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Interactions between domestic and foreign investment

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Author Info
Guy V.G. Stevens
Robert E. Lipsey

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Abstract

This paper studies both the domestic and foreign fixed investment expenditures of a sample of U. S. multinational firms. In addition to explaining empirically each type of investment, an important goal is to determine whether there are significant interactions between expenditures in the different locations. ; Two types of interaction--one, financial, and the other, production-based--are explored theoretically and empirically. The financial interaction is the result of a model which assumes a risk of bankruptcy and its associated costs; under these circumstances, the firm faces an increasing cost of capital as a function of its debt/equity ratio. Domestic and foreign investment will be interdependent, since, in competing for finance, each affects the cost of capital in the other location. Production interactions can arise when, because of start-up costs or other factors that produce nonlinear cost functions, it may become, profitable to shift production from the home to the foreign location. ; The hypotheses are tested on a unique sample of micro-economic data covering the domestic and foreign operations of seven multinational firms for a period of 16 to 20 years. In general the firm-level investment functions fit reasonably well for both domestic and foreign expenditures. An interdependence between domestic and foreign investment was confirmed frequently through the finance side, but only once via production.

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Publisher Info
Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 329.

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Date of creation: 1988
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Handle: RePEc:fip:fedgif:329

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Related research
Keywords: International business enterprises ; Capital ; Investments; Foreign;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Magnus Blomstrom & Robert E. Lipsey & Ksenia Kulchycky, 1989. "U.S. and Swedish Direct Investment and Exports," NBER Working Papers 2390, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Alan K. Severn, 1972. "Investment And Financial Behavior Of American Direct Investors In Manufacturing," NBER Chapters, in: International Mobility and Movement of Capital, pages 367-396 National Bureau of Economic Research, Inc. [Downloadable!]
  3. Kravis, Irving B. & Lipsey, Robert E., 1978. "Price behavior in the light of balance of payments theories," Journal of International Economics, Elsevier, vol. 8(2), pages 193-246, May. [Downloadable!] (restricted)
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  4. Guy V.G. Stevens, 1986. "Internal funds and the investment functions: exploring the theoretical justification of some empirical results," Special Studies Papers 199, Board of Governors of the Federal Reserve System (U.S.).
  5. Peter M. Garber & Robert G. King, 1983. "Deep Structral Excavation? A Critique of Euler Equation Methods," NBER Technical Working Papers 0031, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September. [Downloadable!] (restricted)
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