REGIONAL COOPERATION AND ECONOMIC INTEGRATION

PART III:
3. Foundations of the new concept of international trade
When a large transnational company places an investment in a company abroad taking
control over this foreign company business policy we know that this is a flow of private
capital in a form of foreign direct investment. But this investment can have an huge impact
on the international trade if this affiliates have been involved in international trading.
Usually parent company replaces its direct export to a country by investing in a company
operating in that country. In this way parent company do not export more to that country
rather it supplies the country by producing goods locally in its affiliate and selling those
goods on a host country market. This mode of operation in international trade is referred
to as international production looking from a standpoint of a parent enterprise. So the
conclusion will be that foreign direct investment have a substitutive effect on trade flows
since FDI has replaced direct export.
But this is not completely accurate. Let suppose that this foreign affiliate is a greenfield
investment with a installed capacity several times over the local demand of host country.
Usually parent companies set up a foreign affiliate in order to supply goods in several
neighboring countries especially if these countries are all members of a same trade block.
New plant needs new machines so greenfield FDI usually creates new import flows for a
host country of a foreign affiliate. If we suppose that machines are imported from a country
where parent company is located this investment creates export flows for a home country
also.
But due to a large production capacity of a new plant and a strategy of parent enterprise of
serving a regional market from one centre, products from a new affiliates are exported from
host country all over its regional neighbors. In this way greenfield FDI also creates export
flows for a host country.
The above is all hypothetical but highly likely in practice of international trade. Some
would argue that FDI flows and involvement of TNC in production activities is not so
important but next figure show that in European Union foreign-controlled companies i.e.
foreign affiliated accounted for 18% of value added generated in 2005. Most important
parent companies came from outside of the EU – from USA.
Figure 1: Share in total value added generated by nationally controlled
and foreign-controlled enterprises in 2005 (breakdown by country of origin,
average for all reporting countries), percentage
Source: Eurostat ”Foreign-controlled enterprises in the EU” Eurostat Statistics in Focus, 30/2008, Office for
Official Publication of the European Communities, 13.02.2008, p. 5, Figure 8.
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