The characteristics of the home country itself can influence the generation of home-country effects. Many dimensions could be of relevance:
- The (macro-)economic characteristics of the home country.
- The types of companies and MNEs in the home country (see also B1) Company characteristics), including their sizes, ownership, competitiveness and international experience.
- The industrial and sectoral composition of the home country (see also B2) Industrial sector).
- The institutional and regulatory environment in the home country, including laws governing trade, foreign investment and labour (see also Section C: Home-country Measures).
- The ways in which governments regulate, facilitate and promote OFDI (UNESCAP 2020), the existence of home-country measures and the capacity of the home country government to promote and support OFDI (see Section C: Home-country Measures).
- The amount of capital available in the home country and the extent of foreign portfolio investment and government borrowing.
- The size of the home country and its home market.
- The absorptive capacity of the home country (see also B7) Absorptive capacity).
- The level of development of the home country, its development needs and sustainable development priorities, in areas such as human capital development, labour relations, environmental protection and the construction of domestic infrastructure and connectivity. These considerations will determine what kinds of home-country effect might be of importance for the home country.
- The degree of openness and international integration of the home country.
- The position of the home country in global and regional value chains.
This list is not exhaustive. When determining which types of home-country effect to target through policy, these and other characteristics of the home country need to be considered, as they determine the importance and feasibility of specific home-country effects to a given country in practice.
Key insights
- The extent to which home-country effects are realised depends on the characteristics of the home country. Many properties of the home country can play a role – for example, empirical work has identified the level of development (Ameer et al. 2020), presence of inward investment in the home country, prior existing technological capabilities, human capital (Bodman and Le 2013)and other aspects to be relevant (UNESCAP 2020, Chen, Lin, and Yabe 2019, Zhou et al. 2019, Li et al. 2016).
- Governments and policymakers need to develop OFDI policies and HCMs in ways that fit the specific characteristics of the home country.
Interactions
Section A: Home-country effects: Various characteristics of the home country matter for the presence of home-country effects and the extent to which they can be generated.
Available Research Findings
UNCTAD (2018, 17, 2020): The United States tax reform bill of 2017-18 resulted in a significant repatriation of funds in the following years. The Homeland Investment Act (HIA) of 2005 contributed to bringing back to the United States around two-thirds of funds available for repatriation, or around USD 300 billion of retained earnings.
Ameer et al. (2020): OFDI undertaken between 1996 and 2017 from developed countries augments domestic private capital formation but has a negative association with public capital formation. The effects were found for developed economies but were insignificant in emerging economies.
UNESCAP (2020, 24-33): In a sample of 53 UNESCAP member states between 1960 and 2018, greenfield OFDI from developing countries and ASEAN member states had a positive effect on GDP, while the effect was negative for M&As. OFDI had a positive effect on inward investment only for ASEAN member states, which are well integrated in regional value chains. The effect of OFDI on domestic R&D expenditure is slightly more pronounced in developing countries.
Chen, Lin, and Yabe (2019): Chinese OFDI undertaken in the food industry between 2005 and 2013 improved the productivity of the parent firm only in the short term. Inward investment, R&D and exporting can strengthen this effect, which was only observable in the eastern and western but not central and north-eastern regions of China.
Yang, Lancheros, and Milner (2019): Indian OFDI made from 1999 to 2010 facilitated firms’ productivity growth, but technological convergence slowed down the closer a company was to the technology frontier.
Zhou et al. (2019): Chinese OFDI undertaken in advanced economies was positively associated with domestic innovation performance, but there was a negative association for OFDI in transition economies and emerging markets. Both effects were weakened by the degree of financial development and human capital in the home country.
Li et al. (2016): OFDI from Chinese provinces between 2003 and 2010 had an impact on domestic innovation. The existence of inward FDI strengthened this impact, whereas the competition intensity in the local market had a negative influence.
Bodman and Le (2013): OFDI contributed to productivity in the home country. This effect was stronger with higher levels of human capital.