- Foreign Direct Investment and Domestic Economic Activity
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- by Desai, Mihir A.; Foley, C. Fritz; Hines Jr., J.R.
- 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.
- Publication Type: WCFIA Working Paper
- Published Date: October 2005
- Field of Interest: International Economics
- Desai, Mihir, C.F. Foley, and J.R. Hines Jr. "Foreign Direct Investment and Domestic Economic Activity." Working Paper 2008-0020, Weatherhead Center for International Affairs, Harvard University, October 2005.
- Also NBER Working Paper No. 11717 and Ross School of Business Working Paper No. 1020. October 2005.