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Interactions between domestic and foreign investment

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  • Robert E. Lipsey
  • Guy V. G. Stevens

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.

Suggested Citation

  • Robert E. Lipsey & Guy V. G. Stevens, 1988. "Interactions between domestic and foreign investment," International Finance Discussion Papers 329, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:329
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    References listed on IDEAS

    as
    1. 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.).
    2. Magnus Blomstrom & Robert E. Lipsey & Ksenia Kulchycky, 1988. "U.S. and Swedish Direct Investment and Exports," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 257-302, National Bureau of Economic Research, Inc.
    3. 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.
    4. 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.
    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.
    6. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
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