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Domestic Effects of the Foreign Activities of US Multinationals

Mihir A. Desai, C. Fritz Foley and James R. Hines Jr.
American Economic Journal: Economic Policy
Vol. 1, No. 1 (February 2009), pp. 181-203
Stable URL: http://www.jstor.org/stable/25760031
Page Count: 23
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Domestic Effects of the Foreign Activities of US Multinationals
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Abstract

Do firms investing abroad simultaneously reduce their domestic activity? This paper analyzes the relationship between the domestic and foreign operations of US manufacturing firms between 1982 and 2004 by instrumenting for changes in foreign operations with GDP growth rates of the foreign countries in which they invest. Estimates produced using this instrument indicate that 10 percent greater foreign investment is associated with 2.6 percent greater domestic investment, and 10 percent greater foreign employee compensation is associated with 3.7 percent greater domestic employee compensation. These results do not support the popular notion that expansions abroad reduce a firm's domestic activity, instead suggesting the opposite.

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