The Impact Of US Domestic Market Demand Decline On American Foreign Direct Investment In Multinational Corporations

This paper takes the United States as an example to analyze the impact of demand decrease in home country on outward direct investment from the perspective of investment incentive of multinational corporations.Multinational corporations are affected by demand determined by macroeconomic factors and industrial factors. Economic crisis and industry fluctuations will both decrease the demand in home country. This paper finds out that demand decrease in the United States will reduce American multinational corporations’ outward direct investment. For American horizontal multinationals, demand decrease in US will increase their cash holdings as a cushion against unexpected losses, which reduces internal fund available for outward direct investment. Cash management also requires multinationals to maintain stable cash holdings for parent companies, which poses an upper limit for outward direct investment. Demand decrease will lower this upper limit. For American vertical multinationals, demand shock means decreases in final goods sales in US. In responses, multinationals will produce less final goods and thus need less intermediate goods. According to comparative motives, multinationals will reduce outward direct investment in foreign affiliates which produce intermediate goods.This paper uses panel data from seven US industries (Food, Machinery, Chemicals, Electrical Equipment&Appliances, Computer&Electronic Product, Primary&Fabricated Metals, and Transportation Equipment) to conduct empirical analysis. The results confirm the mechanism of demand decrease in US affecting outward direct investment. Following these results, there are some useful implications for policies targeting at encouraging domestic corporations to make outward direct investment or avoiding massive foreign corporations repatriation due to demand shocks in home countries.