Attempts to measure the spillover effects of multinational enterprises on host countries have generally been cross-sectional and limited to labour productivity in manufacturing for a single country. Recent work in growth theory has measured the extent to which growth in total factor productivity in a country depends not only on domestic R&D capital stocks but also on foreign R&D capital stocks. This paper extends such work by adding foreign direct investment stocks to foreign trade as a channel linking total factor productivity levels between countries. This is done by considering the role of trade and FDI as diffusion channels for G6 R&D to the OECD countries. There are three main results: the coefficient estimates for FDI are higher than those for trade in the standard model; the importance of the trade channel is much reduced once FDI is included; and the overall spillovers increase significantly with the inclusion of FDI.

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Within a gravity model framework, this paper will establish that trade and foreign direct investment (FDI) are complementary, using trade and FDI stock data on a bilateral basis between the U.S. and 51 other countries over the period 1982 to 1994. U.S. outward FDI is found to have a larger predicted impact on U.S. exports than does inward FDI. On the other hand, inward FDI is found to have a larger predicted impact on U.S. imports than does U,S. outward FDL These results are directly linked to patterns of intrafirm trade within the multinational enterprise (MNE), a result consistent with the transactions cost theory of MNEs. In addition, a sectoral analysis indicates that U.S. outward FDI in manufacturing has a large predicted impact on both exports and imports, whereas U.S. outward FDI in services has a large predicted, impact on U.S. exports but little or no predicted impact on imports. (JEL F2, F4) IntroductionIt is often assumed that foreign direct investment (FDI) is an important source of international technology transfer and economic growth for the host economy [Hejazi and Safarian, 1999;Balasubramanyam et al., 1996;Borensztein et al., 1998;McFetridge, 1991;Safarian, 1985]? On the outward side, there is concern in some home countries, including the U.S., that FDI transfers production to locations with relatively inexpensive labor, such as Mexico or China. Reduced exports to such countries and increased imports from them are said to lower home country output, employment, and capital formation as well as increase income inequality. 2 This paper argues this is not necessarily the case. The major reason is that the presence of FDI stocks (domestic and abroad) facilitates the flow ofintrafirm information on a broad front, reducing the costs of conducting business and leading to increases in international trade. To test this view, a gravity model is used to estimate the link between outward and inward U.S. FDI stocks and U.S. exports and imports on a bilateral basis to 51 countries over the period 1982 to 1994. The results indicate that outward FDI to a particular country causes exports and imports to increase with that country. FDI in the U.S. is also found to stimulate * University of Toronto---Canada. The authors acknowledge financial support from Industry Canada, the Ford Foundation, and the Centre for International Studies of the University of Toronto. Detailed comments and suggestions were provided by Joe Daniels, Albert Berry, and seminar participants at the University of Toronto, York University, Industry Canada, and the t999 annual Canadian Economics Association meeting. Research assistance was provided by George Georgopoulos and Anthony Yao. The authors are responsible for any remaining errors. 420HEJAZI AND SAFARIAN: U.S. FDI STOCK AND TRADE 421 exports and imports. A major conclusion is that trade and FDI are complementary, a result consistent with the transactions costs theory of MNEs.The empirical analysis finds that both outward and inward FDI cause increases in U.S. exports, but the former effect...

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This paper examines the reasons for the impact of Buckley and Casson's The Future of the Multinational Enterprise (1976) on research in international business (IB). Earlier work concentrated on ownership-specific advantages or locational determinants rather than the central concept of internalization. The few exceptions were incomplete or not well known. Internalization as applied to the MNE spread rapidly because of the appeal to IB researchers of an analytically powerful idea that was based on institutional economics and involved an accessible methodology. The spread was also helped by the parallel growth of transaction costs in the domestic theory of the firm, and the publication activity of the authors and their associates. Journal of International Business Studies (2003) 34, 116–124. doi:10.1057/palgrave.jibs.8400011