Trade & FDI in Petroleum Exporting Countries: Complements or Substitutes?

Semyon Vavilov

University of Paris I Panthéon - Sorbonne 106-112 Boulevard de l’Hôpital 75013 Paris France +33 1 44 07 81 94 [email protected]

Abstract: The paper presents econometric analysis of relationship between foreign direct investment and international trade. Theory suggests that complementarity or substitutability between exports/imports and FDI depend on types of FDI and disaggregation level. Nevertheless, most empirical works find very seldom substitutability effects. The results of panel data estimation show substitutability between FDI and trade in petroleum exporters of exUSSR and complementarity in the rest of the countries of the same region. Also found that such effects are repeated in five biggest petroleum exporters and other transition economies of Central and Eastern Europe.

Key Words: Foreign Direct Investment, International Trade, Oil & Gas, Transition Economies JEL Classification: F21, Q39

INTRODUCTION Since early 60-ies foreign direct investment has become one of the most important issues in financial globalisation process, growing at a pace far exceeding the volume of international trade. The overall level of FDI has risen particularly in North America and European Union. According to Alguacil, Orts (2001), the increased liberalisation, brought about by reduced barriers to trade and investment within the economies of these regions has led to creation of new and bigger markets where multinational corporations may locate their production and distribution activities. Most of FDI could be traced to multinationals where this fact partially explains why much of the empirical literature focuses on identifying the factors behind the rise and expansion of MNCs (Hajos, 2002). This important growth of FDI has revived the question about the cost & benefits of MNCs. From the point of view of the recipient economy, apart from being a source of extra capital, FDI is desirable for stimulating technology transfer and fostering exchange of managerial know-how (Kokko, et al., 1996). It is also expected to enhance productivity and output growth through an increased rivalry engendered in sectors where MNCs, with higher productivity, enter. (Markusen, Venables, 1999). FDI then believed to improve efficiency and influence overall competition. A central question concerning FDI and trade is whether it increases or decreases the volume of trade. One hypothesis is that FDI is a substitute for trade, that is when multinationals set up subsidiaries abroad to supply local markets, instead of exporting. An alternative hypothesis is that multinational corporations relocate different stages of production in different countries. FDI then promotes trade, especially trade in intermediate goods. The substitutability and complementarity of properties of FDI with respect to trade are therefore often associated with horizontal and vertical FDI. Horizontal FDI is investment abroad at the same level of production, whereas vertical FDI is an investment in different stages of production (Hajos, 2002). But, while there are theoretical arguments that support both complementarity and substitutability effects, empirical works on this question almost always show a net complementarity relationship between trade and FDI. For instance, de Mello and Fukusaku, (2000), Brainard (1997), Clausing (2000), Blonigen (2001), Head and Ries (2001), Lipsey and Weiss (1981) uncover complementarity relationship while Brainard (1997) and Lin (1995) confirm substitution hypotheses. One might expect that the more disaggregated nature of the firm-level data would be more likely to yield net substitution, yet almost all of these studies find net complementarity as well. In this paper I explore the differences in FDI-trade relationship in transition economies, where oil & gas producers and exporters of ex-USSR such as Turkmenistan, Azerbaijan, Kazakhstan, Uzbekistan and Russia considered separately and show substitutability effects on a macrolevel. Other seven economies of CIS confirm macro-level complementarity hypothesis which is also repeated in other transition economies in Central and Eastern Europe. The effect of substitutability in the first group of countries is also repeated in major oil & gas producers and exporters where it appears in the same and the second year of the dynamic model formulation. The panel data estimation in this case is used for Iran, Algeria, Venezuela, United Arab Emirates and Saudi Arabia.

The paper is organised as follows: Introduction is followed by theoretical description of FDI-trade relationship. This part consists of theoretical reasons for complementarity and substitutability effects, evolution of HeckscherOhlin-Samuelson model and Mundell’s contribution in 1957. Second part comprises empirical evidence on both effects indicating main authors and results of their analyses. Third part describes model, methodology and variables used in log-linear regressions followed by tables with empirical results and their description. Gravity approach towards Russian FDI and trade is also considered in this section. The paper ends with annexes and graphs on historical outlook on trends in FDI and international trade in the considered countries accompanied by statistical description of data.

THEORETICAL ISSUES Traditionally, trade theories were developed in frameworks that assumed international immobility of production factors. The first one, originally developed by Ricardo in the early nineteenth century, explains international trade by the concept of comparative advantage. According to The Principles of Political Economy and Taxation (Ricardo, 1817) a country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries. This approach, in which international trade is solely due to international differences in productivity of labor, is known as Ricardian model. For several years, international trade theory was dominated by Heckscher-Ohlin-Samuelson model, that considered that the basis for trade resided in the different relative factor endowment among countries. However, activities of multinational enterprises (MNEs) in the early 60-es particularly between developed economies could not be ignored by new trade models. The fact is that existing general equilibrium theories of international trade have been developed without explicit treatment of the multinational corporation. The discussion of foreign direct investments in Caves (1971) and the works that followed from it is an exception. Such partial equilibrium frameworks though were related to FDI only and leaved without attention central problem of trade theory, that is, explanation of trade patterns. In the 80-ies H-O-S framework began to be questioned as it could not explain the great volumes of trade of similar products among countries with similar endowments. Thus, the industrial organization approach to international trade also known as new trade theory began to incorporate models based on economies of scale, imperfect competition, barriers to trade and product differentiation. Then, models incorporating both trade and FDI have been acknowledged as horizontal and vertical where in the first type of such models FDI and trade proved to be substitutes while in the second – complementary. FDI and exports, for example, could be considered as alternative strategies to supply foreign market, where one consequently substitutes the other. There have been many attempts to combine both types of relationships, but such models, also known as knowledgecapital models (KCM), are analytically difficult. There also exist another classification of FDI-trade models, that is supply-side and demand-side models. Lipsey and Weiss (1984) mention that some theoretical channels exist that influence positively the firms’ foreign demand, and, in that way, allow for existence of a positive relationship between FDI and international trade, namely exports. Simple supply-side models would suggest that in the absence of decreasing returns to scale and barriers to market entry firms would choose to produce in a single low-cost location and serve final markets through trade rather than local production. More detailed description of above-mentioned models is below.

H-O-S framework & Mundell’s approach In conventional 2x- country trade models based on the Heckscher-Ohlin-Samuelson framework with perfectly competitive product markets and no transportation costs, the equalization of factor prices across countries can be brought about either through international trade or through the international mobility of factors of production. In the latter case factor mobility may substitute for trade if production functions are identical (Mundell, 1957), but may expand trade

if capital flows into foreign industries in which domestic investors are at competitive disadvantage (Kojima, 1957). The result of commodity-price equalization even in the absence of international trade in goods goes in line with Stolper-Samuelson theorem, which demonstrates the tendency for factor-price equalization as a consequence of goods trade, even in the absence of international trade in factors. There is a whole set of theorems describing the relationship between the variables of H-O-S model. The Rybczynsky theorem connects output level with factor endowments, the Factor Price Equalization theorem connects factor prices with factor endowments, the Heckscher-Ohlin theorem connects trade with factor endowments. The Mundell’s classical paper can be viewed in two different lights. On the one hand, by drawing attention to the substitutability between international trade and international factor mobility in the Heckscher-Ohlin model, it was a crucial step in the refinement of the factorendowments view of trade. On the other hand, as a positive theory of international capital mobility, it has many attractive features. For example, the levels of international trade and international capital movement are indeterminate (Neary, 1995); if barriers to international capital mobility between two free-trading economies are removed, no capital movements will take place; and if barriers to trade are imposed, then capital movements will occur to an extent sufficient to bring about complete specialization in either production or trade. The only way in which determinate levels of trade and capital flows can coexist in the H-O model is if one good is non-traded (Melvin, 1989). These deficiencies of the Mundell approach to modeling international factor mobility might be thought to matter relatively little, given the widespread impression that the H-O model mow plays a much less central role in international trade theory. However, that model has been used extensively in almost all the important recent developments in general equilibrium models of international trade (Neary, 1995).

Internalisation & Eclectic Paradigm Explanatory theories from the international business literature typically look at FDI and trade as alternative modes of entry to the foreign markets. Among the main FDI approaches, it is worth pointing out internalization theory and eclectic paradigm. The internalization theory, developed by Buckley and Casson (1976) says that a firm will enter a foreign market through FDI when alternative entry modes, namely exports, incur higher transaction costs. According to Buckley and Casson, the origin of internalization theory goes back to Coase and his theory of the firm and to later contributions by Williamson. In the context of this theory, firms and markets are considered as alternative forms of organizing production since the intra-firm and market mechanisms exhibit, potentially, different efficiency levels in the execution of different transaction types. The firm’s role is fundamental whenever the costs of using the market mechanism (transaction costs) were larger that the organization costs of the same activities inside the firm. In these conditions the firm will internalize those activities. More specifically, according to Buckley and Casson the MNE will internalize its activities in the foreign country through FDI if the internalization cost (communication costs, administration costs, etc.) is inferior to the cost associated with export or to other form of entry. Thus, internalization theory considers that FDI substitutes exports. Later on, Ethier (1986) incorporated the internalization decision into a general equilibrium trade model based on a specific factor endowments with differentiated manufacturing sector.

Dunning (1979) extended internalization theory to OLI paradigm, also known as eclectic paradigm, to explain that MNE may choose FDI instead of exports when it possesses ownership advantages, when foreign market has location advantages, and when there is advantages of internalizing market access operations. The ownership advantages refer to the specific assets and qualifications of the firm: to compete with foreign firms in their own markets, MNEs should possess superior assets and qualifications that could have sufficiently high remunerations to compensate the high costs of serving these markets. The location advantages reflect the attractiveness of a specific country in terms of its market potential (size and growth) and investment risk. Measures of location advantages include similitude in culture, in market infrastructures and the availability of lower production costs. Finally, as mentioned above, the internalization advantages are concerned with the cost of FDI instead of export. In this case, FDI and trade can be substitutes as well as complementary depending on which of those advantages was determinant for the investment decision.

Horizontal Models FDI substitutes trade when when the investment is horizontal, meaning that the MNE produces the same goods and services in different countries. This is the most common type of FDI and refers to bilateral investments between developed economies. Some trade models that include horizontal MNEs assume similarity between countries – in size, endowments and technology – plus economies of scale at the firm and plant levels. In these circumstances the models by Horstman and Markusen (1992) and Brainard (1993) show that the equilibrium depends on the trade-off between proximity to the market and the concentration of production facilities. In the other words, these models admit alternative solutions depending on the relative size of the firm’s scale economies, transaction costs – including transport plus barriers to trade and investment – and plant scale economies. In particular, given the technology characteristics (with the firm specific fixed costs and plant specific fixed costs) and Cournot-Nash behavior on the part of the firms, Horstman and Markusen identify the existence of three equilibriums types. First, an export duopoly constituted by national enterprises (NEs) with a single facility (the most familiar in the trade literature), that tends to appear when the plant specific costs are high relative to the firm specific costs and transport costs. Second, a multinational monopoly (MNE with two plants, one in each market), that tends to exist when firm specific costs and transport costs are increased to a point where the duopoly generated negative profits. Finally, a multinational duopoly constituted by two MNEs, both with two plants. This will be obtained by decreasing the plant specific costs in such a way that the multinational duopoly is lucrative and dominates the export duopoly. In this way, it is verified that the market structure is endogenously determined by technology. One implication from variants of this model is that as national income levels converge, (horizontal) foreign production may displace intra-industry trade (Markusen, Venables, 1996), so that particular types of trade and investment may eventually be substitutes. Brainard (1993) develops a two-sector, two-country model where firms in a differentiated products sector choose between exporting and FDI as alternative methods of foreign market penetration. This sector is characterized by increasing returns to scale at the firm level due to some specialized input (such as R&D), scale economies at the plant level, and transport costs increasing with distance. In a simple production process with two stages, Brainard’s model also presents three possible equilibrium types. First, pure trade equilibrium, constituted by NEs,

with a single plant located in the same market of its headquarters. In these case, there exists two-way balanced trade (intra-industry trade) in differentiated final goods (the volume of intraindustry trade is a decreasing function of the transport costs). Second, pure multinational equilibrium, constituted only by MNEs that carry out productive activities and sell abroad. In this equilibrium, the two-way trade in headquarter services substitutes completely the trade of goods in the differentiated sector. Finally, mixed equilibrium where MNEs coexist with NEs. In this equilibrium, two-way trade in final goods as well as in headquarters services occurs. The resulting type of equilibrium depends on the relative size of the transport costs and firmlevel scale economies relative to plant-level scale economies. From here, an equilibrium with MNEs is more likely the higher are scale economies at the firm level relative to those at the plant level, and the higher are transport costs relative to plant-level scale economies. Mixed equilibrium is maintainable for the intermediate interval of the parameters values. A decade later, Markusen, Venables (1998) and Egger, Pfaffermayr (2002) researched the convergence hypothesis, i.e. starting with the assumption of asymmetry between countries they demonstrate that the convergence in terms of size, endowment and income increases the activities of MNEs. As multinational enterprises displace national ones, the volume of trade decreases, meaning that FDI substitutes trade.

