Foreign direct investment, exports and exchange rates: The case of forest industries

Abstract

Foreign direct investment (FDI) by forest companies has increased rapidly in the 1990s. An interesting question is to what extent FDI and traditional trade in the forest sector are substitutes or complements to each other. For example, does FDI lead to increased or decreased exports of forest products from the home country in the long run? This article explores the dynamic relationship between FDI and exports of forest industries with U.S., Finnish, and Swedish data. Both short-term and long-term interrelationships between FDI and exports are studied, as well as the short-term and long-term effects of exchange rate movements and exchange rate variation. The results show that for the U.S. forest industries, FDI and exports of forest products may have become full substitutes in the 1990s. In the case of the Finnish and Swedish forest industries, exports seem to affect negatively the investments abroad, while FDI does not affect exports in the long run. Both the FDI and exports by the U.S. forest industries are unaffected by dollar variability. In the 1980s, the strengthening value of the dollar increased the FDI by the U.S. forest industries.