How does FDI transmit into domestic investment? Exploring intra-industry and financial channels

Tim de Leeuw and Konstantin Wacker

No 261, wiiw Working Papers from The Vienna Institute for International Economic Studies, wiiw

Abstract: Foreign direct investment (FDI) is often seen as a means to boost domestic investment and, hence, capital accumulation. Yet, the empirical support for such a positive investment effect of FDI is inconclusive. A possible reason is that FDI is often directed towards the financial sector, where capital investment tends to be low. In this paper, we first explore the within-industry relationship between FDI and domestic investment. We then use a novel approach to analyse how FDI into the financial sector transmits into domestic investment by non-financial industries. Using industry-level FDI and investment data from 12 Central and Eastern European countries between 1997 and 2019, we find that about a quarter of FDI into an industry results in domestic investment. Additionally, we document that industries with close links to the financial sector increase domestic investment in the presence of financial FDI, particularly manufacturing, trade and real estate.

Keywords: investment; capital formation; FDI; foreign direct investment; inter-industry linkages (search for similar items in EconPapers)
JEL-codes: E22 F21 F3 O11 (search for similar items in EconPapers)
Pages: 41 pages including 13 Tables and 6 Figures
Date: 2025-03
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