The relationship between domestic and outward foreign direct investment: The role of industry-specific effects

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The relationship between domestic and outward foreign direct investment: The role of industry-specific effects. / Braunerhjelm, P; Oxelheim, Lars; Thulin, P.

In: International Business Review, Vol. 14, No. 6, 2005, p. 677-694.

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TY - JOUR

T1 - The relationship between domestic and outward foreign direct investment: The role of industry-specific effects

AU - Braunerhjelm, P

AU - Oxelheim, Lars

AU - Thulin, P

PY - 2005

Y1 - 2005

N2 - 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. JEL no. F12, F21, F23, G34.

AB - 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. JEL no. F12, F21, F23, G34.

KW - industry-specific effects

KW - FDI

KW - gross domestic investment

U2 - 10.1016/j.ibusrev.2005.09.004

DO - 10.1016/j.ibusrev.2005.09.004

M3 - Article

VL - 14

SP - 677

EP - 694

JO - International Business Review

T2 - International Business Review

JF - International Business Review

SN - 1873-6149

IS - 6

ER -