Vertical Models Later contributions showed that trade and foreign investment might be complements rather than substitutes. Empirical evidence contributes to this fact, finding very seldom substitution (see next chapter). For instance, once a certain threshold is reached, exports could result in FDI in the destination market, aimed to exploit certain advantages intrinsic to the host country as well as trying to satisfy in a better way the specific requirements of the market. Hence, FDI would be a mean of consolidating and enlarging exportation markets (Purvis, 1972). Complementarity is normally found when foreign investment is vertical, meaning that the MNE fragments/splits the production process across countries in order to reduce costs. In these types of models, as in the case of Helpman (1984) and Grossman, Helpman (1991), the difference in relative factor endowments between countries play a determinant role in explaining both trade and FDI. They are particularly useful to explain FDI from developed into developing economies. One example of this is direct investment in order to exploit natural resources not available in the home country. These investments are more likely to create interindustry trade, by raising exports of capital equipment and factor services from the home country and exports of resource-based products from the host-economy. Such investments are likely to be particularly important in develop economies with high natural resources endowments such as Canada or Australia, as well as in many developing countries. Complementarity is still possible when countries have identical endowments, preferences and technology. The Helpman (1984) and Helpman, Krugman (1985) model incorporates MNEs into a factor proportions trade model, where one sector is characterized by product differentiation and multiple-stage production. There are multi-plant economies of scale associated with firmspecific input which has a public good character, and production of the input is assumed to be relatively more capital-intensive than production of the final good. In this model multinationals arise only in the presence of sufficiently great factor endowment differences. When factor endowments are sufficiently similar that factor price equalization obtains in the trade

equilibrium, there is no incentive for cross-border investment. When factor prices are not equalized under trade some of the firms in the differentiated sector locate production of the input in the relatively capital-abundant economy and final good production in the relatively labor-abundant economy, and export back to the relatively capital-abundant economy. Thus, this model explains cross-border investment as a response to factor price differentials, and it predicts that multinational activities will only arise in a single direction within an industry, in a single-plant firms. It effectively explains one-way direct investment flows between economies with strong factor proportions differences, but has little to say about two-way intra-industry investment flows between economies with similar factor proportions. Markusen (1984) developed a model based on the concept of multi-plant scale economies, where he additionally distinguishes firm/headquarter specific activities – R&D, marketing, distribution – from plant specific activities, that refer to the production process. One possible solution of the model is a multinational monopoly, in which headquarter activities concentrate at the home country and the production plant goes to the host country, originating bilateral trade – HQ services and final goods. In these cases, factor mobility leads to differences in factor proportions, which means an additional motives for trade in goods. Contrary to Helpman, Markusen assumes that countries have an identical factor endowment, in order to show clearly how the multi-plant economies of scale affect the production and trade pattern. Additionally, he considers that the firm-specific activities involve a centralization characteristic (apart from the public good nature) which gives vertical dimensions to MNE. MNEs tends to disperse the productive activities geographically and to centralize headquarter specific activities in a particular location. On the other hand, Markusen admits that a sector is subject to increasing returns, assuring that the monopolist maintains facilities in two countries (the firm becomes a horizontal MNE) instead of trying to supply the markets from the single facility. Markusen admits two equilibrium types. First, a duopoly between two NEs producing the good in each one of the two countries. In this situation, trade does not exist since the output, the good, and factor prices are the same in the two countries (due to the hypothesis of identical preferences, technology and factor endowment). Second, a multinational monopoly, with the production of the good being monopolized by a MNE, with two plants (one in the each two countries). If MNE considers that it is efficient to concentrate certain activities (HQ specific activities) in the domestic country, the two identical countries will specialize in different activities and will produce different groups of goods. In this case, MNE can lead to the creation of trade, i.e. the multinational activity can become a cause of trade. Therefore, assuming an exogenously specified market structure (multinationality is assumed), Markusen concludes, that Mundell’s result of trade in goods and factors being substitutes would be a special case which is only true if trade is based on differences in relative factor proportions (i.e. for the Heckscher-Ohlin trade model). Overall, the theory suggests that depending on circumstances FDI and trade may have complementary or substitution relationship. The evolution of thought on these relationships is presented in the Table 1.

Table 1 Relationship

Substitution Complementarity Complementarity Complementarity Complementarity Complementarity Complementarity Substitution Complementarity

Complementarity Complementarity Complementarity

Main Issues/Limitations Comparative advantage One factor of production General equilibrium Perfect competition No transportation costs Changes in output Factor prices International factor mobility Production functions identical Technology differences Technology differences Exportation market enlargement Technology differences Increasing returns to scale Proximity-concentration trade-off Multi-plant economies of scale HQ vs plant activities Exogenous market structure Production costs difference No barriers to trade Exogenous market structure After-sale services Commitment-to-market effects MNEs arise endogenously Monopolistic competition

Complementarity Complementarity Substitution Substitution Substitution Complementarity Complementarity Complementarity Substitution

Substitution Substitution

Substitution

Substitution Substitution Complementarity Substitution Substitution

Internalisation decision of MNEs Differentiated manufacturing sector Horizontal MNEs are more prevalent Factor endowments Commodity trade International factor markets Non-traded goods Factor proportions hypothesis

Proximity-concentration trade-off Transaction costs Plant/firm level scale economies Product differentiation Commodity trade International factor markets Commodity trade International factor markets Proximity-concentration trade-off Transaction costs Plant/firm level scale economies Product differentiation Market size difference MNEs arise endogenously Plant/firm level scale economies Transaction costs Single-/multi-plant MNEs Peripheral country Intermediate imports & exports Convergence hypothesis Convergence hypothesis

Author(s)

Year

Ricardo

1817

Hecksher,Ohlin

1919

Samuelson

1947

Mundell

1957

Kemp Jones Schmitz, Helmberger Purvis Kojima

1966 1967 1970 1972 1975

Markusen

1983

Krugman

1983

Markusen

1984

Helpman

1984

Lipsey, Weiss

1984

Helpman, Krugman

1985

Wong

1986

Ehier

1986

Horstman, Markusen

1987

Smith

1987

Melvin Ehier, Horn Rugman Grossman, Helpman

1989 1990 1990 1991

Horstman, Markusen

1992

Motta

1992

Rowthorn

1992

Brainard

1993

Markusen, Venables

1995

Brainard

1997

Barrios

1997

Markusen, Venables Markusen, Venables

1998 2000

Knowledge – Capital Models KCMs are theoretical models combining both horizontal and vertical FDI. Hence, attempts that propose in integrated treatment of these two investment types only recently appeared, allowing that firms have an option of multiple plants or separate the HQ and a single plant geographically. These models have been designated knowledge capital models and they are based on three fundamental hypotheses. First, firm-specific (headquarter) activities, such as R&D can be geographically separate from production; second, headquarter activities are intensive in qualified work relative to production; third, headquarter activities have a public good characteristic, in the measure that they can be used simultaneously by several facilities. The latter hypothesis creates scale economies at the firm level and creates reasons for horizontal FDI while the other create reasons for vertical FDI, locating the HQ activities where the qualified work is cheaper and production where the non-qualified work is cheaper. In these models, several combination of vertical MNEs, horizontal MNEs, and NEs can appear endogenously as a function of the parameters values (trade costs, differences between countries in factor endowments, investment barriers). Such is the case of the model by Markusen et al. (1996), with an extensions in Markusen (1997), Markusen (2000) and Carr et al. (2001) where he tests the model econometrically. Table 2 Other models Demand-Side Model Supply-Side Model Knowledge Capital Model Knowledge Capital Model Knowledge Capital Model Knowledge Capital Model

Author(s) Lipsey, Weiss Goldberg, Klein Markusen Carr et al. Markusen et al. Markusen

Year 1984 1999 2000 2001 1996 1997

CAUSALITY The export-led growth (ELG) hypothesis postulates that exports is a main determinant of overall economic growth. There is quite a few arguments that can be used to provide a theoretical rationale for this hypothesis. The first of these is that export sector may generate positive externalities on non-export sectors through more efficient management styles and improved production techniques (Feder, 1982) The second argument is related to the fact that export expansion will increase productivity by offering greater economies of scale (Helpman, Krugman, 1985) Thirdly, exports are likely to alleviate foreign exchange constraints and can thereby provide greater access to international markets (Esfahani, 1991). The above arguments have recently been supplemented by the literature on endogenous growth theory which emphasizes that exports are likely to increase long-run growth by allowing a higher rate of technological innovation and dynamic learning from abroad (Cuadros, Orts, Aguacil, 2004). Nevertheless, the empirical support for this hypothesis is mixed. While most cross-section studies have found a positive association between exports and growth, a considerable number of studies, applying a range of time series methodologies, found mixed results either supporting or rejecting ELG hypothesis. Furthermore, in the last few decades FDI flows have been growing at a pace, far exceeding the volume of international trade. In this context, if

international capital movements are significant, focusing only on trade as a proxy for growth and openness may be misleading (Goldberg, Klein, 1999) Another important issue that arises in FDI-trade relationship is their causality. The following scheme shortly presents the question of causality: either FDI promote exports and imports or trade, from its side, cause FDI. Pic. 1

? IMPORT

? FDI

EXPORT

One of the most oftenly used statistical methods to figure out causality between two time series data is Granger Causality test. Given certain limitations it helps to identify if one time series, based on historical information of another, could better predict it, if not vice-versa. The table below presents several works on causality. Table 3 Scale

Techniques

Author(s)

Year

Austrian FDI & exports

Granger-Causality Bivariate/multivariate setting

Pfaffermayr

1994

Spain & trading partners

Granger-Causality Cointegration

Bajo-Rubio, Montero-Muñoz

1999

Latin American countries

Granger-Causality VAR estimation

Orts, Alguacil

2001

China

Granger-Causality Cointegration

Zhang, Jacobs

2004

Fontagne (1999) suggests the prevalence of eight possible causal effects: 1. Exports may cause outward FDI, with exports serving as the first stage at an internalization process. 2. Symmetrically, imports may cause inward FDI, with foreign firms establishing affiliates in the home market. 3. Imports may also cause outward FDI, as long as natural resources are imported. An alternative explanation is that declining competitiveness causes a relocation of domestic firms abroad when the national disadvantage becomes too large. Thus, imports cause FDI from a statistical point of view, but it is more likely that the lack of competitiveness cause imports and relocation. 4. Exports may cause inward FDI by foreign firms seeking to benefit from the externalization on which domestic firms base their competitiveness. 5. Outward FDI will cause imports in case backward vertical integration and/or relocation abroad of labour-intensive activities from a capital intensive country. 6. Inward FDI causes exports if foreign firms locate in the host economy to export back home or to provide a regional market.

