Financial earnings are tangible financial gains in the form of profits and other earnings made by MNEs in their overseas operations. When (some of) these financial gains are repatriated, they contribute to the availability of financial resources in the home country. These could then be re-invested domestically or used for other economic purposes.
Financial returns result from a variety of business and economic activities in host countries. They can be generated by the sale of products and services resulting from the investment, or through greater efficiency achieved by production in overseas factories (Knoerich 2017, 447-448). It can also result from other types of cost-savings, such as the circumvention of tariffs.
Certain types of OFDI yield greater financial returns than others. OFDI into large markets or low-cost production locations may generate greater financial gain, but overall, which types of OFDI are most promising financially has yet to be systematically identified.
SDG 17.3 encourages the mobilization of “additional financial resources for developing countries from multiple sources”. The financial returns from OFDI generated by MNEs abroad are an additional financial resource to the home economy.
Key insights
- OFDI can yield above average financial returns of which a substantial amount tends to be repatriated to the home country.
- Financial returns over time offset any financial losses (see 1) Financial losses) resulting from the initial capital outflow and any associated reduction in tax income.
- OFDI policies and measures should promote forms of OFDI that promise to yield financial returns. These financial returns would not have to be immediate but could be anticipated in the medium- to long-term.
Interactions
B3) Investment motivation: Given the focus of market-seeking OFDI on expanding business opportunities, and the purpose of efficiency-seeking OFDI to save costs, both have the potential to increase financial earnings. Resources-seeking OFDI can also result in financial earnings.
B5) Entry mode: In theory, the establishment of sales and representative offices as well as manufacturing facilities overseas can enhance financial earnings, as they help expand sales and save costs, respectively.
B8) Transmission channels: Mechanisms that facilitate direct transfers of funds could promote the return of financial earnings to the home country.
E1) Financial losses: OFDI is a capital outflow that can reduce finances and tax income in the home country. However, OFDI can also generate financial earnings and result in the repatriation of profits.
Available Research Findings
Research on financial earnings from FDI and their repatriation still needs to be fully developed. According to UNCTAD, rates of return from FDI vary significantly from country to country and tend to be higher than other forms of investment (UNCTAD 2013). According to UNCTAD, rates of return on OFDI ranged between 6.2 and 6.4 per cent between 2017 and 2019 (UNCTAD 2020). An UNCTAD estimate from 2013 suggested that around two thirds of the returns, estimated to be about USD 1 trillion, or an average of 3.4 percent of the current account payments, were repatriated to home or other countries (UNCTAD 2013, xvi, 31-34).
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.
Liu and Manzoor (2020): In a dataset of 1208 listed Chinese firms and their OFDI between 2004 and 2015, OFDI had a deteriorating effect on profitability, as measured by return on assets and earnings per share.
Huang (2013): An analysis of a sample of Taiwanese information and electronics firms between 1993 and 2008 revealed that growth in overseas earnings from OFDI increases growth in R&D investment of the parent company.