Domestic Effects of the Foreign Activities of U.S. Multinationals

35 Pages Posted: 26 Oct 2005 Last revised: 27 May 2008

Mihir A. Desai

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

C. Fritz Foley

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

James R. Hines Jr.

University of Michigan; NBER

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Date Written: May 1, 2008

Abstract

Do firms investing abroad simultaneously reduce their domestic activity? This paper analyzes the relationship between the domestic and foreign operations of American manufacturing firms between 1982 and 2004 by instrumenting for changes in foreign operations with GDP growth rates of the foreign countries in which they invest. Estimates produced using this instrument indicate that 10% greater foreign investment is associated with 2.6% greater domestic investment, and 10% greater foreign employee compensation is associated with 3.7% greater domestic employee compensation. These results do not support the popular notion that expansions abroad reduce a firm's domestic activity, instead suggesting the opposite.

Keywords: FDI, multinational firms, investment, outsourcing

JEL Classification: F23, F21, H25

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines Jr., James R., Domestic Effects of the Foreign Activities of U.S. Multinationals (May 1, 2008). Ross School of Business Paper No. 1020. Available at SSRN: https://ssrn.com/abstract=825264 or http://dx.doi.org/10.2139/ssrn.825264

Mihir A. Desai (Contact Author)

National Bureau of Economic Research (NBER)

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Harvard Business School - Finance Unit ( email )

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C. Fritz Foley

Harvard Business School ( email )

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617-495-6375 (Phone)

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

1050 Massachusetts Avenue
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United States

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