7. Outward FDI causes exports owing to enhanced competitiveness on foreign markets or reduced exports if the opposite allies. 8. Inward FDI causes imports owing to the enhanced competitiveness of foreign firms on the domestic market but may give rise to exports when the host country gains competitiveness.

EMPIRICAL WORKS There does not appear to be any single conclusion regarding FDI-trade relationship. It turns out that results seems to be sensitive to the choice of explanatory variables, country and the time period of study. As for country scope, most of the empirical studies have been undertaken on MNEs originated from US, Japan and Sweden, for example, by Lipsey & Weiss (1981), Head & Ries (2000) and by Swedenborg (1980, 1982, 1985, 2001) respectively. Some other countries were also covered: Germany by Hufbauer et al. (1994), Austria by Pfaffermayr (1994, 1996), Spain by Bajo-Rubio & Montero-Munoz (2001) and Anguacil & Orts (2002), Mexico by Blomstrom et al. (1988), Australia by Industry Commission (1996), Taiwan by Lin (1995), South Korea by Liu & Graham (1998), United Kingdom by Blake & Pain (1994) and Tunisia by Mekki (2004). There are four approaches to analyse FDI-trade relationship when aggregation level is considered: macroeconomic or country-level, industry-, firm- and productlevel. Analysis at each level has its strengths and weaknesses as well as techniques and reveals different results. The WTO survey of 1996 concludes: There is no serious empirical support for the view that [outward] FDI has an important negative effect on the overall level of exports from the home country. Nevertheless, one conclusion that is admitted by many researchers is that substitution can be observed more often with more aggregated level. It is also evident from the review of literature presented in this paper. Below are several empirical works at each level with a detailed description of some of them.

Macroeconomic Level The principal difficulty of regression results on the country level is to distinguish between complementarity or substitution associated with FDI and those associated with general macroeconomic conditions. Using time-series analysis, Andersen & Hainaut (1998) find contrasted evidence for complementarity effects between exports and outward FDI flows: there is a complementarity for the United States, Japan and Germany but not for the United Kingdom for which no significant relationship was found. Pain & Wakelin (1998) challenge the issue of complementarity for 11 OECD countries over 1971-1992. Estimates do not rely on bilateral exports and imports, but on total exports, controlling for world demand. The main result is that the relationship changes among countries and over time. However, inward FDI is demonstrated to be pro-competitive within the panel, in contrast to outward FDI, benefiting to the recipient country. Eaton & Tamura (1994) used a model that controlled for country determinant to explain either bilateral exports or bilateral FDI flows between Japan and the United States and about hundred other countries over the period 1985-90. Each variable (exports, imports, inward and outward FDI) was explained by the population of the partner country, its per capita income, its endowment of human capital and dummies accounting for natural regions of integration. Some

factors were found to jointly determine trade and FDI, for example, FDI and trade flows increased with the per capita income of the partner country, while regionalism also exerted a positive impact on trade and FDI bilateral relationships. The conclusion was a large and positive relationship between outward FDI and exports, as well as imports, for both Japan and the United States. This was not obtained in the case of inward FDI. Grubert & Mutti (1991) evaluated the relationship between FDI and international trade (exports and imports) using data from 1982 for 33 countries that have commercial relationship with the United States. In order to avoid endogeneity problems, the authors sustain that the relationships between FDI and trade is more correctly analyzed using exogenous indicators of the relative attractiveness of operations abroad, such as the average effective tax rate. In particular, if trade and FDI are complementary, then as the cost of operating in a certain country decreases (measured by the rates that firms pay in that country), the level of exports to that country will increase. The authors obtained results that support the complementarity in a bilateral perspective: the US seem to import more from the countries where FDI is more accentuated (countries with lower taxes); also, they export more to those countries. However, they consider that a more complete analysis of the relationship between FDI and trade requires a multilateral perspective and not just a bilateral one (as in the case of most empirical studies). In fact, according to this perspective, an appearance of complementarity can occur if the American exports to a certain foreign country increase when operations are established in that country. However, if these exports have been displaced from another foreign country, the total exports cannot increase (they may even decrease if exports to third countries decrease). In accordance with Grubert & Mutti, the separate analysis of local sales and sales to other countries indicates that the potential displacement of exports to third country markets may be significant. Clausing (2000) examines the relationship based on two groups of panel data for the period 1977-1994. The first contains data relative to the operations of US MNEs in 29 host countries and data about their exports. The second includes data relative to operations in the US accompanied by affiliates of MNEs with headquarters in 29 countries and data on US. Clausing estimates specifications that relate to trade flows with variables that reflect the FDI and with typical variables, such as exchange rate, income of the countries involved in the exchange, distance between countries and trade barriers. As a measure of FDI Clausing uses the affiliates’ net local sales, that is excludes the affiliates’ sales to another countries, thus adopting a bilateral perspective, and also excludes imports from the parent firm. Results demonstrate that FDI positively influence trade. A strong complementarity exists between intra-firm trade and FDI (multinational activity may stimulate exports of parts or related products), and a weaker complementarity exists between inter-firm trade and FDI, since some exports may be displaced. This occurs also for the relationship between imports and FDI.

Industry Level Lipsey & Weiss (1981) examine the relationship using cross-section data for 1970 relative to US exports by industry (and of 13 other exporters) for 44 destinations. The authors relate these exports with the characteristics of the destination countries (size, EEC membership, distance from US and from Germany) and with the production in those countries by affiliates of firms with headquarters in the US and in the other 13 countries. In 14 industries that represent most of the US productive investment abroad, Lipsey & Weiss find quite consistently that the level of activity of US manufacturing affiliates is positively related to US exports and, in less developed country markets, negatively related to exports by 13 other countries. The number of

foreign-owned manufacturing affiliates is positively related to exports by foreign countries. As a result, the authors conclude that the activity of the foreign affiliates tends to promote the exports of the countries where the parent firm is located, existing therefore a complementarity relationship in a bilateral perspective. Simultaneously, the results obtained seem to indicate that production of the American firms affiliates substitutes the exports from the other 13 countries and production of the affiliates of MNEs headquartered in there 13 counties substitutes US exports. Hence, in a multilateral perspective, the relationship can be negative. Pfaffermayr (1996) analyses the relationship using data relative to seven Austrian industries during the period 1980-1994 by means of value of FDI stock as a measure of multinational activity. The author argues that outward FDI and exports should be considered endogenous variables with common determinants, such as the intensity in capital, work, qualifications and R&D. Based on this endogenous framework, the methodology followed by the author consisted of the estimate of a simultaneous equations system, having found a significant and stable complementarity relationship between FDI and exports. An increase in FDI influences significantly (in a positive way) the exports while the positive impact of an increase of exports in FDI is confirmed for lower significance levels. Brainard (1997) tests the relationship between FDI and trade on the cross-section data of 1989 relative to 63 industries and 27 countries. The author’s analysis is confined to the US’s bilateral relationships: outward FDI (sales of the foreign affiliates of MNEs headquartered in the US) and US exports and inward FDI (sales by US affiliates of MNEs headquartered in other countries) and US imports). Similarly to Brainard’s previous studies, she uses instrumental variables in order to avoid the simultaneity problems between the affiliates’ employment level and their net assets, and obtained results that point to the existence of a positive relationship between FDI and trade.

Firm Level It is primarily at the firm level that relationships between trade and investment can be studied effectively. On the other hand, there are problems with data availability and the ability to cover all relevant aspects of this relationship. Most firm-level studies has been undertaken on US firms, due to the prevalence of better and more accessible data than can be found for other countries. However, there exist numerous studies on Swedish MNEs, thanks to the database set up by Industrial Institute for Economic and Social Science Research (Stockholm). Examining outward Swedish FDI, Swedenborg (1979, 1982) found that the induced exports of intermediate goods or complementary supply of finished goods, outweighed the substitution effect of exports of finished goods. Braunerhjelm (1996) observed that Swedish engineering firms’ foreign production capacity measured by the percentage of fixed assets abroad out of total assets has consistently negative impact on firms’ exports across different model specifications. Egger (2001) in the case of intra-EU exports and outward FDI did not find statistical support for any relationship. Rikker & Brainard (1997) stress the vertical splitting up of processes that is associated with FDI: FDI does not displace output, but splits the production process world-wide and it complements trade in the intermediate products. Lipsey & Weiss (1984) tried to improve their previous study by disaggregating the data. They argue: by comparing US-owned production and trade across countries within industries we avoided some of the bias that might result from the operation of industry comparative advantages that promoted both direct investment and export. Using cross-section data for 1970

of individual firms, the authors related the exports of each firm for each one of the five areas (composed by developed countries) with the parent firm’s characteristics (parent firm size measured by its sales in the US) and with the output of its foreign affiliates (affiliates’ sales minus imports from the US) and with the size of the market included in each area (measured by the income of that area – GDP). The results obtained indicate the existence of complementarity between the affiliates’ production and the parent firm’s exports to the area in which the production take place: the larger the production of an American firm affiliate in a certain foreign area, the larger, in general, the parent firm’s exports to this area. This relationship is further emphasized between the foreign production and the export of intermediate goods. Head & Ries (2001) use a group of panel data containing 932 Japanese firms during 25-year period (1966-1990) to investigate the effects of FDI on exports. The distinguish productive affiliates from distribution affiliates, thus increasing the chances of obtaining a negative effect of productive investment in exports. As an indicator of FDI, they use the number of investments in production and distribution, having lagged these variables a year in order to remove the influence of shocks that affect contemporaneously FDI and exports (this means that the FDI variables are predetermined relative to exports). The results obtained allowed them to conclude that the firms that increase their investments abroad also increase their exports, that is, in the full sample of firms, the authors find complementarity. However, the relationship varies across firms. In fact, for a group of firms that are not vertically integrated (that are unlikely to ship intermediates to overseas production affiliates) the foreign productive facilities seem to substitute their own exports. Thus, the authors conclude that a source of complementarity is the sales promotion of intermediate goods. Mucchielli et al. (2000) using data relative to 421 French firms for the year 1993 and using the number of workers of the affiliate as proxy/indicator of FDI, obtain results that support the existence of complementarity between global export and FDI (as well as between imports and FDI, though less significant). However, analyzing the volume of trade of French firms that invest abroad, either with their own affiliates (intra-firm trade) or with other firms of foreign countries (inter-firm trade), the conclusion points to a strong complementarity between FDI and intra-firm trade and a substitution between FDI and inter-firm trade (for export and for imports). In terms of global trade, since FDI seem to influence relatively more exports than imports, the trade balance of the French firms that invest abroad is globally positive.

Product-level There are several advantages in the use of this disaggregation level. On the one hand, it permits that the complementarity effect resulting from vertical production relationships and the substitution effects of export by affiliates production be modelled and tested separately in the same equation. On the other hand, as it is centered on a single product, the demand complementarities between products are not disguised by the data. Blonigen (2001) considers Japanese production in the US and export to this country of two types of products: automobile components (that have s strong vertical relationship with automobile production) and final consumption products, using data on employment levels as proxy for the affiliates’ production from 1978 to 1991. As expected, the results found demonstrate a strong positive relationship between the Japanese production of automobiles in the US (the industry that uses these inputs) and the Japanese exports of automobile components to the US (vertical production relationships are associated with strong complementarity

between exports and foreign production). In terms of the Japanese production of automobile components in the US, it was expected that Japanese exports of components decrease, the results obtained for ten specific components confirm the existence of high substitution effects (even without controlling for the potential increase in demand for these products due to the increase of the Japanese production of automobiles in the US). The analysis for eleven products of final consumption suggests equally the substitution of exports for local production for most of the products. Hence, product level data show a strong substitution effect, unlike previous studies at a more aggregated level. Following table indicates empirical works on the abovementioned levels and relationships.

