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Domestic Effects of the Foreign Activities of US Multinationals

  • Mihir A. Desai
  • C. Fritz Foley
  • James R. Hines

Do firms investing abroad simultaneously reduce their domestic activity? This paper analyzes the relationship between the domestic and foreign operations of US manufacturing firms between 1982 and 2004 by instrumenting for changes in foreign operations with GDP growth rates of the foreign countries in which they invest. Estimates produced using this instrument indicate that 10 percent greater foreign investment is associated with 2.6 percent greater domestic investment, and 10 percent greater foreign employee compensation is associated with 3.7 percent greater domestic employee compensation. These results do not support the popular notion that expansions abroad reduce a firm's domestic activity, instead suggesting the opposite. (JEL F23, H25, L25)

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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 1 (2009)
Issue (Month): 1 (February)
Pages: 181-203

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Handle: RePEc:aea:aejpol:v:1:y:2009:i:1:p:181-203
Note: DOI: 10.1257/pol.1.1.181
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  1. Arndt, Christian & Buch, Claudia M. & Schnitzer, Monika, 2007. "FDI and Domestic Investment: An Industry-Level View," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 212, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  3. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2006. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 3-26, Summer.
  4. Stevens, Guy V. G. & Lipsey, Robert E., 1992. "Interactions between domestic and foreign investment," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 40-62, February.
  5. Robert E. Lipsey, 1994. "Outward Direct Investment and the U.S. Economy," NBER Working Papers 4691, National Bureau of Economic Research, Inc.
  6. Martin S. Feldstein & James R. Hines, Jr. & R. Glenn Hubbard, 1995. "Introduction to "The Effects of Taxation on Multinational Corporations"," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 1-6 National Bureau of Economic Research, Inc.
  7. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "The Effects of Taxation on Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-2, December.
  8. repec:oup:qjecon:v:120:y:2005:i:2:p:729-761 is not listed on IDEAS
  9. Blonigen, Bruce A., 2001. "In search of substitution between foreign production and exports," Journal of International Economics, Elsevier, vol. 53(1), pages 81-104, February.
  10. W Hejazi & P Pauly, 2003. "Motivations for FDI and domestic capital formation," Journal of International Business Studies, Palgrave Macmillan, vol. 34(3), pages 282-289, May.
  11. Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc.
  12. Kei-Mu Yi, 2000. "Can vertical specialization explain the growth of world trade?," Staff Reports 96, Federal Reserve Bank of New York.
  13. Bruce A. Blonigen & Wesley W. Wilson, 1999. "Explaining Armington: What Determines Substitutability Between Home and Foreign Goods?," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 1-21, February.
  14. repec:oup:qjecon:v:114:y:1999:i:3:p:907-940 is not listed on IDEAS
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