Scandinavian Working Papers in Economics

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

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

Pontus Braunerhjelm (), Lars Oxelheim and Per Thulin
Additional contact information
Pontus Braunerhjelm: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Lars Oxelheim: Institute of Economic Research and Lund University, Postal: Lund University, P.O. Box 7080, SE–220 07 Lund, Sweden.
Per Thulin: Center for Business and Policy Studies (SNS) and Linköping University, Postal: P.O. Box 5629, SE–114 86 Stockholm, Sweden

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

JEL-codes: F12; F21; F23; G34

29 pages, August 12, 2005

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