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Research Institute of Industrial Economics (IFN) Working Paper Series

No 625:
The Relationship between Domestic and Outward Foreign Direct Investment: The Role of Industry-Specific Effects

Pontus Braunerhjelm, Lars Oxelheim () and Per Thulin ()

Abstract: Previous research has been inconclusive as regards the effect of outward foreign direct investment (FDI) on domestic investments. In this article we show that this inconclusiveness can be explained at a disaggregated level as a function of the way industries are organized. Based on a simple model including monitoring and trade costs, we argue that a complementary relationship can be expected to prevail in vertically integrated industries, whereas a substitutionary relationship can be expected in horizontally organized production. The empirical analysis confirms a significant difference between the two categories of industry as regards the impact of outward FDI on domestic investment. The results may thus have profound policy implications.

Keywords: FDI; Gross Domestic Investment; Industry-Specific Effects; Monitoring Costs; Trade Costs; (follow links to similar papers)

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

30 pages, July 15, 2004

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This paper is published as:
Braunerhjelm, Pontus, Lars Oxelheim and Per Thulin, (2005), 'The Relationship between Domestic and Outward Foreign Direct Investment: The Role of Industry-Specific Effects', International Business Review, Vol. 14, No. 6, pages 677-694



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