The Relationship between Domestic and Outward Foreign Direct Investment: The Role of Industry-Specific Effects

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

No 625, Working Paper Series from Research Institute of Industrial Economics

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 (search for similar items in EconPapers)
JEL-codes: F12 F21 F23 G34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2004-07-15
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Published in International Business Review, 2005, pages 677-694.

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Persistent link: http://EconPapers.repec.org/RePEc:hhs:iuiwop:0625

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