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The effect of investing abroad on investment at home: On the role of technology, tax savings, and internal capital markets

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  • Goldbach, Stefan
  • Nagengast, Arne J.
  • Steinmüller, Elias
  • Wamser, Georg

Abstract

This paper examines the relationship between foreign and domestic investment activity of multinational enterprises. The empirical analysis is based on micro data of German firms and their operations at home and abroad, including information on investment in fixed assets. The empirical approach, which rests upon extensive and intensive margin variation, is shown to produce very robust results. These suggest a positive relationship between foreign and home investment in real capital. This positive effect seems to be mainly related to additional opportunities for tax planning and better access to financing capital. In contrast, we do not find evidence that improved production processes and technology upgrading cause the positive effect on investment at home. Our empirical approach allows us to distinguish between an extensive and intensive margin effect: setting up a new foreign affiliate leads to an immediate positive effect of about EUR 460,000 additional investment; the investment elasticity at the intensive margin is estimated to be approximately 0.13.

Suggested Citation

  • Goldbach, Stefan & Nagengast, Arne J. & Steinmüller, Elias & Wamser, Georg, 2019. "The effect of investing abroad on investment at home: On the role of technology, tax savings, and internal capital markets," Journal of International Economics, Elsevier, vol. 116(C), pages 58-73.
    • Handle: RePEc:eee:inecon:v:116:y:2019:i:c:p:58-73
    DOI: 10.1016/j.jinteco.2018.10.001
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    More about this item

    Keywords

    Outward FDI; Multinational Firms; Domestic Investment; Corporate taxes; Internal Capital Markets; Technology;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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