A simple test of the role of foreign direct investment in the Feldstein- Horioka puzzle

Abstract

The purpose of this article is to test the dependency of domestic investment on domestic saving in the Feldstein-Horioka spirit. Its innovation is to use a definition of investment that does not include foreign direct investment. It does so since FDI should not be considered in the intertemporal budget constraint of a recipient country and therefore should not be related to domestic saving in a meaningful way. Once it adopts, as the dependent variable, pure domestic investment the result is a weakened relationship between internal saving and investment.