Trade-FDI Nexus:
Economic liberalization promotes both trade and FDI. FDI could be export-promoting, import substituting or import enhancing depending upon supply and demand factors in the global economy. We usually do not look at direct magnitude of trade orientations of FDI but also its indirect effects- technological advancement, skill up-gradation, linkage effects with local firms, spillover and other related externalities, and reorientation of demand patterns.
Presently MNCs conduct a large proportion of world trade and have also become active in undertaking FDI. Though MNCs provide linkage between FDI and trade, determinants of this relationship (linkage) are mostly country-specific such as size of the local market, factor cost in the host market, location advantage as also trade investment restrictions in the host home countries.
Available information suggests that the contribution of FDI to export expansion has been quite large for the ASEAN and China as they attracted mainly export- oriented FDI. For instance, foreign affiliates accounted for about half of total exports of China during 2002 and even higher in some high tech products. In case of India, exports as percent of value of total production of foreign investment companies have shown a marginal increase during 1990s. Rather import intensity of these companies remained marginally higher than their export intensity. (RBI, Report on Currency and Finance 2002-03).
As stated earlier, trade- linked FDI in services sector provide enormous scope for Indian exporters. Recently, Indian MNCs began seeking investment via cross-border M&A activities particularly in software industry in USA and UK.
Due to technological advances in ICT (Information, Communication and Telecom), possibilities for export-oriented FDI in data processing, accounting and similar services have gone up tremendously (Medium Tm Export Strategy 2002-07).