Multinational Firms and the Impact of Trade Disputes on Investment Decisions

• In Event: Governance Implications of Multinational Firm Activity

Abstract

The rise of global value chains (GVCs) is reshaping the political economy of trade in several ways, including the politics of trade disputes. Trade disputes affect access to markets and suppliers in ways that are likely to affect investment decisions. Indeed, recent work examines how multinationals influence the initiation and duration of disputes. Yet we do not know how multinationals respond to trade frictions in a world of GVCs. We offer a theory of international trade and investment that interrelates trade, FDI, global production, and GVC participation. We expect that the effect of trade disputes will depend on how and to what extent the industry integrates into global value chains. Disputes over intermediate goods, relative to final goods, may cause serious disruption to tightly integrated GVCs. For industries reliant on imports of intermediates, disputes and the consequent risk will make investors seek alternate suppliers other than the host government involved in a dispute. Thus, disputes over intermediate goods will decrease FDI in that host. At the same time, a dispute will increase FDI in other potential supplier countries. The magnitude of the effects will increase as the industry becomes more dependent on the imports of intermediate goods for production. We use data on dyad-industry level greenfield FDI from FDI markets between 2003 and 2016 to test our hypotheses. We examine WTO disputes for all countries and use the United Nations-sponsored Integrated Database of Trade Disputes for Latin America and the Caribbean (IDATD) to examine all trade disputes in Latin America.

Authors

• Yoo Sun Jung, University College Dublin

• Erica Owen, University of Pittsburgh