Abstract:
Since the seventies, the Federal Republic of Germany has become increasingly integrated in the world economy through it's high rates of foreign direct investment carried out by German multinational enterprises. In the limelight of the 'job export1 debate which paralleled these investment flows was the question: 'Do foreign direct investment flows have a job displacement effect (a substitutive character) or do foreign direct Investments promote domestic employment and export levels (possessing a complementary nature) ?'. Empirically, it has been observed that foreign direct Investment flows demonstrate a high level of congruity with damestic import-export trade structures. German Companies with high levels of foreign direct investment also rank high in exports, thus offering evidence supporting the complementary nature of these investments. However, it must be recognized that a streng substitutive relationship may under certain conditions exist. Applying a simple international trade model incorporating a multinational enterprise, imperfect competition and exchange rate risk parameter constellations are examined in which foreign direct investment flows exhibit a substitutive - rather - complementary character. It is demonstrated that given exchange rate risk as well as international produetion cost comparative advantages foreign direct investment flows substitute potential export flows. Given a damestic comparative produetion cost advantage however, foreign direct investments and exports are complementary.
