Foreign Direct Investment and the Domestic Capital Stock

15 Pages Posted: 23 Mar 2006

See all articles by Mihir A. Desai

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

This paper evaluates evidence of the impact of outbound foreign direct investment (FDI) on domestic investment rates. OECD countries with high rates of outbound FDI in the 1980s and 1990s exhibited lower domestic investment than other countries, which suggests that FDI and domestic investment are substitutes. U.S. time series data tell a very different story, however: years in which American multinational firms have greater foreign capital expenditures coincide with greater domestic capital spending by the same firms. One dollar of additional foreign capital spending is associated with 3.5 dollars of additional domestic capital spending in the time series, implying that foreign and domestic capital are complements in production by multinational firms. This effect is consistent with cross sectional evidence that firms whose foreign operations expand simultaneously expand their domestic operations, and suggests that interpretation of the OECD cross sectional evidence may be confounded by omitted variables.

Keywords: Multinational firms, investment, FDI, foreign direct investment

JEL Classification: F23, F21, H87

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines, James Rodger, Foreign Direct Investment and the Domestic Capital Stock (January 2005). Ross School of Business Paper No. 1023. Available at SSRN: https://ssrn.com/abstract=646126 or http://dx.doi.org/10.2139/ssrn.646126

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
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National Bureau of Economic Research (NBER)

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C. Fritz Foley

Harvard University - Business School (HBS) ( email )

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National Bureau of Economic Research (NBER)

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James Rodger Hines

University of Michigan ( email )

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Ann Arbor, MI 48109-1215
United States

NBER

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United States

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