The extent to which OFDI generates home-country effects, and the nature of such effects, can vary by industrial sector. Home-country effects may, for example, depend on whether an investment is made in the primary, secondary or tertiary sectors, vary by knowledge- and skill-intensity of the sector, and depend on the degree of export-orientation in an industry.
Key insights
- A large number of studies examining manufacturing firms found positive home-country effects, including on exports, domestic investment, know-how generation, productivity and employment. The impact on employment was particularly pronounced (Tham et al. 2018, Huang and Zhang 2017, Li et al. 2017, Chen and Yang 2013, Hayakawa et al. 2013, Rabbiosi and Santangelo 2013, Hijzen, Jean, and Mayer 2011, Desai, Foley, and Hines 2009, Castellani, Mariotti, and Piscitello 2008, Federico and Minerva 2008, Lipsey and Ramstetter 2003, Pfaffermayr 1996).
- In some studies, the positive effect on employment was particularly strong in the tertiary industry (Liu and Lu 2011, Hijzen, Jean, and Mayer 2011, Masso, Varblane, and Vahter 2008).
- To promote home-country effects, OFDI policy and HCMs should generally focus on sectors of importance in national development strategies. Manufacturing and tertiary sectors could be considered as particularly promising for the generation of home-country effects.
Interactions
A2) Exports and production: In the manufacturing sector, a few studies have found a positive impact of OFDI on exports (Tham et al. 2018, Lipsey and Ramstetter 2003, Pfaffermayr 1996).
A3) Domestic investment: In the manufacturing sector, a few studies find a positive impact of OFDI on domestic investment (You and Solomon 2015, Desai, Foley, and Hines 2009).
A4) Know-how and technology: In the manufacturing sector, a few studies find a positive impact of OFDI on home-country know-how and technologies (Chen and Yang 2013, Rabbiosi and Santangelo 2013). OFDI in knowledge-intensive sectors could also enhance know-how and technology in the home country.
A7) Productivity: In the manufacturing sector, a few studies find a positive impact of OFDI on home-country productivity (Chen, Lin, and Yabe 2019, Huang and Zhang 2017, Li et al. 2017).
A8) Resources capacities: OFDI in natural resources and raw materials sectors could enhance home-country resources availability and security.
A10) Employment: OFDI in the manufacturing and services sectors can have a positive impact on employment (Federico and Minerva 2008, Hayakawa et al. 2013), though not all studies confirm this, and some report mixed results (Gu 2018, Harrison and McMillan 2010, Konings and Murphy 2006). OFDI in the tertiary industry could have a particularly strong effect on employment generation in the home country (Liu and Lu 2011, Hijzen, Jean, and Mayer 2011, Masso, Varblane, and Vahter 2008).
D2) Industrial sector: Home-country measures can be targeted at specific industrial sectors.
Available Research Findings
Lee, Hong, and Makino (2020): Japanese non-conventional OFDI (e.g., aimed at tax advantages, financial hedging or circumventing trade barriers) made in 60 countries between 1996 and 2010 had a positive or neutral impact on domestic employment when it was in non-core business activities (i.e., for financial hedging or in tax-havens), depending on whether or not it aimed to develop firm-specific advantages. Its impact was negative in core business activities when OFDI aimed at circumventing host or home country restrictions.
Chen, Lin, and Yabe (2019): Chinese OFDI in the food industry made between 2005 and 2013 improved the productivity of the parent firm in the short term. The impact varied by sub-sector within the industry. It was positive in the agricultural food processing and beverage manufacturing industries, but there was no measurable impact in the food manufacturing industries.
Fu, Hou, and Liu (2018): Prior international experience enhanced the positive effect of OFDI on the innovation performance of Chinese companies especially in high-tech sectors. Yet, in high-tech sectors, OFDI also substituted for in-house R&D.
Gu (2018): Japanese OFDI had a negative impact on domestic employment and production. The study focused on the manufacturing industry.
