Does outward foreign direct investment reduce domestic investment? Macro-evidence from Finland

Abstract

The paper is concerned with the relationship between outward foreign direct investment (FDI) and domestic investment in Finland during the post-depression years of low domestic investment activity. The relationship is analysed by the use of macroeconomic data on the period from 1965 till 2006 and through the estimation of dynamic investment equations which are based on the macroeconomic framework employed by Feldstein (1994). According to the results, outward FDI decreased domestic investment activity. The relationship is a one-to-one -trade-off: one euro abroad decreases domestic investment by one euro in the long run. This result is in conformity with the results which Feldstein obtained by utilizing data on 15–18 OECD countries. The strong growth of outward FDI can therefore be regarded as the major cause of low investment activity in Finland.

• ISSN: 1795-1801
• ISBN: 978-952-209-053-9
• JEL: E22, F21, F23
• Publication in PDF-format