The Interactive Relationship between Regional Trade Integration and Foreign Direct Investment


Department of Economics, University of Isfahan, Isfahan, Iran



conomic integration among countries has continued to deepen over the past decade. This is especially visible at the regional level, with the escalation of Regional Integration Agreements (RIAs) ranging from Free Trade Areas (FTAs) to Customs Unions (CUs). Nowadays, many developing countries have entered a new regional integration agreement with developed and developing countries. Since international trade and Foreign Direct Investment (FDI) are generally  recognized as the two main channels of economic integration, the common question is whether international trade and FDI act as complements or substitutes. This paper tries to examine the interaction between trade integration and FDI in Iran, and provide an empirical assessment of the complementarity or substituting relationship between trade and FDI. We consider Iran bilateral trade as integration variable, with selected countries in EU, ASEAN+3, ECO and D8, by using 2SLS estimators within the period 1994–2014. Results indicate that the bilateral manufacturing export and foreign direct investment have a significant direct relationship with each other in Iran. Also, economic similarities with ECO and D8 have higher effect on both export and FDI.


Africano, A. P., & Magalhaes, M.  (2005). FDI and Trade in Portugal: A Gravity Analysis. FEP Working Papers, 174, Retrieved from

Aizenman, J., & Noy, I. (2006). FDI and Trade Two-Way Linkages? The Quarterly Review ofEconomics and Finance, 46(3), 317-337.

Albulescu, C. T., & Goyeau, D. (2016). The Interaction between Trade and FDI: CEE Countries Experience. Retrieved from https://hal.archives-ouvertes.

Azhar, A., Ullah, N., & Malik, Q. A. (2015). Effect of Exchange Rate Volatility on Foreign Direct Investment in Saarc Countries, Middle-East. Journal of Scientific Research, 23(2), 350-356.

Bajio, R., & Simon, S. (1994). An Econometric Analysis of  Foreign Direct Investment 1964-89. Southen & Economic Journal, 1(2), 1-33.

Baum, C. F., Schaffer, M. E., & Stillman, S. (2003). Instrumental Variables and GMM: Estimation and Testing. The Stata Journal, 3(1), 1-31.

Beugelsdijk, S., Smeets, R., & Zwinkels, R. (2008). The Impact of Horizontal and Vertical FDI on Host’s Country Economic Growth. International Business Review, 17, 452-472.

Bevan, A. A., & Estrin, S. (2004). The Determinants Foreign Direct Investment into European Transition Economies. Journal of Comparative Economics, 32(4), 775-787.

Carr, D. L., Markusen, J. R., & Maskus, K. (2001). Estimating the Knowledge-Capital Model of the Multinational Enterprise. American Economic Review, 91(3), 693-708.

Chakraborty, D., & Mukherjee, J. (2012). Is There Any Relationship between FDI and Economic Growth in India. Review of Market Integration, 4(3), 309-337.

Clausing, K. A. (2000). Does Multinational Activity Displace Trade? Economic Inquiry, 38(2), 190-205.

Culem, C. (1988). The Locational Determinants of  Direct Investment among Industrial Countries. European Economic Review, 32, 885-904.

Dauti, B. (2016). Trade and Foreign Direct Investment: Evidence from South East European Countries and New European Union Member States. Zbornik Radova Ekonomskog Fakulteta Rijeci:Asopis Za Ekonomsku Teoriju i Praksu, 34(1), 63-89.

De Mello, L. R. (1997). FDI in Developing Countries and Growth: A Selective Survey. The Journal of Development Studies, 34(1), 1-34.

Dodangi, M. (2016). Factors Affecting Domestic and Foreign Investments in Iran.  Quarterly Journal Of Economic Growth And Development Research, 6(23), 131-147.

Dunning, J. (1977). Trade, Location of Economic Activity and MNE: A Search for anEclectic Approach. London: The International Allocation of Economic Activity.

Falk, M., & Hake, M. (2008). A Panel Data Analysis on FDI and Exports. Forschungsschwerpunkt Internationale Wirtschaft (FIW) Research Report, 12, 1-27.

Frankel, J., Stein, E., & Wei, Sh. J. (1995). Trading Blocs and the Americas: The Natural, the Unnatural, and the Super-Natural. Journal of DevelopmentEconomics, 47(1), 61-95

Froot, K. A., & Stein, J. L. (1991). Exchange Rates and Foreign Direct Investment: An Imperfect Capital Market Approach. Quarterly Journal of Economics, 106(4), 1191-1217.

