FDI and the Structure of Home Country Production

Abstract

This paper provides a selective survey of the literature on home country effects of FDI, and points to some new questions regarding the impact of outward FDI on economic structure in the home country. Much of the existing literature on production interactions between the domestic and foreign operations of MNCs has examined what happens to home country exports and employment as a result of outward FDI. Although the results of earlier studies vary somewhat, there appears to be a consensus that the quantitative effects are not dramatic. The reduced exports of finished products from the home country to independent foreign customers are balanced by increases in exports of intermediate products to the foreign affiliates. However, the structural changes ? the transformation that occurs when the parent company becomes increasingly specialised in the production of intermediate goods ? have not been discussed in great detail. Drawing heavily on the example of Sweden, we outline some of the changes that have occurred as a result of the increasing globalisation of Swedish industry, and discuss some possible consequences for the Swedish economy. Our discussion suggests that the home country operations of Swedish MNCs focused increasingly on activities with relatively high raw material content and low value added during the period between the early 1980s and mid-1990s. In addition, much of R&D was concentrated to Sweden. While the high investments in R&D are probably beneficial for the home country, it is possible that the specialisation in raw material intensive operations may have some negative effects. In particular, we discuss the possible growth effects of a more concentrated industry structure. However, due to the lack of detailed data on production structure, factor intensities and other production characteristics, the discussion is largely speculative, and the paper points to the need for more data and more research in this area.

Keywords: FDI, home country, production structure

JEL Classification: F1, F30, F41