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Foreign Direct Investment and Domestic Economic Activity

43 Pages Posted: 16 Jan 2006  

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 2005

Abstract

How does rising foreign investment influence domestic economic activity? Firms whose foreign operations grow rapidly exhibit coincident rapid growth of domestic operations, but this pattern alone is inconclusive, as foreign and domestic business activities are jointly determined. This study uses foreign GDP growth rates, interacted with lagged firm-specific geographic distributions of foreign investment, to predict changes in foreign investment by a large panel of American firms. Estimates produced using this instrument for changes in foreign activity indicate that 10% greater foreign capital investment is associated with 2.2% greater domestic investment, and that 10% greater foreign employee compensation is associated with 4.0% greater domestic employee compensation. Changes in foreign and domestic sales, assets, and numbers of employees are likewise positively associated; the evidence also indicates that greater foreign investment is associated with additional domestic exports and R&D spending. The data do not support the popular notion that greater foreign activity crowds out domestic activity by the same firms, instead suggesting the reverse.

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines Jr., James R., Foreign Direct Investment and Domestic Economic Activity (October 2005). NBER Working Paper No. w11717. Available at SSRN: https://ssrn.com/abstract=837160

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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617-496-6592 (Fax)

C. Fritz Foley

Harvard Business School ( email )

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Morgan 270C
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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
Cambridge, MA 02138
United States

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