The Role of Uncertainty in Shaping the Relationship between Direct Investments and International Trade: Evidence from VAR Models

Abstract

In this study, we test whether uncertainty shocks can affect the choice between direct investments and international trade as competitive modes of operating on foreign markets. In order to verify this, we built simple investments-to-trade ratios and used them with selected uncertainty measures in VAR models. Our analysis shows that in the case of the Polish manufacturing sector, different types of uncertainty not only affect the choice between direct investments abroad and exports but also affect the choice between foreign direct investment and imports as different modes of supplying the Polish market by foreign entities.

Keywords:

• Foreign direct investment
• international trade
• uncertainty
• VAR

Notes

1 The criteria for the choice of the number of lags in the model are presented in the next section.