Multinational enterprises, foreign direct investment and trade in China: A cointegration and Granger-causality approach

Multinational enterprises (MNEs) play a dominant role in the international business (IB) literature. Traditionally, by far the majority of IB studies deal with issues at the micro level of the individual MNE, or at the meso level of a sample of individual MNEs. This paper focuses on a macro-level issue: the impact of MNE behavior through foreign direct investment (FDI) on international trade, and vice versa. In so doing, this study responds to a recent plea for more macro-level studies in IB into the effect of MNE behavior on the macroeconomic performance of countries as a whole, particularly developing and emerging economies. In this way, IB research would inform the heated debate about the pros and cons of globalization, where antiglobalization rhetoric emphasizes the negative consequences of the increased dominance of MNEs for the world at large and the Third World in particular. In the current study, we focus on the largest developing or emerging economy of all: China. Applying sophisticated econometric techniques, we unravel the causality and direction of FDI – trade linkages for the Chinese economy in the 1980 – 2003 period.