Working Paper No. 625

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

Published: July 15, 2004Pages: 30Keywords: FDI; Gross Domestic Investment; Industry-Specific Effects; Monitoring Costs; Trade Costs JEL-codes: F12; F21; F23; G34

The Relationship between Domestic and Outward Foreign Direct Investment: The Role of Industry-Specific Effects Pontus Braunerhjelm, Lars Oxelheim and Per Thulin


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.

 

Lars Oxelheim

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Interdisciplinary European Studies

The European Union and the Return of the Nation State

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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