The characteristics of the investing MNE and the parent company can have an influence on the extent to which its OFDI yields home-country effects. Four aspects are of particular importance:
a) The size of the MNE – whether it is a large company or a small- and medium-sized enterprise (SME) – can influence the extent to which home-country effects are realised. Large MNEs are often more competitive and more experienced than SMEs. They tend to have greater pools of capital and readily available financing capacity. This is particularly important for undertaking large-scale investment projects in sectors such as construction, natural resources or infrastructure. Nevertheless, SMEs often operate in key sectors and important niche industries that are important for the national economy.
b) The ownership of the MNE – whether it is state-owned, privately-owned or has mixed ownership – can influence the extent to which home-country effects are realised. State-owned enterprises (SOEs) are often larger and better endowed with financial and other resources, cluster in important industries and are often of strategic importance to domestic economies (UNESCAP 2020). Private enterprises are often considered to be more business-oriented and, as a result, more profitable and successful.
c) The nationality of the MNE – whether it comes originally from the home country, or is an entity owned by a foreign company making an onward investment via the home country – can influence the extent to which home-country effects are realised.
d) The capabilities of parent company management can influence the extent to which home-country effects are realised. Such capabilities include managerial experience, education and entrepreneurship. The degree to which MNEs are already internationally experienced prior to their overseas investments can also have an influence on the realisation of home-country effects. Such experience may result from prior OFDI, from being a business partner in the context of an inward investment, or from engagements with international counterparts through international trade (especially exports).
In addition, individual studies have identified further company characteristics that matter for the effective generation of home-country effects resulting from OFDI. For example, whether the investing company is family-owned or listed on a stock exchange could be of relevance.
Key insights
- Private firms appear to be better able to generate home-country productivity effects from OFDI than SOEs (Liu and Manzoor 2020, Chen, Lin, and Yabe 2019, Huang and Zhang 2017, Li et al. 2017).
- The capabilities of parent company management, such as international experience and entrepreneurial orientation, can influence the extent to which OFDI generates know-how and technology gains for the home country (Fu, Hou, and Liu 2018, Tang and Altshuler 2015, Borini et al. 2012).
- The size of the parent firm is likely an important influencing factor (Herstad and Jónsdóttir 2006).
- OFDI policy and HCMs should focus on promoting OFDI by private firms and those with well-qualified and (internationally) experienced management.
Interactions
A4) Know-how and technology: The capabilities of parent company management, such as international experience and entrepreneurial orientation, can influence the extent to which OFDI generates know-how and technology gains for the home country (Fu, Hou, and Liu 2018, Borini et al. 2012).
A7) Productivity: The impact of OFDI on domestic productivity is greater for private firms than for SOEs (Liu and Manzoor 2020, Huang and Zhang 2017, Li et al. 2017).
D1) Company characteristics: Home-country measures can be targeted at companies with specific characteristics.
Available Research Findings
Liu and Manzoor (2020): In a dataset of 1,208 cases of Chinese OFDI between 2004 and 2015, OFDI by SOEs had a worse effect on productivity compared to non-SOEs. This study focused on listed companies.
Chen, Lin, and Yabe (2019): The positive impact of Chinese OFDI in the food industry between 2005 and 2013 on productivity of the parent firm is only observable in firms that are not state-owned, and not observable in SOEs.
Fu, Hou, and Liu (2018): Prior international experience enhances the positive effect of OFDI on the innovation performance of Chinese companies, especially in high-tech sectors.
Huang and Zhang (2017): OFDI made by Chinese manufacturing firms between 2002 and 2007 led to increases in parent firm productivity, especially for privately owned MNEs.
Li et al. (2017): The Chinese manufacturing MNEs in the period from 2002 to 2008 that became significantly more productive once they had engaged in OFDI were privately owned.
Anderson, Sutherland, and Severe (2015): Acquisitions by Chinese companies in advanced markets for the purpose of seeking strategic assets increases parent company patents – this applied to both state-owned and private firms.
Liu, Tsai, and Tsay (2015): OFDI by Taiwanese manufacturing firms in high-wage countries between 2000 and 2010 had a favourable impact on employment when it was made by low-tech firms, but a negative impact on employment, production and investment when made by high-tech firms. For both high- and non-high-tech sectors, the impacts on employment, production and investment tended to result in hollowing out when made in low-wage economies.
Tang and Altshuler (2015): United States OFDI made between 1999 and 2009 resulted in productivity spillovers from MNEs to home country suppliers. This was particularly strong for exporting firms. Absorptive capacity was critical in determining the extent of these spillovers, especially for small and non-exporting firms, along a U-shaped curve where firms with particularly high or low levels of technological capabilities enjoyed the greatest benefits.
You and Solomon (2015): Domestic investment responds positively to Chinese OFDI, especially in state-dominated industries and when supported by the government.
Borini et al. (2012): A survey of 66 subsidiaries of 30 emerging market multinationals found that reverse knowledge transfers were contingent on the ‘entrepreneurial orientation’ of the firm.
Masso, Varblane, and Vahter (2008): The positive effect of Estonian OFDI made between 1995 and 2002 on home country employment growth was stronger when the investor was domestically- rather than foreign-owned.
Herstad and Jónsdóttir (2006): Large Nordic multinationals function as global knowledge pipelines that feed into domestic innovation systems in sectors where technological specialisation is already high.