United States, Japanese, and Korean FDI and Intra–East Asian Trade

Abstract

This paper documents the growing importance of intra–East Asian trade of parts and components. Our empirical analysis shows that foreign direct investment (FDI) does play an important and independent role in facilitating the trade of parts and components in East Asia. This is true for FDI from all three source countries: the United States, Japan, and South Korea. Furthermore, our empirical studies show that compared with U.S. and Korean FDI, FDI from Japan has a particularly strong influence on trade in parts and components as well as trade in capital goods. One policy implication is that economies need to improve their physical infrastructure as well as the quality of their institutions to integrate further into the East Asian production network.