Domestic and Foreign Investment in Advanced Economies. The Role of Industry Integration

28 Pages Posted: 22 Oct 2019

Date Written: October 21, 2019

Abstract

Previous research using country or firm data has been inconclusive on the sign of the relation between domestic and foreign investment. Though several hypotheses have been formulated, the factors determining the sign of this relationship are not clearly identified yet. In this paper we explore the role of industry integration in determining the relation between outward foreign direct investment (FDI) and domestic investment by using disaggregated data at the industry level and several indicators of industry integration. The proportion of intangible investment is used as a proxy of horizontal integration and several measures of participation in Global Value Chains (GVCs) as proxies of vertical integration. The empirical results confirm that the relationship between outward FDI and domestic investment is very varied and differs across industries and countries. That relation is positive (complementary) for those industries with low intensity in intangible investment and high forward integration in GVCs –two features of vertically integrated industries– and becomes negative for those industries with high intangible investment (usually more horizontally integrated).

Keywords: investment, foreign direct investment, vertical and horizontal integration, global value chains

JEL Classification: E22, F21

Suggested Citation

Sastre, Teresa and Heras Recuero, Laura, Domestic and Foreign Investment in Advanced Economies. The Role of Industry Integration (October 21, 2019). Banco de Espana Working Paper No. 1933 (2019), Available at SSRN: https://ssrn.com/abstract=3472856 or http://dx.doi.org/10.2139/ssrn.3472856

Teresa Sastre (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

Laura Heras Recuero

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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