Interesting article from Pekka Sauramo, who shows that direct investment in foreign countries prevent investors from investing in their country, which can be a real problem, except perhaps for big countries. It is part of a research project which has been financed by the Finnish Academy and the Finnish Work Environment Fund. Pekka Sauramo works for the Labour Institute for Economic Research, in Helsinki, Finland.

ABSTRACT
The paper is concerned with the relationship between outward foreign direct investment (FDI) and
domestic investment in Finland during the post-depression years of low domestic investment
activity. The relationship is analysed by the use of macroeconomic data on the period from 1965 till
2006 and through the estimation of dynamic investment equations which are based on the macroeconomic
framework employed by Feldstein (1994).

According to the results, outward FDI decreased domestic investment activity.

The relationship is a one-to-one -trade-off: one euro abroad
decreases domestic investment by one euro in the long run. This result is in conformity with the
results which Feldstein obtained by utilizing data on 15-18 OECD countries. The strong growth of
outward FDI can therefore be regarded as the major cause of low investment activity in Finland.

1. Introduction

Finland is one of those industrialized countries which has been heavily influenced by globalisation,
and economic integration in general. During the past fifteen years, this has been reflected in a very
rapid internationalisation of Finnish firms, of which the Nokia Company may be the best example.
While membership of the European Union in 1995 strengthened the already strong economic
relations to European countries, the expansion of Finnish firms to North America and to Asia has
marked a new phase in the economic history of Finnish multinational enterprises.
As part of the process, the Finnish economy has transformed from a capital-importing into a capitalexporting
country. The change has been drastic, because traditionally a chronic current account
deficit was one of the main concerns for Finnish policymakers. The question about the relationship
between outward foreign direct investment (FDI) and domestic investment is of particular interest in
Finland, because the process of the internationalisation of Finnish firms has been associated with
historically low domestic investment activity during the post-depression years (Figure 1). Deficient
domestic saving cannot be blamed for the decline because after the depression the saving-GDP ratio
has returned to the average pre-depression level or even higher. This has been due mainly to the very
good average profitability of Finnish firms.
In this paper the relationship between outward FDI and domestic investment is analysed by the use of
macroeconomic data. The paper employs the framework which was originally used by Feldstein (1994).
That framework is an extension of the well-known approach which Feldstein and Horioka (1980) utilised
in their study of the relationship between saving and investment among OECD countries during the
1960s and 1970s. The main result of that study has been summarized as the Feldstein-Horioka puzzle.
Feldstein and Horioka (1980) found that even in the presence of high international mobility of
capital domestic investment and domestic saving were highly positively correlated. Saving that
originates in a country tends to remain in that country. This contrasts with the view that with perfect
capital mobility there is little (or no) relation between domestic investment and domestic saving. The
authors rationalized their finding by arguing that even in the world of high capital mobility the
international capital market is de facto segmented. Investors have home bias, which is reflected in a
close association between domestic investment and domestic saving.

The full article on the website of the Finnish Labour Institute for Economic Research