Table 4 Aggregation Relationship Industry Both Both Industry Both Industry Both Firm Complementarity Complementarity Macro Complementarity Industry Substitutability Complementarity Complementarity Complementarity Industry Substitutability Complementarity Complementarity Complementarity Complementarity Complementarity Complementarity Industry Complementarity Complementarity Complementarity Firm Substitutability Macro Complementarity Complementarity Industry Complementarity Macro Complementarity Industry Complementarity Industry Complementarity Both Complementarity Complementarity Firm Substitutability Firm Complementarity Industry Complementarity Complementarity Product Both Complementarity Industry Both Macro Complementarity Complementarity Complementarity Firm Complementarity Complementarity Product Both No significance Firm Complementarity Complementarity Complementarity Complementarity Industry Complementarity Industry Complementarity Industry Both

Country/Group United States Sweden United States United States United States Sweden, Mexico United States United States Japan-US Sweden Ireland Sweden United Kingdom Sweden Japan Japan, Germany Austrian FDI & exports Canada United States Portugal Taiwan United States Japan-US Japan Austrian FDI & exports Japan US FDI & Exports 12 EU 11 OECD countries EU, Japan, US Japan France EU Taiwan, Korea US imports to Japan United States United States Japan Japan France Spain US imports to Japan intra-EU Japan Spain United States United States Tunisia United States

Author(s) Bergsten et al. Swedenborg Lipsey, Weiss Pearce Lipsey, Weiss Blomstrom et al. Grubert, Mutti Ramstetter Yamawaki Andersson O'Sullivan Svensson Blake, Pain Blomstrom, Kokko Buigues, Jacquemin Hufbauer et al. Pfaffermayr Rao et al. Sachs, Shatz Cabral Lin McGuire Eaton, Tamura Graham Pfaffermayr Bayomi, Lipworth Brainard Fontagne, Pajot Pain, Wakelin Rikker, Brainard Andersen, Hainaut Belderbos, Sleuwaegen Chedor, Mucchielli Fontagne et al. Liu, Graham Blonigen Head, Ries Swenson Clausing Head, Ries Lipsey et al. Mucchielli et al. Bajo-Rubio, Montero-Munoz Blonigen Egger Head, Ries Hejazi, Safarian Alguacil, Orts Amiti, Wakelin Head et al. Mekki Swenson

Year 1978 1979 1981 1982 1984 1988 1991 1991 1991 1993 1993 1993 1994 1994 1994 1994 1994 1994 1994 1995 1995 1995 1996 1996 1996 1997 1997 1997 1997 1997 1998 1998 1998 1998 1998 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2001 2002 2003 2004 2004 2004

Dynamic Relationship Helleiner and Lavergne (1980) observed that intra-firm trade is much more important in US trade with other countries than in other bilateral trade relations. The United States need not be representative of other countries, however. Furthermore, micro evidence suggests that the relationship varies over time (Fontagne, 1999). Studying variation among US firms, Bergsten et al. (1978) found that an initial complementarity effect between investment abroad and exports is turned into a substituting impact as internalisation advances to a higher degree and, hence, operations in host countries become more competitive. Pearce (1982) further concluded that trade between affiliates in different host countries will gradually replace trade between the home country and affiliates, thus marginalizing the role and the development of the home base. As already mentioned above, Pain & Wakelin (1998) challenge the issue of complementarity for 11 OECD countries over 1971-1992. Estimates do not rely on bilateral exports and imports, but on total exports, controlling for world demand. The main result is that the relationship changes among countries and over time as clearly indicates Svensson (1996), that for Swedish MNEs the complementarity relationship overturned in 1980s. Many US foreign affiliates have a relatively high local content in their output, possibly reflecting the age of investments and he extent to which affiliates have come to resemble their locally-owned competitors (McGuire, 1995). Thus, any initial stimulus to exports of intermediate goods may fade over time.

FDI Effects on Trade and Economy Empirical studies on different aggregation level find an overwhelmingly positive association between foreign production and home country exports. Besides, FDI effects on the home and host markets go much further than the scope of the questions considered above. The table below presents synthesis of the most important issues. Table 5

Home Market

Host Market

Export

Export

Changes in trade structure Complement to export Trade shift to third markets Increase in export of semi-finished goods Increase in capital flows Increase in export of same type products Import Re-import of final products Re-import of semi-finished products Import decrease due to delocalisation

Platform for export to third markets Foreign market penetration Competition with local enterprises Influence on country's competitive advantage Creation of trade supporting infrastructure NEs improve international competitiveness Import Sibstitute to national investment Increase import of semi-finished products Increase in import of same type products Source: Mucchielli, Author's synthesis

EMPIRICAL ANALYSIS

This section presents two empirical analyses of FDI-trade relationship. First, export and import substitution and complementarity effects are tested empirically for two groups of countries Central & Eastern Europe (CEE) and Commonwealth of Independent States (CIS). Moreover, oil & gas producing and exporting countries are considered independently from other CIS countries. Second, gravity approach is applied to Russia and its eight main trading and investment partners. The results show difference in complementarity and substitution effects across various country groups. It turns out that countries exporting no energy resources show positive relationship between FDI and trade where export and import is respectively complementary to investment inflows and outflows. In oil & gas producing and exporting countries both effects take place. As shown in the table below, export is positively correlated with investment outflows, while import expresses net substitutability to FDI inflows in considered countries. Details of these relationships accompanied by descriptive statistics are presented below.

Export Table 8

Inward FDI

CIS Oil & Gas exporters and producers 5 World Biggest Oil & Gas exporters and producers

+ +

Other CIS Central & Eastern Europe

Import

Outward FDI

Inward FDI

+ + +

+

Outward FDI

+ +

Methodology Model used in the analysis aims to explain export and import by macroeconomic variables with an obvious simultaneous impact on trade and FDI: those are size of the market proxied by real GDP and exchange rate of countries’ currencies to US $. Investment flows and stocks are lagged for 1 and 2 years in order to indicate timing effects.

log Xt | log Mt = αt log GDPt + βt log ExRatet + γt+n log inwFDIt+n + δt+n log outFDIt+n + ξt ,where

(t = 1992…2004; n = 0,1,2)

Relationship issues could be tackled using different information on FDI: flows and stocks. Results show better behaviour of FDI stocks variables for less risky countries where macroeconomic indicators are not volatile. Nevertheless in the less stable countries (in our case

those are oil & gas exporters) FDI flows are sometimes better correlated to international trade due to high volatility of main economic indicators. Here, log-linear regression is applied to the panel data for different country groups estimated by random-effects OLS method. Variables used in panel data estimation and lately in gravity equation are presented in the table below. Real GDPs are taken from International Monetary Fund’s World Economic Indicators database while exchange rates derived from IMF’s International Financial Statistics database. Inward and outward FDI flows and stocks are taken from United Nations’ database with an extension for the year 2004 from IMF’ International Financial Statistics database. Countries’ total imports and exports derived from World Trade Organisation’s statistics while Russian bilateral trade flows come from RosStat (ex. Goskomstat) – Russian Federal State Statistic Service. Bilateral FDI flows between Russia and its eight European partners originate from Organisation for Economic Cooperation and Development database (OECD Source). Table 9 Variables

Description

Source

GDP

Real gross domestic product

IMF(WEO)

RusGDP

Russian real gross domestic product

IMF(WEO)

ExRate

Exchange rate

IMF(IFS)

RuExRate

Foreign currencies to Russian rouble exchange rate

IMF(IFS)

inwFDIflow

Inward foreign direct investment flow

UNCTAD, IMF (IFS)

outFDIflow

Outward foreign direct investment flow

UNCTAD, IMF (IFS)

inwFDIstock

Inward foreign direct investment stock

UNCTAD, IMF (IFS)

outFDIstock

Outward foreign direct investment stock

UNCTAD, IMF (IFS)

EXP

Country's export

WTO

IMP

Country's import

WTO

RusExp

Russian exports to partner country

RosStat

RusImp

Russian import from partner country

RosStat

Dist

Distance from Moscow to partners' capitals

IEPP

RusFlow

Outward foreign direct investment flow from Russia to partner

OECD Source

FlowRus

Inward foreign direct investment flow from partner to Russia

OECD Source

RusStock

Outward foreign direct investment stock from Russia to partner OECD Source

StockRus

Inward foreign direct investment stock from partner to Russia

OECD Source

t-1, t-2

Time lags for FDI (1 and 2 years)

calculations

FDI-trade relationship in CEE & CIS (non-energy exporters) Statistics on international trade and foreign investment presented in the table below.

CEE's Global Presence, $bln. Export Import Inward FDI Outward FDI

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 68 65 76 98 106 114 126 124 141 156 179 231 303 76 80 92 121 144 157 171 165 184 200 226 289 370 9.0 15 20 33 42 56 78 90 106 124 167 199 222 1.9 2.3 2.8 3.0 3.4 4.2 5.5 5.3 5.8 7.1 10 14 17 Source: WTO, UNCTAD

According to WTO, trade volume in Central and Eastern Europe increased 4 times during last ten years. At the same time trade balance stayed always negative due to simultaneous growth of import and export. After a slight decrease in 1998-99, trade growth returned to positive and achieved its initial pace as of 1994 at 20% per year on average. In 2004 cumulative export and import in this group of countries equaled over $300 and $370 respectively at 30% AAGR.

CEE's International Trade, $bln. 400

Export 300

Import

200

100

0 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Foreign investment in CEE followed different way of development than international trade. Asian crisis almost has not influenced inward FDI to the region whereas outward FDI expressed negative growth of -5% in 1999. Despite the fact of being net FDI importers and overall decreasing investment growth, outward stocks continue to increase at 30% within last five years while inward FDI growth reached only 20% within the same period.

CEE's FDI, $ bln. 250 200

Inward Stock Outward Stock

150 100 50 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

International trade statistics in seven non-energy exporters of CIS and 13 CEE countries is very similar. Asian crisis though influenced more CIS and decreased its import and export growth to -10% and -20% respectively. Since 2000, trade in 7 non-energy exporters of CIS continues to increase at 20% per year on average, like in the case with CEE, and reached over $50 bln. in

2004 for both export and import. In the same year, export almost equaled import at the level of $50bln. and 35% AARG.

CIS' (non hydrocarbon producers & exporters) Global Presence, $bln. Export Import Inward FDI Outward FDI

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 13 11 15 20 23 24 22 20 24 26 29 36 50 13 14 16 24 29 30 28 22 26 28 30 40 52 0.3 0.6 0.8 1.3 2.1 3.4 4.8 6.0 7.2 8.5 10 12 15 0.00 0.08 0.10 0.12 0.11 0.16 0.16 0.19 0.26 0.28 0.26 0.29 0.30 Source: WTO, UNCTAD

CIS' (non hydrocarbon producers/exporters) International Trade, $bln. 60

Export

50

Import

40 30 20 10 0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

FDI in CIS non-energy exporters resembles those of CEE except outward stocks which are not substantial and volatile. In fact, most of them are FDI of Russian multinationals that due to rapid policy changes and unclear property rights follow unclear way of development. Despite all that inward FDI in these countries reached $15 bln. in 2004 and after Russian crisis in 1998 increased 20% per year. Outward FDI stock within all the transition time reached only $300 mln. in 2004 expressing highest growth of 8% in 2003.

