Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

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

Pontus Braunerhjelm , Lars Oxelheim () and Per Thulin ()
Additional contact information
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.

Keywords: FDI; Gross Domestic Investment; Industry-Specific Effects; Monitoring Costs; Trade Costs

JEL-codes: F12; F21; F23; G34

30 pages, July 15, 2004

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