A Simple Test of the Role of Foreign Direct Investments in the Feldstein-Horioka Puzzle

The purpose of this paper is to test the dependency of domestic investment on domestic saving in the Feldstein-Horioka spirit. Our innovation is to use a de nition of investment that does not include foreign direct investment. We do 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 we adopt, as the dependent variable, pure domestic investment the result is a weakened relationship between internal saving and investment