Foreign Direct Investment in the US: Externalities between the Two-Sector of the Economy

This paper empirically unfastens the spillover effects between the domestic-funded sector and the foreign-funded sector in the United States using inter-sectorial externalities. The study analyzes the spillover effect from domestic firms to foreign firms of the United States economy. Based on the two-sector analysis, the hypothesis that the domestic-funded sector plays a significant role in promoting the foreign-funded sector was tested in order to derive the externalities between the two sectors of the economy. The research provides support that a mean to supplement foreign investment for achieving a higher level of economic growth is possible through capital structure, transfer of technology, and managerial skills. Empirical evidence provided considerable support that the domestic-funded sector plays a significant role in promoting the foreign-funded sector in the United States. Indeed, the contribution of foreign direct investment is minimal. The empirical results also strengthen the view that multinationals concentrate their more capital-intensive or skill-intensive operations in the United States and allocate their more labor-intensive production to their affiliates in poor countries.