CIS' (non hydrocarbon producers & exporters) FDI, $ bln. 16

Inward Stock 12

Outward Stock

8 4 0 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Empirical tests of export as explained variable in the log-linear regression show positive and significant correlation of GDP in all the equation formulations and negative correlation of countries’ exchange rates to US $, though with more than 10% significance level for CIS nonenergy exporters. Such results for both macro-economic indicators, influencing simultaneously trade and FDI correspond to the theory of international trade and investment.

Table 10 Other CIS

Export GDP ExRate inwFDIstock outFDIstock

.4303*** (6.90) -.0179 (-0.87) .0079* (2.64) .0034 (2.13)

.4850*** (7.68) -.0281 (-1.42) .0088** (2.81)

CEE .3978*** (6.33) -.0350 (-1.74)

.9132*** (12.2) -0.0909* (-2.55)

0.0181*** (3.93) .0028849 (1.00)

0.0179*** (3.97)

0.9585*** (11.46) -0.1041** (-2.84)

.0039* (2.49)

inwFDIstock, t-1 outFDIstock, t-1 inwFDIstock, t-2 outFDIstock, t-2 2.7959*** 2.7230*** 2.8137*** (25.69) (29.27) (18.07)

_const

0.8833*** 0.9095*** (11.65) (11.00) -0.0811 -.0924** (-2.50) (-2.77)

.0166*** (3.88) .0038 (1.42) 2.4734*** 2.4389*** (24.45) (21.46)

0.0167*** (3.99)

2.4227*** (21.66)

2.3581*** (19.00)

№ of obs.

91

91

91

156

143

156

143

R²

0.82

0.80

0.78

0.82

0.83

0.80

0.80

Prob > χ²

0.0000

0.0000

0.0000

0.0000

0.0000

0.0000

0.0000

As mentioned above, hypothesis of complementary relationship of trade and FDI turns out to be true. FDI stocks of both country groups are positively correlated to exports. Besides, it is worth mentioning that at least statistically in the CIS non-energy exporters, export response to investment changes seem to be more rapid than in CEE. The fact that inward FDI increases export in both country groups (with 0.083 and 0.017 elasticities for CIS & CEE) explains strategies of foreign MNEs when investment in the country is made in order to penetrate to neighbour countries’ markets by trade. In the case of 7 CIS non-energy exporters, FDI could be of Russian origin destined not only to acquire strategic assets at relatively low prices, but also with intention to supply Russian and EU markets. Vital examples of such transactions could be acquisitions of tubes production and petrochemical assets in Ukraine and Belarus. Investment strategies by foreign MNEs in Central and Eastern Europe imply the same objectives. According to OECD, petrochemistry, metals and machinery are largest FDI host industries in manufacturing while financial intermediation, trade and transport are largest ones in services sector.

The activities of MNEs originating from CIS and CEE and positive correlation of outward FDI and export explain the fact that investment abroad aims to create input that will be involved in trade between host and home country. As in the case with export, correlation of GDP and exchange rate to imports also proves theoretical assumptions. Market size implies larger imports and exports but local currency appreciation supposed to positively influence international trade. In this research, GDP is positive and significant, exchange rate is negative but less significant for the CIS non-energy exporters.

Table 11 Other CIS

Import GDP ExRate inwFDIstock outFDIstock

CEE

0.6364*** 0.6701*** .4583*** (11.34) (12.18 (7.00) -0.0176 -.0004 -.0259 (-0.83) (-0.02) (-1.20) 0.0115*** 0.0126*** (3.16) (3.43) 0.0041 .0048** (2.15) (2.75)

.9139*** 0.9385*** (14.98) (17.26) -.0487 -.0435452 (-1.95) (-1.79)

.0055 (1.33) .0065** (2.63)

inwFDIstock, t-1 outFDIstock, t-1

.9585*** (11.46) -.1041** (-2.84)

0.0072** (2.94) .0167*** (3.99)

inwFDIstock, t-2 outFDIstock, t-2

2.8931*** 2.8164*** 2.9669*** 2.6877*** 2.6783*** 2.3581*** (48.39) (57.58) (30.04) (34.76) (36.64) (19.00)

_const № of obs.

91

91

91

156

156

143

R²

0.92

0.91

0.91

0.92

0.92

0.80

Prob > χ²

0.0000

0.0000

0.0000

0.0000

0.0000

0.0000

Due to double complementarity relationships between inward/outward FDI and export, the explanations stated above could also be inversely applied to import except for X-outFDI in CEE group of countries. Such insignificance is explained by difference in nature of outward FDI across CEE countries. For example, Poland largely invest in foreign automotive industry, Czech Republic in petrochemicals while Hungary in food industry. Thus it is less evident that outward stock dynamics would be the same at the macro level as in the case with inward stock. Moreover, for 3 biggest FDI hosts in CEE (Poland, Czech Republic and Hungary) inward FDI is distributed quite equally in each country across core manufacturing industries and services sector. Industrial distribution of inward investments is also available for Slovakia, where inflows in the same manufacturing industries as in Poland, Czech Republic and Hungary are relatively large, but over 80% of total FDI inflows are made in financial intermediation.

FDI-trade Relationship in CIS (oil & gas exporters) and World Biggest Oil & Gas Exporters The initial hypothesis for oil & gas exporters is that investment-trade relationship is the same across the country groups. As indicated above, effects of complementarity and substitutability are repeated in oil & gas exporters in CIS (Russia, Kazakhstan, Turkmenistan, Azerbaijan and Uzbekistan) and five world biggest oil & gas exporters (Saudi Arabia, Iran, United Arab Emirates, Algeria and Venezuela). Moreover, beside hydrocarbons production (calculated in oil equivalent), other criteria considered are: market size and trade policy similar to those in CIS. Production of hydrocarbons is presented in the following table. Table 12

Biggest Oil & Gas Producers and Exporters (2004) CIS Russia Kazakhstan Turkmenistan Uzbekistan Azerbaijan

mtoe 989 77 59 57 20

mtoe/GDP 1,7 1,9 4,2 5,9 2,3

World Saudi Arabia Iran Venezuela UAE Algeria

mtoe 563 280 179 167 157

mtoe/GDP 2,2 1,7 1,7 1,6 1,8

Source: IEA, IMF

Trade openness of energy exporting economies does not differ much from those in nonexporting ones (see Appendix 1). In terms of export/GDP ratio, Saudi Arabia and Algeria with their 0.42 and 0.37 ratios are not very far from Hungary’s 0.56 and Czech’s 0.55 within last 5 years. But FDI flows is less in energy exporters despite large market sizes as in Algeria or Venezuela. CIS Oil & Gas Producers and Exporters, $bln. Export Import Inward FDI Outward FDI

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 51 53 76 94 103 101 85 87 122 119 125 158 215 49 45 64 77 86 90 73 53 60 72 80 100 129 1,4 4,0 5,5 9,2 14 23 23 26 41 56 74 81 101 2,3 2,4 2,5 3,0 3,8 6,4 7,5 9,1 21 33 49 53 64 Source: WTO, UNCTAD

Trade of CIS Oil & Gas Producers and Exporters, $ bln. 250 Export 200 Import 150 100 50 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Export dynamics in CIS oil & gas producers and exporters is more volatile and unpredictable comparing to non-exporters and CEE. Crude oil price disturbances explain very well such volatility: lower prices in 1993-94, 1998 and 2001 decreased export in the whole region, while beginning of 2004 resulted in sharp price increase that caused simultaneous increase in export. Despite disturbances in oil prices, trade growth stayed at the level of 20-25% per year on average where export and import reached roughly $220 bln. and $130 bln. respectively.

5 Crudes Average Price, $/bbl. 60 Lowest Peaks

50 40 30 20 10

Source: Platts 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

FDI stock dynamics in CIS is different than that in export and is not clearly dependent on the oil price. Inward stock growth at a rate of 50% per year was influenced by Russian crisis when it dropped to -2% in 1998. Later on it returned to its initial level being slightly reduced last years that resulted in $100 bln. in 2004. Outward FDI in the region were less susceptible to Asian crisis and expressed higher growth than inward ones. Last five years resulted in roughly 50% average yearly stock thanks to international activities of Russian and Azerbaijani multinationals. As a result, the graph bellow depicts very well that CIS countries still stay net FDI importers. FDI of CIS Oil & Gas Producers and Exporters, $ bln. 120

Inward Stock 90

Outward Stock

60 30 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

It is not new to contend that international trade dynamics of oil & gas exporting countries is highly dependent on oil price changes. Many gas sales take-or-pay contracts are indexed on oil prices and since the beginning of 90-ies spot prices at main gas trading hubs like NBP or Henry

Hub are well correlated to oil prices. Closer look to trade dynamics in CIS energy exporters and world major ones, reveals visible and statistical similarity.

Top World Oil & Gas Producers and Exporters, $bln. Export Import Inward FDI Outward FDI

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 120 107 114 125 147 149 113 141 210 185 198 242 305 100 90 77 86 85 96 94 89 97 107 112 125 159 32 34 3 33 37 46 53 57 60 66 37 69 76 4,3 7,2 8,2 8,8 6,7 7,2 7,5 9,0 10 15 18 12 16 Source: WTO, UNCTAD

Trade of Top World Oil & Gas Producers and Exporters, $ bln. 350 300

Export

250

Import

200 150 100 50 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Trade volume in major oil & gas exporters reached over $360 bln. (~$300 bln. in export and ~$160 bln. in import) in 2004. Interestingly, trade volume for 5 energy exporters in CIS is close to that in major energy exporters while CIS energy exporters attracted relatively more foreign investment within last 10 years of transition. Nevertheless, trade growth stabilised at the average annual level of 15% only since 2000 while before was often negative and expressed not clear dynamics. Within last 5 years export continued to increase twice more rapidly than import at 20% AAGR and reached negative value of -12% only in 2001 as a result of oil price decline. FDI of Top World Oil & Gas Producers and Exporters, $ bln. 80

Inward Stock 60

Outward Stock

40 20 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Foreign investment inflows to major energy exporters is also susceptible to oil prices. Like in exports, there are two periods of lower spot oil price followed by FDI remittances from these countries. Four out of five countries in the group except Algeria experienced negative inflows in 1994. 2002, from its part, caused substantial remittances from Venezuela and Iran. 1999 lower peak of oil price resulted in FDI remittances from Iran and United Arab Emirates but it is less evident in the graph due to significant share of inflows to Venezuela and Saudi Arabia. In fact, the age of FDI plays important role in two considered country groups. If lower oil price peaks ($14/bbl. in mid-February 1994, $10/bbl. mid-December 1998 and $17/bbl. in midNovember 2001) decrease the pace of investment in ex-USSR, in major petroleum exporters such peaks urge foreign investors to take their money back. Such remittances are often accompanied by time lags of 6-12 months. One more fact that explains the difference between major energy exporters and CIS countries is that due to relatively recent phenomena of foreign investment in CIS, these countries are largely under-invested. Inward FDI stock growth across 5 major energy exporters reached 13% within last 5 years overtaken by 16% of that in outward stocks. CIS oil & gas exporters experience FDI growth at least 2 times higher than in majors where outward stock showed over 50% AAGR since 2000, 20% higher than AAGR in outward stocks. Another interesting fact to notice is that trade and FDI dynamics is similar across two groups of countries. Within the same time period, export and import dynamics express better correlation than investments. Inward FDI stock, from its part, seems more responsive to oil price changes than outward stock. In fact, petroleum products comprise lion’s share of export in these countries and international activities are undertaken mostly by energy MNEs. In some countries like for ex. Turkmenistan or Iran, outward investments are made only by energy multinationals and often controlled by the state. Moreover, inward FDI and imports are less energy oriented and still represent substantial part of the total. Thus similarity is less evident than in the case of imports but general trend seems to be the same. X 60%

5 oil & gas exporters

in stock CIS oil & gas exporters

100%

40%

80% 60%

20%

40%

0%

20% 0%

-20%

-20% -40%

-40%

CIS oil & gas exporters

-60% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

M 60%

5 oil & gas exporters

5 oil & gas exporters

out stock CIS oil & gas exporters

5 oil & gas exporters

CIS oil & gas exporters

100% 80%

40%

60% 20%

40%

0%

20% 0%

-20%

-20%

-40%

-40% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Two previous sets of regressions for CEE and CIS non-energy exporters considered GDP and exchange rate influence on export and import. The same approach is applied here and obtained results are the same: positive correlation of GDP and negative of exchange rate also prove theoretical assumptions. Market size implies larger imports and exports but local currency appreciation supposed to positively influence international trade. Furthermore, GDP is positive and significant; exchange rate is negative but not significant for the CIS group.

