How does FDI transmit into domestic investment? Exploring intra-industry and financial channels
Wacker, Konstantin M.
How does FDI transmit into domestic investment? Exploring intra-industry and financial channels - Wien : Wiener Institut für Internationale Wirtschaftsvergleiche (wiiw), 2025. - 41 S., 13 Tables and 6 Figures, 30cm. - wiiw Working Papers 261 . - wiiw Working Papers 261 .
Foreign direct investment (FDI) is often seen as a means to boost domestic investment and, hence, capital accumulation. Yet, the empirical support for such a positive investment effect of FDI is inconclusive. A possible reason is that FDI is often directed towards the financial sector, where capital investment tends to be low. In this paper, we first explore the within-industry relationship between FDI and domestic investment. We then use a novel approach to analyse how FDI into the financial sector transmits into domestic investment by non-financial industries. Using industry-level FDI and investment data from 12 Central and Eastern European countries between 1997 and 2019, we find that about a quarter of FDI into an industry results in domestic investment. Additionally, we document that industries with close links to the financial sector increase domestic investment in the presence of financial FDI, particularly manufacturing, trade and real estate.
investment
capital formation
FDI
foreign direct investment
inter-industry linkages
Albania
Bosnia and Herzegovina
Bulgaria
Czechia
Estonia
Hungary
Latvia
Lithuania
North Macedonia
Poland
Slovakia
Slovenia
How does FDI transmit into domestic investment? Exploring intra-industry and financial channels - Wien : Wiener Institut für Internationale Wirtschaftsvergleiche (wiiw), 2025. - 41 S., 13 Tables and 6 Figures, 30cm. - wiiw Working Papers 261 . - wiiw Working Papers 261 .
Foreign direct investment (FDI) is often seen as a means to boost domestic investment and, hence, capital accumulation. Yet, the empirical support for such a positive investment effect of FDI is inconclusive. A possible reason is that FDI is often directed towards the financial sector, where capital investment tends to be low. In this paper, we first explore the within-industry relationship between FDI and domestic investment. We then use a novel approach to analyse how FDI into the financial sector transmits into domestic investment by non-financial industries. Using industry-level FDI and investment data from 12 Central and Eastern European countries between 1997 and 2019, we find that about a quarter of FDI into an industry results in domestic investment. Additionally, we document that industries with close links to the financial sector increase domestic investment in the presence of financial FDI, particularly manufacturing, trade and real estate.
investment
capital formation
FDI
foreign direct investment
inter-industry linkages
Albania
Bosnia and Herzegovina
Bulgaria
Czechia
Estonia
Hungary
Latvia
Lithuania
North Macedonia
Poland
Slovakia
Slovenia