FDI and Domestic Capital Stock in US Manufacturing Industries: Crowding-Out and Displacement Effects

The global financial crisis has witnessed a dramatic slowdown in FDI flows, yet concerns over its possible impacts on investment and employment in home and host economies have actually intensified. Although weakened national economies may be a source of many such concerns, research has yet to clarify many of the consequences of bi-directional FDI flows. Inward FDI is often prized by policymakers based on the belief that it results in job creation and technology transfer, but unresolved issues remain. For example, its role as a catalyst in local investment is unsettled, despite the general positive effect it has on domestic productivity. Evidence on the “crowding-in” vs. “crowding-out” hypothesis concerning FDI’s impact on domestic investment remains scarce. A common view of outward FDI is that it displaces local investment; however, some researchers note that the underlying motivation for this investment ultimately will determine its impact on source economies, with the possibility that favourable employment and investment effects could materialize. The present research provides empirical evidence on the crowding-out and displacement effects of bi-directional FDI, relying on disaggregated industry-level data for U.S. manufacturing industries from 1997 to 2007.