Table 13 CIS oil & gas producers & exporters

EXP GDP ExRate

.9240*** (26.13) -0.0008 (-0.32)

inwFDIflow outFDIflow

Five biggest oil & gas producers & exporters .7724*** (10.22) -0.1292*** (-9.54) 0.0246 (1.67) 0.0655*** (3.48)

.7738*** (9.35) -0.1270*** (-8.89)

0.0204 (1.34) 0.0578** (2.81)

inwFDIflow, t-1 outFDIflow, t-1 -0.0034 (-1.2) 0.0052* (2.55)ª 2.6683*** (40.2)

2.9935*** (21.59)

3.0230*** (19.83)

№ of obs.

55

65

60

R²

0.99

0.91

0.90

Prob > χ²

0.0000

0.0000

0.0000

inwFDIstock, t-2 outFDIstock, t-2 _const

ª - significance level increases when GDP per capita added to regression

The results suggest positive and significant relationship between export and outward FDI stock both in 5 major oil & gas exporters and CIS oil & gas exporters. In fact, substantial share (if not all) of outward FDI in those countries is involves energy MNEs’ activities when marketing or downstream such as trading or oil refining are outsourced abroad. Thus, energy MNEs are involved in vertical FDI when a part of product value chain is displaced abroad. Good examples could be Lukoil’s acquisitions in Romania, Bulgaria and US, Yukos’ refining activities in Lithuania or trading representatives of Gulf countries in Europe and the US. Product’s value chain separation suppose to increase trade between host and home country what is proved by regression analysis. There are also limitations to this study. Due to the statistical discrepancies, capital flight could be registered as FDI outflows (for ex. in Azerbaijan). Another important issue is that Russian biggest MNE – Gazprom despite its large overseas activities and multiple JVs in almost each European country, does not disclose financial details on its foreign investment.

In the following regression, GDP is positively and exchange rate negatively correlated to imports that proves theoretical assumptions. Exchange rate though is less significant for the CIS oil & gas exporters. Table 14 CIS oil & gas producers & exporters

IMP

Five biggest oil & gas producers & exporters

.8507*** .8919*** .8832*** 0.2942*** 0.4272*** 0.3920*** (33.89) (29.25) (34.85) (3.74) (5.16) (4.22) -0.0059** -0.0038 -0.0025 -0.0974*** -0.0897*** -0.0982*** ExRate (-3.13) (-1.89) (-1.42) (-7.18) (-7.18) (-7.22) -0.0115*** -0.0090 inwFDIflow (-6.5) (-0.62) 0.0024 0.1224 outFDIflow (1.66) (-0.63) -0.0163*** -0.0359 inwFDIstock (-5.71) (-1.46) 0.0001 -0.0175 outFDIstock (0.1) (-0.76) -0.0082*** -0.0469 inwFDIstock, t-1 (-3.84) (-1.76) 0.0013 -0.0117 outFDIstock, t-1 (0.94) (-0.42) 2.6664*** 2.6320*** 2.6102*** 3.9274*** 3.8382*** 3.9422*** _const (61.76) (49.97) (56.78) (27.11) (30.06) (27.08) GDP

№ of obs.

65

65

65

65

65

55

R²

0.99

0.99

0.99

0.74

0.80

0.84

Prob > χ²

0.0000

0.0000

0.0000

0.0000

0.0000

0.0000

Explanation of negative relation of import and inward FDI for both country groups is two-fold. First, foreign investors choose strategic industries that they are interested to develop, the products of those initially were imported. In the petroleum exporters for example, tubes for pipeline construction that were originally imported, started to be produced in the home country and thus decreased imports. Abdel-Rahman, 2002 investigating FDI in Saudi Arabia, obtains the same negative correlation for FDI and imports. Such effect is known as foot on the door in the economic literature. Secondly, not only market rules or current macroeconomic situation could influence FDI-trade relationship. Within the time period of 1992-2004 the governments of most considered countries applied import substitution model of international trade in order to support local production. In such partial autarky, import and FDI developed almost independently and while countries received foreign investment, import continued to decline what resulted in their negative relationship.

GRAVITY APPROACH This chapter presents empirical analysis of FDI-trade relationship based on gravity specification of regression equation. The analysis considers Russian bilateral trade and investment flows with its main EU 15 partners: Germany, France, Finland, Netherlands, Austria, Italy, Spain and United Kingdom. Other important trade and investment partners such as Unites States, Japan or South Korea as well as Ukraine and Belarus are not considered because the flows are either unsubstantial or not existing. As for eight above-mentioned countries, bilateral trade and investment flows are available. In the equation, Russian export to its main partners used as explained variable. Gravity specification is as follows: log RusExpt = αt log ParGDPt + βt log RusGDPt + γt log ExRatet + δt log Distt +

ζt+n log RusFlowt+n | ζt+n log RusStockt+n + ηt+n log FloRust+n | ηt+n log StoRust+n + ξt ,where

(t = 1995…2004; n = 0,1,2)

It would be also interesting to consider bilateral trade and investment inflows before 1995. But due to unavailability of data the question requires further research and at the moment stays open. Table 15

Russian Bilateral FDI & Trade Growth, 5-Y av. % ch. Austria Netherlands Spain UK Italy Germany France Finland 5-Y AAGR

Export 15% 36% 34% 17% 30% 19% 30% 21% 25%

Import 30% 22% 18% 26% 21% 23% 15% 20% 22%

Trade Vol. 16% 19% 31% 19% 28% 33% 26% 20% 24%

Inward FDI 130% 39% 12% 2% 22% 9% 2% 13% 29%

Outward FDI 32% 39% 53% 65% 21% 17% 16% 10% 32%

Source: OECD, Rosstat, Author's Calculations

It is evident that Russian entry to the global economy and trade openness proceeds very rapidly. Export and import growth with its main partners representing about 30% of total trade surpassed 20% on average within last five years. Investment flows growth surpassed trade growth at 10% within the same period. Another positive fact that characterises Russian efforts towards globalisation is that export and outward FDI dynamics is superior to that in import and inward FDI. The policy of import substitution and local production promotion resulted in positive trade balance and net outward investment stock approaching to zero. According to RosStat, inward and outward FDI flows first reached the same level in 2000. UNCTAD in World Investment Report discloses information on FDI stocks and states that difference in inward and outward stock decreased to $0.7 bln. out of total $50 bln. OECD, from its part,

reported that Russian outward FDI stock to its eight major EU partners is superior to inward stock for all the counties beside Spain. Russian Outward FDI stock exceeded inward stock in 1996 for Finland and Germany, in 2003 for France and was always superior for the rest of the countries since the collapse of the USSR.

Partners with Trade Volume > $10 bln. in 2004 25 20

Germany Netherlands Italy

15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Since 1996 Europe becomes more important destination for Russian international trade. Beside its rapidly growing volume, the export share to 8 EU members in total trade increased 8% since 1996 and represented 32% in 2004. Imports’ share in total expressed 5% increase within the same period and stayed at the level of 23% in 2004. The geography of Russian international trade is quite diversified but still European Union plays important role where Germany, Netherlands and Italy remain major partners within last years. According to WTO, trade volume reached $24 bln. in 2004 with Germany, $17 with the Netherlands and $15 bln. with Italy. According to RosStat, France being major Russian strategic investor, remains limited on international trade with $7 bln. in 2004.

Russian Direct Investors > $1bln. in 2004 1500

1000

500

France Germany

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Still Russia is highly under-invested. Market size, stable currency, industrialised manufacturing and overall positive macroeconomic situation still do not permit to attract sufficient foreign investment. The questions like how much is ‘sufficient’ or if Russia needs foreign investment at all would be interesting to answer but out of the problematics of this article. Even among other emerging economies Russia is one of the latest in rating on FDI attraction. France and Germany are major strategic investors with FDI stocks equal to $1.4 bln. and $1.1 bln. respectively. FDI growth of these 2 partners represented 2% per year in 2004 (slightly higher for Germany) and has a decreasing trend. Besides, Austria and Italy continue to actively invest in Russia with stable and positive FDI growth dynamics.

Russian FDI Hosts > $1bln. in 2004 7500 6000 4500

UK Netherlands Germany France

3000 1500 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Russian outward investment is mostly associated with commodities trading and activities of energy companies. Europe stays dependent on Russian oil & gas and due to existing pipelines and European refineries designed for Urals blend the cooperation does not seem to change in the long-term. It is logic that the activities of Russian MNEs are located in the countries importing energy resources. Germany, France, Netherlands and United Kingdom receive most of Russian FDI. Within the considered period, investment growth remained stable and positive with France and the Netherlands while with Germany and the UK dropped to negative in 2003 and 2002 respectively. FDI outflows to other countries within the considered group are more volatile but with positive dynamics of 20% AAGR. Econometric analysis shows results close to those with FDI of oil & gas exporters. Within the gravity formulation, both GDPs of home and host countries positively influence countries’ exports and are significant in all the equation specifications. Rouble/€ exchange rate turns out to positively influence exports as well, and is significant at a level of 1% in all the specifications. Distance plays important role in international trade (in our case, trade of goods) as transportation costs decrease. Results show negative significant correlation of distance variable to exports but at weaker significance level in some specifications. Both inward and outward FDI positively influence Russian export to its 8 major trade and investment partners in Europe. Certain specifications prove that fact using either FDI flows or stocks as explanatory variables. Correlation is better explained by FDI stocks due to the higher

significance level for both specifications, when 2 FDI variables are simultaneously regressed to exports. Complementary Russian outward FDI relationship to exports could be explained by vertical nature of the investment. Almost every Russian MNE involved in strategic investment in Europe is energy company. Vertical FDI are known to promote trade and imply the parts of value chain of the product to be displaced abroad. In the case with energy companies, those are marketing/trading representatives in European capitals. Inward FDI’s positive relationship to exports suggests that within the considered time period foreign investors mostly financed Russian export-oriented industries (largely petroleum & petrochemicals) that increased trade with investor’s countries. Table 16 RusExp ParGDP RusGDP RuExRate Dist RusFlow FlowRus RusFlow t-1 FlowRus t-1 RusFlow t-2 FlowRus t-2 RusStock StockRus RusStock t-1 StockRus t-1 RusStock t-2 StockRus t-2 _const № of obs. R² Prob > χ²

