TY - JOUR AU - Desai,Mihir A. AU - Foley,C. Fritz AU - Hines,James R.,Jr. TI - Foreign Direct Investment and Domestic Economic Activity JF - National Bureau of Economic Research Working Paper Series VL - No. 11717 PY - 2005 Y2 - October 2005 UR - http://www.nber.org/papers/w11717 L1 - http://www.nber.org/papers/w11717.pdf N1 - Author contact info: Mihir A. Desai Graduate School of Business Administration Harvard University Soldiers Field Boston, MA 02163 Tel: 617/495-6693 Fax: 617/496-6592 E-Mail: mdesai@hbs.edu C. Fritz Foley Graduate School of Business Administration Harvard University Soldiers Field Boston, MA 02163 Tel: 617/495-6375 Fax: 617/496-8443 E-Mail: ffoley@hbs.edu James R. Hines Department of Economics University of Michigan 343 Lorch Hall 611 Tappan Street Ann Arbor, MI 48109-1220 Tel: 734/764-2320 Fax: 734/764-2769 E-Mail: jrhines@umich.edu AB - 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. ER -