Working Paper: NBER ID: w11717
Authors: Mihir A. Desai; C. Fritz Foley; James R. Hines Jr.
Abstract: How does rising foreign investment influence domestic economic activity? Firms whose foreign operations grow rapidly exhibit coincident rapid growth of domestic operations, but this pattern alone is inconclusive, as foreign and domestic business activities are jointly determined. This study uses foreign GDP growth rates, interacted with lagged firm-specific geographic distributions of foreign investment, to predict changes in foreign investment by a large panel of American firms. Estimates produced using this instrument for changes in foreign activity indicate that 10% greater foreign capital investment is associated with 2.2% greater domestic investment, and that 10% greater foreign employee compensation is associated with 4.0% greater domestic employee compensation. Changes in foreign and domestic sales, assets, and numbers of employees are likewise positively associated; the evidence also indicates that greater foreign investment is associated with additional domestic exports and R&D spending. The data do not support the popular notion that greater foreign activity crowds out domestic activity by the same firms, instead suggesting the reverse.
Keywords: Foreign Direct Investment; Domestic Economic Activity; Multinational Firms
JEL Codes: F230; F210; H250
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign GDP growth (F62) | Foreign direct investment (FDI) (F21) |
| Foreign direct investment (FDI) (F21) | Domestic capital investment (E22) |
| Foreign employee compensation (J33) | Domestic employee compensation (J38) |
| Foreign sales (F19) | Domestic sales (F19) |
| Foreign assets (G15) | Domestic assets (D14) |
| Foreign employee numbers (F22) | Domestic employee numbers (J89) |
| Growing foreign operations (F23) | Increased domestic operations (L93) |