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American Economic Journal: Economic Policy: Vol. 1 No. 1 (February 2009)

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Domestic Effects of the Foreign Activities of US Multinationals

Article Citation

Desai, Mihir A., C. Fritz Foley, and James R. Hines. 2009. "Domestic Effects of the Foreign Activities of US Multinationals." American Economic Journal: Economic Policy, 1(1): 181-203.

DOI: 10.1257/pol.1.1.181

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. (JEL F23, H25, L25)

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Authors

Desai, Mihir A. (Harvard U)
Foley, C. Fritz (Harvard U)
Hines, James R. (U MI)

JEL Classifications

F23: Multinational Firms; International Business
H25: Business Taxes and Subsidies including sales and value-added (VAT)
L25: Firm Performance: Size, Diversification, and Scope

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