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The Relationship between Domestic and Outward Foreign Direct Investment: The Role of Industry-Specific Effects

Author

Listed:
  • Braunerhjelm, Pontus

    (Center for Business and Policy Studies (SNS) and Linköping University)

  • Oxelheim, Lars

    () (The Research Institute of Industrial Economics)

  • Thulin, Per

    () (Center for Business and Policy Studies (SNS))

Abstract

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 model 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.

Suggested Citation

  • Braunerhjelm, Pontus & Oxelheim, Lars & Thulin, Per, 2004. "The Relationship between Domestic and Outward Foreign Direct Investment: The Role of Industry-Specific Effects," Working Paper Series 625, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:0625
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    References listed on IDEAS

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    Cited by:

    1. Nagubadi, Rao V. & Zhang, Daowei, 2011. "Bilateral foreign direct investment in forest industry between the U.S. and Canada," Forest Policy and Economics, Elsevier, vol. 13(5), pages 338-344, June.
    2. Liu, Zhiyuan & Xu, Yue & Wang, Peijie & Akamavi, Raphaël, 2016. "A pendulum gravity model of outward FDI and export," International Business Review, Elsevier, vol. 25(6), pages 1356-1371.
    3. You, Kefei & Solomon, Offiong Helen, 2015. "China's outward foreign direct investment and domestic investment: An industrial level analysis," China Economic Review, Elsevier, vol. 34(C), pages 249-260.
    4. Santi Chaisrisawatsuk & Wisit Chaisrisawatsuk, 2007. "Imports, Exports and Foreign Direct Investment Interactions and Their Effects," Working Papers 4507, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..
    5. Oxelheim, Lars & Ghauri, Pervez, 2008. "EU-China and the non-transparent race for inward FDI," Journal of Asian Economics, Elsevier, pages 358-370.
    6. P. Butzen & S. Cheliout & E. De Prest & S. Ide & W. Melyn, 2016. "Why is investment in the euro area continuing to show only weak recovery ?," Economic Review, National Bank of Belgium, issue ii, pages 81-98, september.
    7. Blevins, Dane P. & Moschieri, Caterina & Pinkham, Brian C. & Ragozzino, Roberto, 2016. "Institutional changes within the European Union: How global cities and regional integration affect MNE entry decisions," Journal of World Business, Elsevier, vol. 51(2), pages 319-330.
    8. Zhan, Ge, 2013. "Statistical power in international business research: Study levels and data types," International Business Review, Elsevier, vol. 22(4), pages 678-686.
    9. Julian Emami Namini & Enrico Pennings, 2009. "Horizontal Multinational Firms, Vertical Multinational Firms and Domestic Investment," Tinbergen Institute Discussion Papers 09-004/2, Tinbergen Institute.

    More about this item

    Keywords

    FDI; Gross Domestic Investment; Industry-Specific Effects; Monitoring Costs; Trade Costs;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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