Thursday, 25 March 2010: 17:05
Foreign vs. Direct Investment:
Evidence on Crowding-in and Crowding-out for U.S. Industry Groups
J.K. Mullen and Martin Williams*
As the global financial crisis has slowed national economies and heighted domestic employment concerns, international investment flows have attracted much attention from the public and policymakers alike. Foreign direct investment (FDI) is generally prized by policymakers because of the belief in its positive attributes such as job creation, technology transfer, skill upgrading, improved access to international markets, etc. Yet there remain a number of unresolved issues surrounding the effects of FDI on various measures of economic performance within host economies. For example, while some evidence has documented the role of inward FDI in promoting domestic productivity, its role as a catalyst for local investment remains unsettled. One hypothesis is that FDI serves to stimulate domestic investment that might not otherwise occur, commonly referred to as a 'crowding-in' effect. An alternative view maintains that FDI may actually displace local investment initiatives because of the potential for it to 'crowd-out' home-grown spending. If there is good reason to believe that this latter effect dominates, then it is possible that FDI might destabilize existing local entrepreneurial activity. In turn, this makes it more difficult, at the policy level, to create economic incentives to promote and nurture entrepreneurial talent. In this paper, we investigate and provide empirical evidence regarding the nature of these competing hypotheses as they pertain to inward FDI into various sectors of theU.S. economy. Relying on financial data for multinational companies operating within the U.S., we examine the impact of FDI on capital stocks and flows for domestic firms within the same 4-digit (NAICS) industry groups. The analysis, based on a sample of over 150 industry groups within the manufacturing, information, finance and professional services sub-sectors, focuses on changes that have occurred from 1997 to 2007.
Evidence on Crowding-in and Crowding-out for U.S. Industry Groups
J.K. Mullen and Martin Williams*
As the global financial crisis has slowed national economies and heighted domestic employment concerns, international investment flows have attracted much attention from the public and policymakers alike. Foreign direct investment (FDI) is generally prized by policymakers because of the belief in its positive attributes such as job creation, technology transfer, skill upgrading, improved access to international markets, etc. Yet there remain a number of unresolved issues surrounding the effects of FDI on various measures of economic performance within host economies. For example, while some evidence has documented the role of inward FDI in promoting domestic productivity, its role as a catalyst for local investment remains unsettled. One hypothesis is that FDI serves to stimulate domestic investment that might not otherwise occur, commonly referred to as a 'crowding-in' effect. An alternative view maintains that FDI may actually displace local investment initiatives because of the potential for it to 'crowd-out' home-grown spending. If there is good reason to believe that this latter effect dominates, then it is possible that FDI might destabilize existing local entrepreneurial activity. In turn, this makes it more difficult, at the policy level, to create economic incentives to promote and nurture entrepreneurial talent. In this paper, we investigate and provide empirical evidence regarding the nature of these competing hypotheses as they pertain to inward FDI into various sectors of the