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CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology KTH/CESIS Working Paper Series in Economics and Institutions of Innovation

No 35:
The Relationship Between Domestic and Outward Foreign Investment Revisited: The Impact of Industry-Specific Effects

Pontus Braunerhjelm (), Lars Oxelheim and Per Thulin

Abstract: The ambiguity reported in previous research as regards the effect of foreign direct investment (FDI) on domestic investments is shown to be related to how industries are organized. Based on a simple model including monitoring and trade costs, we argue that a complementary relationship should prevail in vertically integrated industries, whereas a substitutionary relationship can be expected in horizontally organized production. Applying iterative SUR-technique, the empirical analysis confirms a significant difference between the two categories of industries. To our knowledge, this is the first attempt to reconcile the inconclusiveness reported in previous empirical analyses.

Keywords: FDI; complementarities; substitutes; knowledge intensity; (follow links to similar papers)

JEL-Codes: F12; F21; F23; G34; (follow links to similar papers)

29 pages, August 12, 2005

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