Working Paper: NBER ID: w11075
Authors: Mihir A. Desai; C. Fritz Foley; James R. Hines Jr.
Abstract: This paper evaluates evidence of the impact of outbound foreign direct investment (FDI) on domestic investment rates. OECD countries with high rates of outbound FDI in the 1980s and 1990s exhibited lower domestic investment than other countries, which suggests that FDI and domestic investment are substitutes. U.S. time series data tell a very different story, however: years in which American multinational firms have greater foreign capital expenditures coincide with greater domestic capital spending by the same firms. One dollar of additional foreign capital spending is associated with 3.5 dollars of additional domestic capital spending in the time series, implying that foreign and domestic capital are complements in production by multinational firms. This effect is consistent with cross sectional evidence that firms whose foreign operations expand simultaneously expand their domestic operations, and suggests that interpretation of the OECD cross sectional evidence may be confounded by omitted variables.
Keywords: Foreign Direct Investment; Domestic Investment; Multinational Firms
JEL Codes: F23; F21; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher levels of capital expenditures by U.S. multinational firms' foreign affiliates (F23) | greater levels of domestic investment (E20) |
| growth rate of foreign economies (F43) | changes in foreign investment (F21) |
| foreign capital expenditure (F21) | domestic capital expenditure (E22) |