Chapter II - Literature Survey

Abstract

This chapter focuses on the literature survey that deals with the effects of direct foreign investment (DFI) on the level of employment demand in the United States. Several studies have approached the question of what effect DFI has on the domestic labor market by considering a range of assumptions as to the nature of the domestic production alternatives that exist for firms that invest abroad. The effect on domestic employment demand of denying the firm a direct foreign investment option will be different in different stages of the product cycle. During the late sixties, the Office of Foreign Direct Investment (FDI) was established for the purpose of monitoring cash outflows from U.S. parents to foreign subsidiaries. Given that a great percentage of subsidiary financing was generated overseas, it would be difficult to argue that the limited activities of OFDI constituted any real barrier to subsidiary expansion. In evaluating the results of econometric studies of MNC behavior, the crucial point for our purposes is that a positive association between foreign and domestic activity variables implies virtually nothing about what would have happened had firms been kept from investing abroad. Econometric studies that measure the statistical association between domestic and foreign activity variables may provide a basis for summarizing various potentially interesting relationships involved in the foreign investment phenomenon but contribute very little useful information on which to base judgments about the degree of substitutability of home for foreign production.