**Abstract**

As globalization and trade liberalization have increased integration of the world economy through financial and trade flows, the role of FDI and trade on economic growth is becoming more influential. This paper investigates the impact of FDI on trade of the East Asian economic transition countries, namely the China, Cambodia, Lao PDR, and Vietnam, employing FDI flow and FDI stock data separately. The data from these four countries during the period 1990–2019 have been collected, and OLS and panel within fixed effect estimators are utilized. The main findings show that, first, when estimated using FDI flow as independent variable, there exists complementary effect between FDI and trade, and the coefficients are significant except for Cambodia. Second, when estimated using FDI stock as independent variable, the impact of FDI decreases and even substitutability effect is found in China at significant level. Third, in both cases, the coefficient of FDI is shown positive and significant in Vietnam. In addition, the paper finds the effects of human capital, GDP, and WTO accession on trade are positive, while the effects of exchange rate, financial development, and tariff rate vary among the East Asian economic transition countries.

**Keywords:** foreign direct investment, trade, East Asian transition economies, panel within fixed effect, China, Cambodia, Lao PDR, Vietnam

#### **1. Introduction**

In the last decade, global trade increased more than twice as fast as the global GDP and growth of FDI (foreign direct investment) outpaced the growth of global exports [1, 2]. According to WDI, Global trade volume accounted for 51% of global GDP in 2000, but as in 2019, it accounts for 60% of global GDP. Global FDI stock invested by global economies in 2019 were US\$34 trillion at current price, which increased at significant pace considering that it was US\$7.4 trillion in 2000.

This increase in global trade accompanied by a rapid growth of FDI intrigued a number of studies to investigate the role of FDI and trade on economic growth and the relationship between the FDI and trade. Most empirical studies find complementary relationship, while few find substitute effect of FDI on trade [2–6]. Some studies suggest the effect of FDI on trade depends on the type of FDI, type of industry, or income level of recipient countries [3, 7, 8]. While [3] finds complementary relationship between FDI and trade in most cases, he argues the impact of FDI on import is greater than export in developing countries in short term.

Despite the effect of FDI on export can be negative (or relatively smaller than on import) for developing countries, FDI inflow enables transfer of technology and managerial skills from developed countries, hence leading to positive spillover [9]. Hence, role of FDI and trade are particularly important for emerging countries and transition countries who opened its economy quite recently.

A number of literatures classify the transition into three types: Germany, Former Soviet Union, and East-Asian types [10, 11]. This study is interested in East-Asian type in specific, covering China, Vietnam, Cambodia, and Lao PDR. These countries transformed the economic system to capitalistic market system through reform and opening up. However, they maintain their political system of one-party communist system. This type is often referred to economic transition countries.

The case of the East Asian economic transition countries is interesting as they have shown fast economic growth soon after they transited their economic system from socialist regime to market-oriented regime. China, Cambodia, Lao PDR, and Vietnam initiated economic reforms in 1979, 1989, 1986, and 1986, respectively. However, most of existing empirical studies investigate the trade determinants of specific country or countries in same geographical area or in similar development level. There is limited empirical evidence about the determinants of East Asian economic transition countries' regional trade development.

By examining the impact of FDI on trade of these East Asian economic transition countries, this paper provides more insight into the regional and global implications of FDI and trade in East Asian economic transition countries. Policy implications can be derived for the countries that have been experiencing economic transition such as Myanmar, Cuba and the country such as North Korea in the future. Therefore, through utilizing the panel fixed effect regression, this study investigates the impact of FDI on trade.

Empirical results show complementary effect between FDI and trade when estimated using FDI flow variable. To be specific, the effect of FDI on trade is shown the highest in the order of Vietnam, China, Cambodia, and Lao PDR although the coefficient of FDI is insignificant in Cambodia. When estimated using FDI stock variable, the complementary relationship between FDI and trade weakens, and even substitutability effect is found in China at significant level. Interestingly, the coefficient of FDI is positive and significant in Vietnam in both cases.

The rest of the paper is organized as follows. In Section 2, the paper briefly investigates the role, trend and relationship between the global trade and FDI with providing a related literature review. In Section 3, terminology related to economic transition and performance of trade and FDI of East Asian economic transition countries (China, Cambodia, Laos, and Vietnam) are reviewed. In addition, FDI policies of these countries are thoroughly analyzed. In Section 4, the paper provides empirical analysis and results in Section 5. Finally, Section 6 concludes the study with a discussion of our findings.
