Working Paper: NBER ID: w4691
Authors: Robert E. Lipsey
Abstract: Investment in production outside the United States is a method by which U.S. firms raise their shares in foreign markets and defend them against foreign rivals from the host countries and from other countries. The investing firms are exploiting their firm-specific assets such as proprietary technologies, patents, or skills in advertising or marketing, and the opportunity to produce abroad raises the value of these assets and encourages firms' investment in them by extending the range of markets and the length of time over which they can be exploited. Overseas production has contributed to the ability of American multinationals to retain world market shares in the face of the long- term decline in the share of the U.S. as a country and short-term changes such as exchange rate fluctuations. It has performed the same functions for Swedish firms and, more recently, for Japanese firms. Within U.S. multinationals, those with higher shares of their production overseas have higher employment at home relative to home production. Foreign production appears to require larger numbers of employees in headquarters activities such as R&D and supervision.
Keywords: Outward Direct Investment; US Economy; Multinational Firms
JEL Codes: F21; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| outward direct investment (ODI) (F23) | domestic employment (J63) |
| outward direct investment (ODI) (F23) | operational dynamics of multinational firms (F23) |
| foreign production (F23) | competitiveness in foreign markets (F23) |
| decline in share of US firms in global direct investment (F23) | overall economic performance (P47) |