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U.S. corporate investment and foreign penetration: Imports and inward foreign direct investment

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  • Li, Rui
  • Wan, Chi
  • Wang, Mengying

Abstract

This paper examines the joint effect of imports and inward foreign direct investment (iFDI), the two primary entry forms of foreign companies to the U.S. product market, on domestic firms’ capital investment decisions. We develop novel firm-level measures to gauge the impact of imports and iFDI. We show that increased import competition significantly reduces U.S. firms’ investment; in contrast, the effect of iFDI on investment is largely nonsignificant. Further analysis suggests that the negative effect of imports on investment is due to competition-induced decline in cash flows. And the nonsignificant result for iFDI can be partly attributed to technology spillovers generated by foreign multinational’s U.S. productions, which promote U.S. local firms’ innovation capacity and consequently offset the negative effect of foreign competition on investment. Overall, our results indicate that foreign competition plays a key role in shaping corporate investment policy and highlight the distinct implications of imports and iFDI on firm investment.

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  • Li, Rui & Wan, Chi & Wang, Mengying, 2018. "U.S. corporate investment and foreign penetration: Imports and inward foreign direct investment," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 124-144.
    • Handle: RePEc:eee:jimfin:v:85:y:2018:i:c:p:124-144
    DOI: 10.1016/j.jimonfin.2018.04.003
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    More about this item

    Keywords

    Foreign direct investment; International trade liberalization; Capital investment;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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