Working Paper: NBER ID: w2713
Authors: W. Erwin Diewert
Abstract: This paper examines the domestic and foreign fixed investment expenditures of a sample of U.S. multinational firms to explain empirically each type of investment and to determine whether there are significant interactions between them. Models exhibiting two types of interactions, one, financial and the other, production-based, are explored theoretically and empirically. The financial interaction is the result of a model which assumes a risk of bankruptcy and its associated costs; under these circumstances, the firm faces an increasing cost of capital as a function of its debt/equity ratio. Domestic and foreign investment are interdependent, since, in competing for finance, each affects the cost of capital in the other location. Production interactions can arise when, because of start-up costs or other factors that produce nonlinear cost functions, it may become profitable to shift production from the home to the foreign location. The hypotheses are tested on data covering the domestic and foreign operations of seven multinational firms for a period of 16 to 20 years. The firm level investment functions fit reasonably well for both domestic and foreign expenditures; an interdependence between domestic and foreign investment was confirmed frequently through the finance side, but only once via production.
Keywords: price index; economic approach; historical survey
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic approach to index number theory (C43) | accurate representation of price measurement (E30) |
| economic approach (D61) | precise estimations of price changes (E30) |
| economic approach (D61) | substitution bias (D11) |
| treatment of consumer durables in price measurement (L68) | impact on overall savings measures (D14) |
| circularity test satisfied by paasche, laspeyres, and superlative indexes (C43) | robust relationship between methodologies (C18) |