International Business Cycle Comovement: Trade and Foreign Direct Investment

This paper investigates the relationship between foreign direct investment (FDI) and business cycle synchronization in the period 1982–2010 for eight industrialized countries. We find that more synchronized business cycles are associated with stronger FDI relations during 1995–2010, but that they are mainly associated with stronger trade linkages before 1995. More intensive FDI links are also associated with a greater vulnerability to lagged output spillovers from abroad, whereas trade links are not. Our findings suggest that FDI has become a separate channel through which economies may affect each other and that FDI stocks are now an essential aspect of economic interdependence. 

Keywords: business cycle synchronization, international linkages, trade, FDI, vertical integration.
JEL Code: F21, F44.

Working paper no. 319