8 Russia's Main Trading Partners (Germany, France, Finland, Netherlands, Italy, Spain, United Kingdom, Austria) 0.6681*** 0.6300*** 0.7351*** 0.6810*** 0.6569*** 0.6749** (3.34) (3.26) (3.87) (3.65) (3.30) (3.14) 0.5292*** 0.5600*** 0.4956*** 0.4347*** 0.5061*** 0.5174*** (5.18) (5.86) (5.26) (4.38) (5.09) (5.32) 0.2199*** 0.2519*** 0.2753*** 0.1717*** 0.2232*** 0.2686*** (8.86) (8.7) (6.72) (4.86) (5.61) (5.58) -1.8443 -1.7945*** -1.9104 -1.7016** -1,705 -1,7435 (-1.69) (-1.69) (-1.97) (-2.17) (-2.03) (-1.91) -0.0027 (-2.26) 0.0327* (2.52) -0.0034** (-3.00) 0,0104 (0.85) -0.0026 (-2.22) 0.0231 (1.35) -0.0074** (-2.7) 0.0876** (2.69) -0,0051 (-1.85) 0,0527 (1.64) -0,0052 (-1.96) 0,0404 (1.33) 1,9078 1,8821 1,8205 1,8738 1,7890 1,7246 (1.62) (1.64) (1.76) (2.27) (2.03) (1.84) 80

80

64

80

80

64

0.77

0.72

0,83

0,77

0.78

0,82

0.0000

0.0000

0.0000

0.0000

0.0000

0.0000

CONCLUSION Undertaken research spills light on differences in investment and trade between oil & gas exporting countries and countries that do not possess hydrocarbon reserves. The comparison of four groups suggest that FDI and trade dynamics in CIS countries with no energy reserves is closer to the countries of CEE. At the same time, investment and trade dynamics in CIS countries that possess oil & gas reserves is closer to that of major world oil & gas producers and exporters. The results of empirical analysis is two-fold. It is found that in CEE and non-energy producers and exporters of CIS, FDI increase trade volume. In both country groups inward FDI is positively correlated to export of the countries while outward FDI is positively correlated to import. One difference found is that in 5 considered CIS members both exports and imports are positively correlated to both inward and outward FDI. But in CEE, relation between outward FDI and export as well as between inward FDI and imports is positive but not statistically significant. Such effects are explained by difference in FDI distribution per industry in CEE. In fact, FDI-trade relationship across oil & gas exporters of ex-USSR and major world petroleum exporters is similar across these country groups but contrast to non-energy endowed countries. Results end up in positive relation between outward FDI and export and negative between inward FDI and import. Such issues for both country groups explain external factors influencing macroeconomic performance of the countries when import substitution model of international trade takes place. Second part of empirical research considers gravity specification of FDI-trade relationship equation. In this case Russian trade and investment with its major partners is analysed. Found that both inward and outward FDI are complementary to Russian export to its eight major EU partners. Import turns out to be not significant due to differences in FDI inflows across the industries. So, import is excluded from the results. There are several limitations to this study. First, there are statistical discrepancies between Russian methodology and methodology of UNCTAD in measurement of trade and investment. Second, the biggest Russian multinational Gazprom providing substantial financial flows to EU, does not disclose details of its activities abroad. Third, investment outflows from untransparent petroleum exporters could be considered as capital flight.

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Appendix 1 Trade Volume (X+M) / GDP Estonia Slovak Republic Hungary Czech Republic Slovenia Bulgaria Lithuania Bosnia & Herzegovina Latvia Romania Croatia Serbia & Montenegro Poland Belarus Tajikistan Moldova Ukraine Kyrgyz Republic Armenia Georgia Kazakhstan Azerbaijan Turkmenistan Uzbekistan Russian Federation United Arab Emirates Saudi Arabia Algeria Iran Venezuela

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0,38 0,94 1,23 1,17 1,14 1,49 1,45 1,28 1,62 1,55 1,45 1,47 1,27 1,11 0,88 0,86 0,90 0,96 1,01 1,07 1,06 1,22 1,31 1,28 1,36 1,39 0,58 0,55 0,60 0,63 0,75 0,88 1,04 1,10 1,29 1,24 1,11 1,11 1,13 0,78 0,77 0,75 0,82 0,80 0,86 0,88 0,91 1,10 1,14 1,07 1,11 1,25 0,95 0,93 0,91 0,88 0,87 0,90 0,91 0,86 0,98 0,99 0,96 0,96 1,03 0,95 1,91 1,10 0,84 1,01 0,95 0,72 0,73 0,90 0,91 0,88 0,92 1,02 0,47 0,87 1,01 0,99 0,98 0,97 0,86 0,72 0,81 0,90 0,95 0,93 0,96 2,01 0,53 0,69 0,63 0,75 0,74 0,71 0,83 0,88 0,87 0,88 0,87 0,93 0,33 0,62 0,61 0,64 0,67 0,72 0,76 0,65 0,65 0,67 0,69 0,73 0,79 0,55 0,43 0,44 0,51 0,55 0,56 0,48 0,53 0,63 0,67 0,69 0,73 0,79 0,93 0,79 0,65 0,65 0,62 0,66 0,60 0,61 0,67 0,70 0,68 0,71 0,72 0,19 0,07 0,08 0,04 0,38 0,39 0,49 0,27 0,49 0,58 0,55 0,52 0,62 0,38 0,39 0,39 0,38 0,40 0,44 0,45 0,45 0,48 0,46 0,50 0,58 0,67 1,71 1,21 1,15 0,98 0,87 1,14 1,03 1,04 1,25 1,27 1,17 1,21 1,31 2,92 1,40 1,25 2,96 1,38 1,33 0,99 1,25 1,47 1,27 1,20 1,08 1,10 1,28 0,82 0,88 1,10 1,12 1,07 0,98 0,91 0,97 0,99 1,01 1,11 1,06 0,73 1,25 0,89 0,77 0,72 0,63 0,65 0,74 0,91 0,84 0,82 0,92 0,95 0,82 1,15 0,59 0,62 0,74 0,74 0,83 0,85 0,77 0,62 0,67 0,68 0,75 2,67 0,49 0,94 0,73 0,72 0,69 0,59 0,56 0,62 0,57 0,63 0,70 0,63 0,03 0,58 0,60 0,29 0,29 0,33 0,30 0,29 0,34 0,33 0,34 0,41 0,41 2,49 1,39 0,58 0,55 0,49 0,49 0,45 0,56 0,76 0,68 0,66 0,69 0,81 2,03 1,03 0,63 0,54 0,50 0,40 0,38 0,43 0,56 0,66 0,61 0,72 0,84 4,31 0,73 1,00 0,55 1,27 0,83 0,55 0,69 0,85 0,71 0,57 0,54 0,51 1,12 0,82 0,79 0,61 0,64 0,56 0,46 0,37 0,44 0,53 0,53 0,67 0,78 0,97 0,44 0,45 0,48 0,42 0,42 0,51 0,61 0,60 0,53 0,51 0,51 0,50 1,19 1,14 1,25 1,14 1,06 1,25 1,21 1,11 1,08 1,13 1,13 1,19 1,22 0,68 0,60 0,55 0,61 0,56 0,54 0,47 0,49 0,57 0,54 0,56 0,61 0,65 0,40 0,37 0,43 0,49 0,46 0,47 0,40 0,44 0,57 0,53 0,55 0,56 0,60 0,40 0,46 0,49 0,35 0,35 0,31 0,28 0,32 0,44 0,36 0,43 0,45 0,47 0,47 0,45 0,43 0,40 0,47 0,42 0,36 0,35 0,41 0,36 0,42 0,39 0,45

5Y av. 1,47 1,31 1,17 1,13 0,98 0,93 0,91 0,89 0,71 0,70 0,69 0,55 0,54 1,24 1,23 1,03 0,89 0,70 0,63 0,37 0,72 0,68 0,64 0,59 0,53 1,15 0,58 0,56 0,43 0,41

Group av.

0,92

0,87

0,63

0,63

Source: WTO, IMF

Export / GDP Slovak Republic Estonia Hungary Czech Republic Slovenia Bulgaria Lithuania Romania Latvia Poland Croatia Bosnia & Herzegovina Serbia & Montenegro Tajikistan Belarus Ukraine Moldova Kyrgyz Republic Armenia Georgia Kazakhstan Azerbaijan Turkmenistan Russian Federation Uzbekistan United Arab Emirates Saudi Arabia Algeria Venezuela Iran

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0,54 0,41 0,43 0,44 0,42 0,45 0,48 0,50 0,59 0,60 0,59 0,67 0,67 0,24 0,47 0,54 0,49 0,45 0,59 0,59 0,54 0,70 0,67 0,62 0,61 0,51 0,28 0,23 0,26 0,29 0,35 0,42 0,49 0,52 0,60 0,59 0,53 0,53 0,54 0,38 0,38 0,36 0,38 0,35 0,39 0,42 0,44 0,52 0,55 0,52 0,54 0,62 0,50 0,45 0,44 0,41 0,41 0,43 0,43 0,40 0,46 0,47 0,47 0,46 0,49 0,43 0,80 0,51 0,41 0,49 0,48 0,33 0,31 0,38 0,38 0,37 0,38 0,42 0,35 0,49 0,47 0,42 0,42 0,39 0,33 0,28 0,33 0,38 0,40 0,39 0,41 0,23 0,19 0,20 0,22 0,23 0,24 0,20 0,24 0,28 0,28 0,30 0,31 0,33 0,26 0,31 0,27 0,27 0,26 0,27 0,27 0,24 0,24 0,24 0,25 0,26 0,28 0,17 0,16 0,17 0,17 0,16 0,17 0,17 0,17 0,19 0,19 0,21 0,26 0,31 0,47 0,36 0,29 0,25 0,23 0,21 0,21 0,22 0,24 0,24 0,21 0,21 0,23 0,87 0,11 0,06 0,08 0,11 0,15 0,13 0,15 0,22 0,21 0,18 0,19 0,22 0,08 0,02 0,02 0,01 0,13 0,14 0,18 0,08 0,16 0,16 0,15 0,13 0,14 1,37 0,66 0,59 1,42 0,74 0,66 0,45 0,64 0,79 0,61 0,61 0,51 0,44 0,86 0,53 0,52 0,46 0,39 0,52 0,47 0,49 0,57 0,60 0,55 0,56 0,60 0,39 0,56 0,44 0,35 0,32 0,28 0,30 0,37 0,47 0,43 0,42 0,46 0,50 0,54 0,36 0,39 0,51 0,49 0,46 0,38 0,41 0,37 0,38 0,39 0,40 0,38 0,37 0,51 0,31 0,27 0,28 0,34 0,32 0,37 0,37 0,31 0,30 0,30 0,33 0,77 0,19 0,33 0,21 0,18 0,14 0,12 0,13 0,15 0,16 0,21 0,24 0,22 0,01 0,20 0,19 0,08 0,07 0,07 0,05 0,08 0,11 0,10 0,10 0,12 0,12 1,14 0,64 0,28 0,32 0,28 0,29 0,25 0,35 0,48 0,39 0,39 0,42 0,49 1,24 0,55 0,29 0,26 0,20 0,20 0,14 0,20 0,33 0,41 0,35 0,36 0,42 2,63 0,44 0,59 0,32 0,71 0,37 0,21 0,31 0,50 0,39 0,33 0,32 0,28 0,49 0,24 0,24 0,26 0,23 0,22 0,28 0,39 0,41 0,33 0,31 0,32 0,32 0,47 0,36 0,39 0,34 0,30 0,27 0,24 0,19 0,24 0,27 0,27 0,37 0,44 0,70 0,59 0,70 0,65 0,59 0,66 0,70 0,66 0,71 0,70 0,70 0,74 0,76 0,41 0,36 0,35 0,39 0,38 0,37 0,27 0,31 0,41 0,37 0,38 0,43 0,48 0,23 0,20 0,21 0,24 0,27 0,29 0,20 0,26 0,40 0,35 0,33 0,36 0,38 0,23 0,25 0,28 0,24 0,33 0,25 0,19 0,21 0,27 0,21 0,28 0,28 0,29 0,17 0,21 0,29 0,20 0,20 0,17 0,13 0,20 0,29 0,21 0,24 0,25 0,26

5Y av. 0,63 0,62 0,56 0,55 0,47 0,38 0,38 0,30 0,26 0,23 0,23 0,20 0,15 0,59 0,58 0,46 0,38 0,32 0,20 0,11 0,44 0,37 0,36 0,34 0,32 0,72 0,42 0,37 0,27 0,25

Source: WTO, IMF

Group av.

