OFDI can stimulate domestic industrial upgrading, beyond the direct acquisition of know-how and technologies (see A4) Know-how and technology).
Greater exposure to international competition often associated with OFDI could, for example, induce investing MNEs to enhance their international competitiveness. This would have positive implications for their business, production and innovation activities in the home country (UNESCAP 2020).
Upgrading can also occur when efficiency-seeking OFDI moves low-cost and low-skilled production to less advanced economies. In such circumstances, the reduced demand for low-skilled labour in the home country might then provide the conditions for a shift in its labour force composition towards higher-end economic activities (Knoerich 2017, Moran 2006, Lipsey 2004, UNESCAP 2020). The outcome would be more capital- and skill-intensive production and more ‘white collar’ employment in the home country. Higher worker productivity would then increase wages (Moran 2006). Such positive (re)structuring of home economies can occur, amongst other scenarios, when OFDI integrates MNEs into global value chains or upgrades existing value chains (Sauvant and Chen 2014).
Such industrial upgrading resulting from OFDI can promote an enhancement of scientific and technological capabilities, technology development, upgrading and innovation in home countries, thus contributing to SDG 9.5 (“enhance scientific research, upgrade the technological capabilities of industrial sectors”), SDG 9.B (“support domestic technology development, research and innovation in developing countries”) and SDG 12.A (“support developing countries to strengthen their scientific and technological capacity”). This industrial upgrading would occur in different sectors, including those particularly relevant to sustainability, such as the energy sector which, according to SDG 7.B, requires modernisation and greater sustainability in many developing countries.
Key insights
- OFDI has the potential to induce industrial upgrading in the home country (Chen, Pan, and Xiao 2020, Li and Yu 2020, Wang 2018, Castellani, Mariotti, and Piscitello 2008, Navaretti, Castellani, and Disdier 2010).
- Industrial upgrading is often associated with offshoring labour-intensive and low-cost activities to make space for higher-end industrial activities in the home economy. However, it remains uncertain whether this shift to capital- and skill-intensive activities actually materialises in an economy (see E2) Offshoring).
- Policies should accompany, through appropriate measures, the transition and (re)structuring of the economy associated with efficiency-seeking OFDI and ‘offshoring’, to make sure that the benefits of industrial upgrading are fully realised.
Interactions
B3) Investment motivation: Efficiency-seeking activities can result in home country industrial upgrading as low-end activities are moved offshore.
B6) Investment destination: Efficiency-seeking OFDI associated with ‘offshoring’ is usually undertaken in less advanced economies, whereas strong exposure to international competition is more likely in the advanced economies. Thus, OFDI in both more and less advanced economies has the potential to induce home-country industrial upgrading.
B7) Absorptive capacity: Absorptive capacity could strengthen the relationship between OFDI and industrial upgrading in the home country.
8) Transmission channels: Competition effects can induce industrial upgrading in the home country as companies are forced to improve to keep up with international competitors.
E2) Offshoring: Empirical research still needs to further investigate to what extent industrial upgrading happens in response to offshoring via efficiency-seeking OFDI.
Available Research Findings
Chen, Pan, and Xiao (2020): Chinese OFDI undertaken in developing countries from 2003 to 2015 had a positive impact on industrial upgrading in China through marginal industrial transfer.
UNESCAP (2020, 24-33): OFDI between 1960 and 2018 from 53 ESCAP member states was associated with greater R&D expenditure in the home country.
Li and Yu (2020): OFDI from Chinese provinces has a positive effect on provincial industrial upgrading.
Wang (2018): OFDI from Sichuan province, China, between 2003 and 2016 optimised and upgraded the industrial structure of the province.
Huang (2013): Taiwanese OFDI from 1993-2008 both in mainland China and globally was negatively associated with parent company R&D investment, especially in the short term.
Liang and Bing (2010): Japanese OFDI from 1981 to 2008 had a positive effect on industrial upgrading in the primary industry, but mixed effects in the secondary and tertiary industries.
Navaretti, Castellani, and Disdier (2010): Italian OFDI has a positive long-term effect on value added in the home country.
Sun, Fulginiti, and Chen (2010): In a sample of Taiwanese OFDI in 15 industries between 1991 and 2001, efficiency-seeking OFDI had a negative effect on Taiwanese competitiveness due to reduced innovative activity.
Castellani, Mariotti, and Piscitello (2008): Italian manufacturing MNEs investing in Central and Eastern European countries from 1998 to 2004 experienced some skill upgrading.