Aggregation Issues of Foreign Direct Investment Estimation in an Interdependent World

Abstract

AbstractThis paper attempts to understand foreign direct investment (FDI) heterogeneity and offers useful insights about aggregation issues in FDI estimations by carrying out a spatial econometric analysis using affiliate‐level data on sales activities of Swedish multinational corporations around the globe. The results indicate that the multilayered nature of aggregation in FDI matters for empirical analysis. Affiliate‐level host‐country and third‐country sales activity provides evidence of a negative spatial lag or substitution of FDI in space, broadly supporting the export‐platform theory. For exports back to Sweden, we find a positive spatial lag suggesting agglomeration of production activities and vertical specialisation. The sequential aggregation from affiliate level to firm and country level provides evidence of a severe scale problem particularly in export‐platform FDI. This aggregation bias is likely present in many of the country‐level analyses in previous literature.