Regional integration in Europe and North America now entails a liberalization of trade and factor movements and the removal of restrictions on the location of plants, which may lead to significant changes in patterns of foreign direct investment. In Discussion Paper No. 931, Research Fellow Magnus Blomström and Ari Kokko review recent research on the impact of foreign investment by Swedish multinational corporations (MNCs) on investment, exports and employment in the domestic economy, and they discuss the implications of an increasing division of labour between parent firms and foreign affiliates. Most available studies find that foreign investment has tended to raise Sweden's exports: MNCs have captured larger foreign market shares by locating affiliates abroad than the parents could achieve from Sweden. The resulting fall in exports of finished products has been more than offset by the rise in MNCs' exports of intermediates to their foreign affiliates; total exports and domestic employment have therefore risen.

Blomström and Kokko note that the limited available data on intra-firm trade appear to confirm the Swedish plants' specialization in producing intermediates, but the lack of comprehensive data on product categories or factor contents in parents' and affiliates' production prevents them from drawing conclusions about such intermediates' characteristics. Some argue that Sweden's comparative advantage vis-à-vis the other OECD countries is still in products with low and medium R&D content, many of which are based on indigenous natural resources, although the R&D expenditures of Swedish firms as a proportion of value added have been among the highest in the world since the mid-1970s. Future research could usefully focus on the possible benefits from potential R&D externalities of concentrating production on fewer and simpler goods, the impact of an increasing raw material bias on income distribution and exchange rate volatility, and the consequences of increased specialization for industrial structure and growth rates.

Home Country Effects of Foreign Direct Investment: Evidence from Sweden
Magnus Blomström and Ari Kokko

Discussion Paper No. 931, April 1994 (IT)