FDI and Domestic Investment: An Industry-Level View

48 Pages Posted: 30 May 2008

See all articles by Christian Arndt

Christian Arndt

University of Tuebingen

Claudia M. Buch

Deutsche Bundesbank

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 2007

Abstract

Previous empirical work on the link between domestic and foreign investment provides mixed results which partly depend on the level of aggregation of the data. We argue that the aggregated home country implications of foreign direct investment (FDI) cannot be gauged using firm-level data. Aggregated data, in turn, miss channels through which domestic and foreign activities interact. Instead, industry-level data provide useful information on the link between domestic and foreign investment. We theoretically show that the effects of FDI on the domestic capital stock depend on the structure of industries and the relative importance of domestic and multinational firms. Our model allows distinguishing intra-sector competition from inter-sector linkage effects. We test the model using data on German FDI. Using panel cointegration methods, we find evidence for a positive long-run impact of FDI on the domestic capital stock and on the stock of inward FDI. Effects of FDI on the domestic capital stock are driven mainly by intra-sector effects. For inward FDI, inter-sector linkages matter as well.

Keywords: domestic capital stock, foreign direct investment

JEL Classification: E22, F21, F23

Suggested Citation

Arndt, Christian and Buch, Claudia M. and Schnitzer, Monika, FDI and Domestic Investment: An Industry-Level View (September 2007). CEPR Discussion Paper No. DP6464. Available at SSRN: https://ssrn.com/abstract=1138577

Christian Arndt

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

Claudia M. Buch

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Monika Schnitzer (Contact Author)

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 2217 (Phone)
+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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