0,38

0,38

0,36

0,40

Appendix 2 Inward FDI Stock, $mln. Poland Hungary Czech Republic Romania Croatia Slovak Republic Estonia Bulgaria Lithuania Slovenia Serbia & Montenegro Latvia Bosnia & Herzegovina

1992 1370 3424 2300 122 126 200 110 210 107 775 126 176 0

1993 2621 5576 3423 215 246 400 272 250 137 954 222 221 0

1994 3789 7087 4547 402 363 592 486 355 321 1326 284 436 0

1995 7843 11304 7350 821 478 810 688 445 352 1763 329 615 20

1996 11463 13282 8572 1097 988 1604 838 554 700 1998 329 936 18

1997 14587 17968 9234 2352 2136 1671 1148 1059 1041 2207 1069 1272 19

1998 22479 22315 14375 4418 1903 2129 1822 1597 1625 2766 1182 1558 75

1999 26075 23260 17552 5469 2578 2272 2467 2403 2063 2687 1294 1795 229

2000 34227 22870 21644 6480 3560 3738 2645 2257 2334 2894 1319 2084 376

2001 41247 23337 27092 7638 4706 4836 3160 2758 2665 2602 1484 2332 506

2002 2003 47900 52125 35890 42915 38450 41033 8873 12693 6711 11351 7800 10248 4226 6511 3662 5082 3981 4960 4109 4290 1959 3319 2751 3320 772 1153 Source: UNCTAD

2004 58284 47099 43615 14259 12527 11248 7559 6691 5733 4806 4679 3967 1651

Outward FDI Stock, $mln. Hungary Poland Croatia Slovenia Czech Republic Estonia Slovak Republic Lithuania Romania Latvia Bosnia & Herzegovina Serbia & Montenegro Bulgaria

1992 224 101 672 279 0 58 0 0 79 365 0 0 113

1993 226 198 691 281 181 65 110 0 103 361 1 0 113

1994 291 461 698 354 300 67 110 0 107 296 5 0 113

1995 278 539 703 490 346 69 87 1 121 231 13 0 105

1996 265 735 728 460 498 109 160 3 120 209 42 0 76

1997 647 678 914 459 548 215 215 26 114 222 40 0 74

1998 844 1165 1002 608 804 198 379 16 122 281 40 0 75

1999 924 1024 882 628 698 281 303 26 133 244 40 0 90

2000 1280 1025 875 768 738 259 325 29 142 241 40 0 87

2001 1556 1156 967 1004 1136 442 446 48 127 47 40 0 97

2002 2003 2162 3921 1453 1839 1818 2295 1486 1790 1496 1727 676 1021 479 562 60 120 155 211 67 105 40 40 0 0 125 147 Source: UNCTAD

2004 4456 2645 2609 2288 1959 1289 562 382 307 214 41 0 0

Inward FDI Stock, $mln. Ukraine Belarus Tajikistan Georgia Armenia Moldova Kyrgyz Republic

1992 284 7 9 0 0 16 0

1993 484 25 18 18 8 16 10

1994 643 35 30 26 9 29 48

1995 910 50 40 32 34 94 144

1996 1431 154 58 68 52 117 191

1997 2064 506 76 138 103 196 274

1998 2801 709 101 210 313 258 383

1999 3248 1153 122 292 421 323 428

2000 3875 1306 146 423 513 459 439

2001 4801 1397 155 533 577 600 427

2002 2003 5529 6953 1646 1897 192 223 698 1036 684 840 727 789 476 501 Source: UNCTAD

2004 7053 2067 1938 1535 1058 789 501

Outward FDI Stock, $mln. Ukraine Armenia Kyrgyz Republic Moldova Georgia Belarus Tajikistan

1992 0 0 0 0 0 0 0

1993 79 0 0 0 0 0 0

1994 87 0 0 18 0 0 0

1995 97 0 0 18 0 0 0

1996 92 0 0 19 0 0 0

1997 134 0 0 23 0 2 0

1998 98 12 23 24 0 4 0

1999 105 25 29 23 0 5 0

2000 170 33 33 23 0 6 0

2001 156 44 39 23 0 20 0

2002 2003 2004 144 157 157 55 54 56 39 45 45 23 23 23 0 0 10 4 6 7 0 0 4 Source: UNCTAD

Inward FDI Stock, $mln. Algeria Iran Saudi Arabia United Arab Emirates Venezuela

1992 1993 1465 1465 2071 2278 22582 23951 907 1308 4805 5177

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1465 1465 1735 1995 2496 3003 3441 4637 5702 6336 6970 228 2297 2323 2376 24 2435 2474 2529 2805 2925 3045 243 22423 21294 24338 28627 27847 25963 25983 25368 25576 27669 137 177 2071 2303 2561 1576 1061 2246 308 356 1822 599 6975 9158 14694 19189 22479 26944 30392 3171 34241 36772 Source: UNCTAD

Outward FDI Stock, $mln. Algeria Iran Saudi Arabia United Arab Emirates Venezuela

1992 243 16 1313 104 2583

1993 247 2025 1336 116 3469

1994 262 2425 1557 97 3827

1995 266 2875 1621 98 3918

1996 269 33 1852 87 4425

1997 277 112 1841 74 4925

Inward FDI Stock, $mln. Azerbaijan Kazakhstan Russia Turkmenistan Uzbekistan

1992 0 0 1379 0 9

1993 0 1271 2590 79 57

1994 22 1931 3230 182 130

1995 330 2895 5465 415 106

1996 1997 1998 1999 2000 2001 2002 2003 2004 957 2072 3095 3606 3735 3962 5354 8639 12195 4032 5354 6505 7977 10078 12917 15464 17567 21836 7876 14718 11769 12757 25226 36776 51374 52518 64189 523 631 693 818 944 1114 1214 1314 1346 196 363 503 624 699 782 847 917 992 Source: UNCTAD

Outward FDI Stock, $mln. Azerbaijan Kazakhstan Russia Turkmenistan Uzbekistan

1992 0 0 2304 0 0

1993 0 0 2446 0 0

1994 0 0 2547 0 0

1995 0 0 3015 0 0

1996 0 0 3753 0 0

1997 0 2 6403 0 0

1998 278 121 1915 44 5158

1998 137 10 7377 0 0

1999 325 859 1965 160 5659

2000 343 1207 212 2253 5766

2001 352 4019 2076 2695 5914

2002 2003 452 466 5318 6804 2126 218 3136 4129 6807 795 Source: UNCTAD

2004 480 8358 317 5159 1938

1999 2000 2001 2002 2003 2004 473 474 632 957 1260 2465 14 16 0 417 305 0 8586 20141 32437 47676 51809 61410 0 0 0 0 0 0 0 0 0 0 0 0 Source: UNCTAD

Appendix 3 Russia’s Main Trading Partners Finland, $ bln.

Netherlands, $ bln. 6

16

Export

Export 12

Import

Import

4

8 2 4 0

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Germany, $ bln. 16

Austria, $ bln. 1.5 Export

Export 12

Import

Import

1.0

8 0.5 4 0

0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

France, $ bln. 5

Spain, $ bln. 2.0

Export

Export

4

1.5

Import

Import

3 1.0 2 0.5

1 0

0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Italy, $ bln. 14

United Kingdom, $ bln. 6

12

Export

10

Import

5 4

Export Import

8 3

6 4

2

2

1

0

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Appendix 4 Russia’s Main Investment Partners (FDI Stocks) Italy, $ mln. 160

Germany, $ mln. 2500

Inward 120

Inward 2000

Outward

Outward

1500 80 1000 40

500

0

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Austria, $ mln. 700

Netherlands, $ mln. 6000

600

Inward

500

Outward

5000 4000

Inward Outward

400 3000 300 2000

200

1000

100 0

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Spain, $ mln. 400

France, $ mln. 2000

Inward 300

Inward

Outward

1500

200

1000

100

500

0

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

United Kingdom, $ mln.

Finland, $ mln. 7500

500

Inward

Inward 400

Outward

Outward

6000

300

4500

200

3000

100

1500

Outward

0

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Appendix 5 Russian Exports, $bln. Netherlands Germany Italy Finland UK France Spain Austria

1995 3,19 6,21 3,38 2,39 3,07 1,52 0,29 0,89

1996 3,32 6,74 2,83 2,64 3,21 1,60 0,41 0,82

1997 4,55 6,53 3,56 2,77 2,85 1,63 0,63 0,74

1998 3,95 5,72 3,22 2,07 2,96 1,46 0,55 0,58

1999 3,67 6,21 3,76 2,41 2,89 1,21 0,50 0,58

2000 4,35 9,23 7,25 3,10 4,67 1,90 1,07 0,76

2001 4,70 9,19 7,40 3,11 4,28 2,25 0,89 0,72

2002 2003 2004 7,53 8,66 15,25 8,06 10,42 13,30 7,44 8,51 12,08 2,94 4,32 5,83 3,80 4,87 5,64 2,66 3,49 4,43 1,10 1,31 1,74 0,73 1,03 1,12 Source: Rosstat

Russian Imports, $bln. Germany Italy France Finland UK Netherlands Austria Spain

1995 6,48 1,85 1,07 2,04 1,10 1,65 0,98 0,24

1996 5,19 2,34 1,27 1,68 1,13 1,01 0,67 0,36

1997 6,64 2,64 1,59 1,87 1,48 1,21 0,71 0,53

1998 5,49 1,82 1,60 1,44 1,22 0,91 0,51 0,41

1999 4,20 1,16 1,23 0,95 0,68 0,69 0,40 0,25

2000 3,90 1,21 1,19 0,96 0,86 0,74 0,42 0,31

2001 5,81 1,72 1,54 1,29 1,00 0,85 0,54 0,49

2002 6,60 2,23 1,90 1,52 1,12 1,06 0,61 0,58

2003 2004 8,10 10,58 2,40 3,20 2,34 3,07 1,85 2,33 1,44 2,07 1,26 1,37 0,79 0,92 0,76 0,88

Source: Rosstat

Russian Inward Bilateral FDI Stocks, $mln. France Germany United Kingdom Spain Finland Netherlands Austria Italy

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1 247 1 248 1 252 1 256 1 257 1 264 1 297 1 370 1 394 1 418 306 472 651 733 733 842 1 021 1 087 1 112 1 137 225 320 351 351 351 351 378 378 378 378 77 127 173 206 206 206 235 235 295 355 91 109 120 124 136 153 206 224 227 244 22 39 71 73 82 83 244 244 244 244 2 4 5 8 38 69 1 2 3 4 5 6 9 10 11 12 Source: OECD

Russian Outward Bilateral FDI Stocks, $mln. United Kingdom Netherlands Germany France Austria Finland Italy Spain

1995 253 40 228 276 75 36 15 2

1996 1997 1998 1999 2000 2001 2002 459 1 193 911 1 285 1 657 2 374 1 570 111 731 853 1 135 1 409 1 660 2 715 469 672 1 047 1 047 1 292 1 818 2 160 348 410 595 780 849 912 1 186 88 154 154 175 245 392 574 109 180 199 268 318 444 396 20 50 56 59 93 112 121 6 10 16 16 17 24 63

2003 5 780 4 180 1 918 1 401 551 310 131 83

Source: OECD

2004 6 780 5 644 2 218 1 616 651 390 142 103

Semyon Vavilov [email protected] +33 6 14 44 96 21 Université Paris I Panthéon – Sorbonne 106-112 boulevard de l’Hôpital 75013 Paris France