Braunerhjelm, Pontus (Center for Business and Policy Studies) Oxelheim, Lars () (Department of Business Administration, School of Economics and Management, Lund University) Thulin, Per (Center for Business and Policy Studies)
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Previous research has been inconclusive as regards the effect of outward foreign direct investment (FDI) on domestic investments. In this article we show that this inconclusiveness can be explained at a disaggregated level as a function of the way industries are organized. Based on a simple theoretical framework including monitoring and trade costs, we argue that a complementary relationship can be expected to prevail in vertically integrated industries, whereas a substitutionary relationship can be expected in horizontally organized production. The empirical analysis confirms a significant difference between the two categories of industry as regards the impact of outward FDI on domestic investment. The results may thus have profound policy implications.
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Paper provided by Lund University, Institute of Economic Research in its series Working Paper Series with number
2004/10.