, Lars Oxelheim
() and Per Thulin
Pontus Braunerhjelm: Center for Business and Policy Studies (SNS) and Linköping University, Postal: P.O. Box 5629, SE-114 86 Stockholm, Sweden
Lars Oxelheim: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Per Thulin: Center for Business and Policy Studies (SNS), Postal: P.O. Box 5629, SE-114 86 Stockholm, Sweden
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.
30 pages, July 15, 2004
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