated. We do not, however, have measures for "aggregate" cross-border supply and that is the starting point of this paper. We develop new concepts and measures of extended supply and illustrate their utility by applying them to US bilateral intra-industry supply. Our analysis shows that two-way international production is more important than two-way trade. Our new measures also reveal that levels of two-way interpenetration of markets are even higher than the levels of two-way intra-industry merchandise trade predict. The results point to the importance of measuring globalisation fully and provide a basis for doing so more completely than in the past.

Issued in December 1998.

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