Globerman, S. (2002). Trade, FDI and Regional Economic Integration: Cases of North America and Europe. Presented at the Conference Enhancing Investment Cooperation in Northeast Asia, Retrieved from

Gushman, D. (1985). Real Exchange Rate Risk, Expectations, and the Level of Direct Investment. Review of Economics and Statistics, 67(2), 297-308.

Helpman, E., & Krugman, P. (1986). Market Structure and Foreign Trade. Cambridge: MIT Press.

Iqbal, M. S., Shaikh, F. M., & Shar, A. H. (2010). Causality Relationship between Foreign Direct Investment, Trade and Economic Growth in Pakistan. Asian Social Science, 6(9), 82-83.

Javed, K., Falak, S., Awan, R., & Ashfaq, M. (2012). FDI, Trade and Economic Growth: A Comparison of Selected Asian Countries. International Journal of Humanities Science, 2(5), 210-220.

Johnson, A. (2006). FDI Inflows to the Transition Economies of Eastern Europe: Magnitude and Determinants. CESIS Electronic Working Paper Series, 59, Retrieved from

Kumar, N. (1998). Multinational Enterprises, Regional Economic Integration, and Export Platform Production in the Host Countries. Weltwirtschaftliches Archive, 134, 450-483.

Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit Root Test in Panel Data: Asymptotic and Finite Sample Properties. Journal of Econometrics, 108(1), 1-24.

Majeed, M. T., & Ahmad, E. (2006). Determinants of Exports in Developing Countries. The Pakistan Development Review, 45(4), 1265-1274.

Markusen, J. R. (2002). Multinational Firms and the Theory of International Trade. Colorado, Boulder: MIT Press.

MartInez1, V., Bengoa, M., & Robles, M. (2012). Foreign Direct Investment and Trade: Complements or Substitutes? Technology and Investment, 3, 105-112.

Najarzadeh, R., & Shagaghi, S. V. (2005). Regional Integration and Its Impact on FDI. Tahghighat- E- Eghtesadi, 72, 362-337.

Pontes, J. P. (2004). A Theory of the Relationship between Foreign Direct Investment and Trade. Economics Bulletin, 6, 1-8.

Pourshahabi, F., Salimi, E., & Mahmoudinia, D. (2013). Panel Causality Relationship among FDI and Trade. Iranian Economic Review, 17(1), 22-36.

Raju, R., & Gokhale, M. S. (2012). Empirical Analysis of Relationship between Nominal Exchange Rate and Foreign Direct Investment in India. Global Journal of Management and Business Research, 12(22), 60-66.

Resmini, L. (2000). The Determinants of  Foreign Direct Investment in the CEECs: New Evidence from Sectoral Patterns. The Economics of Transition, 8(3), 665-689.

Schneider, F., & Frey, B. S. (1985). Economical Political Determinants of FDI. WorldDevelopment, 13(2), 161-175.

Shawa, M. J., & Amoro, G. (2014). The Causal Link between Foreign Direct Investment, GDP Growth, Domestic Investment and Export for Kenya. JournalofEconomicsandSustainableDevelopment,5(16), 107-115.

Shukurov, M. (2016). Determinants of FDI in Transition Economies: The Case of CIS Countries. Journal of International and Global Economic Studies, 9(1), 75-94.

Tayyebi, K., Azarbayegani, K., & Rafat, B. (2007). Instrumental Variable and Two-Stage Least Squares for Panel-Data in Interaction between Trade and FDI. Pajoheshhay-E-Eghtesadi, 8(4),77-94.

Turkan, K. (2006). Foreign Outward Direct Investment and Intermediate Goods Exports: Evidence from USA. Retrieved from

Umoh, O. J., Jacob, A. O., & Chuku, C. A. (2012). Foreign Direct Investment and Economic Growth in Nigeria. Current Research Journal of Economic Theory, 4(3), 53-66.

Vernon R. (1966). International Investment and International Trade in the Product Cycle. TheQuarterly Journal of Economics,80(2), 190-207.

Wang, Z. Q., & Swain, N. J. (1995). The Determinants of Foreign Direct Investment in Transforming Economies. WeltwirtschaftlichesArchive, 131, 359-382.

Wheeler, D., & Mody, A. (1992). International Investment Location Decisions: The Case of US Firms. Journal of International Economics, 33, 57-76.

Zhang, K. H., & Maskusen, J. R. (1999). Vertical Multinationals and Host Country Characteristics. Journal of Development Economics, 59, 233-252.