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How does FDI transmit into domestic investment? Exploring intra-industry and financial channels

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Foreign direct investment (FDI) is often seen as a means to boost domestic investment and, hence, capital accumulation. Yet, the empirical support for such a positive investment effect of FDI is inconclusive. A possible reason is that FDI is often directed towards the financial sector, where capital investment tends to be low. In this paper, we first explore the within-industry relationship between FDI and domestic investment. We then use a novel approach to analyse how FDI into the financial sector transmits into domestic investment by non-financial industries. Using industry-level FDI and investment data from 12 Central and Eastern European countries between 1997 and 2019, we find that about a quarter of FDI into an industry results in domestic investment. Additionally, we document that industries with close links to the financial sector increase domestic investment in the presence of financial FDI, particularly manufacturing, trade and real estate.

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  • Tim de Leeuw & Konstantin M. Wacker, 2025. "How does FDI transmit into domestic investment? Exploring intra-industry and financial channels," wiiw Working Papers 261, The Vienna Institute for International Economic Studies, wiiw.
    • Handle: RePEc:wii:wpaper:261
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    1. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    2. Joseph P. Joyce, 2021. "The sources of international investment income in emerging market economies," Review of International Economics, Wiley Blackwell, vol. 29(3), pages 606-625, August.
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    Keywords

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F3 - International Economics - - International Finance
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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