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Institute of Economic Research, Lund University Working Paper Series, Institute of Economic Research, Lund University

No 2004/10:
The Relationship Between Domestic and Outward Foreign Direct Investment

Pontus Braunerhjelm, Lars Oxelheim () and Per Thulin

Abstract: Previous research has been inconclusive as regards the effect of outward foreign direct investment (FDI) on domestic investments. In this article we show that this inconclusiveness can be explained at a disaggregated level as a function of the way industries are organized. Based on a simple theoretical framework including monitoring and trade costs, we argue that a complementary relationship can be expected to prevail in vertically integrated industries, whereas a substitutionary relationship can be expected in horizontally organized production. The empirical analysis confirms a significant difference between the two categories of industry as regards the impact of outward FDI on domestic investment. The results may thus have profound policy implications.

Keywords: FDI; gross domestic investment; industry-specific effects; (follow links to similar papers)

15 pages, December 20, 2004

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