Tham et al. (2018): OFDI from Malaysia since 2007 has complemented exports in the services, mining and manufacturing sectors.
Huang and Zhang (2017): Chinese OFDI made between 2002 and 2007 led to increases in parent firm productivity. The study focused on manufacturing firms.
Li et al. (2017): Chinese MNEs from 2002 to 2008 became more productive upon engaging in OFDI. The study focused on manufacturing firms.
Liu, Tsai, and Tsay (2015): OFDI undertaken by a sample of 1,084 Taiwanese firms between 2000 and 2010 had a favourable impact on employment, production and investment when it was directed to high-wage countries, but tended to result in hollowing out when made in low-wage economies. The study focused on the manufacturing industry.
You and Solomon (2015): Domestic investment responds positively to Chinese OFDI, especially in state-dominated industries.
Chen and Yang (2013): OFDI made by Taiwanese manufacturing firms between 1992 and 2005 was positively associated with domestic R&D expenditure, especially in R&D-intensive industries.
Hayakawa et al. (2013): Japanese horizontal OFDI undertaken from 1992 to 2005 increased demand for non-production workers. Vertical OFDI raised demand for skilled production workers. The study focused on manufacturing firms.
Rabbiosi and Santangelo (2013): A survey database of 84 Italian MNEs showed that, among 301 parent-subsidiary dyads, 31 percent exhibited evidence of reverse knowledge transfers. The study focused on the manufacturing industry.
Liu and Lu (2011): Chinese OFDI from 1982 to 2007 had a positive impact on employment growth, especially in the tertiary industry.
Hijzen, Jean, and Mayer (2011): OFDI undertaken by French firms between 1987 and 1999 was associated with job creation in the services sector. In the manufacturing sector, this association existed for market- but not factor-seeking OFDI.
Harrison and McMillan (2010): Evidence from United States MNEs indicates that offshoring to low-wage countries substitutes for domestic employment. Yet, foreign and domestic employment complement each other when the activities in parent and subsidiary are significantly different. The study focused on manufacturing firms.
Liang and Bing (2010): Japanese OFDI made from 1981 to 2008 had a positive effect on industrial upgrading in the primary industry, but mixed effects in the secondary and tertiary industries.
Desai, Foley, and Hines (2009): United States OFDI made between 1982 and 2004 increased domestic investment and employee compensation. The study focused on manufacturing firms.
Castellani, Mariotti, and Piscitello (2008): OFDI made by 108 Italian manufacturing MNEs from 1998 to 2004 did not reduce domestic employment in parent companies and resulted in some skill upgrading for those investing in Central and Eastern European countries. The study focused on the manufacturing industry.
Federico and Minerva (2008): Italian OFDI undertaken between 1996 and 2001 in twelve manufacturing industries from 103 administrative provinces was associated with faster local employment growth, relative to the national industry average.
Masso, Varblane, and Vahter (2008): Estonian OFDI made between 1995 and 2002 had a positive impact on home country employment growth. The effect was stronger for services firms compared to manufacturing firms.
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.
Konings and Murphy (2006): In OFDI made by 1,067 EU MNEs from 1993 to 1998, affiliate and parent employment acted as substitutes when such investment occurred among advanced (Northern) EU countries, especially in the manufacturing sector.
Lipsey and Ramstetter (2003): Japanese exports are positively associated with the level of employment in foreign affiliates of Japanese MNEs. The study focused on the manufacturing industry.
Egger, Pfaffermayr, and Wolfmayr-Schnitzer (2001): Austrian OFDI undertaken in Eastern European transition economies from 1990 to 1998 enhanced domestic growth in total factor productivity. This was stronger in capital-intensive industries, compared to low-skill, labour-intensive industries.
Pfaffermayr (1996): OFDI undertaken by Austrian firms in the 1980s and 1990s was complementary to exports. The study focused on Austrian manufacturing.