The generation and extent of home-country effects from OFDI may depend on the motivation for investing overseas and associated investment strategies. A common distinction is made between four key types of investment motivation (Dunning 2000):
a) Market-seeking OFDI: Such investments are aimed at facilitating better access to overseas markets to enhance the sales of goods and services in these markets. They could, for example, increase financial earnings and promote home-country exports, especially of final goods.
b) Resources-seeking OFDI: Such investments are aimed at accessing and acquiring raw materials and natural resources in other countries, such as through mining concessions, resources exploitation rights and purchases of agricultural land. They could, for example, support home countries in achieving greater natural resources security.
c) Efficiency-seeking OFDI: Such investments are aimed at reducing the costs of production and business operations, such as by producing in locations where labour, land and other costs are comparatively low. Such activities could, for example, increase financial earnings and promote home-country exports, especially of intermediary products. They could also facilitate home-country industrial upgrading.
d) Strategic asset-seeking OFDI: Such investments are aimed at acquiring overseas strategic assets, such as technologies, know-how and brands. They could, for example, improve know-how, technologies and productivity in home countries.
Investment success and the corresponding realisation of home-country effects will depend on the extent to which the precise strategies to seek markets, efficiency, resources and strategic assets are effective.
At the same time, it is important to note that OFDI may be motivated by other factors, or may be responding to a combination of motivations. Examples of other factors include tax regimes (Driffield et al 2021), escaping from a non-friendly investment climate (Cuervo-Cazzura and Narula 2015) in the home-economy, or geopolitical influence (Moghaddam et al 2014).
Key insights
- Under the right conditions and strategies, all four motivations – market-, resources-, efficiency- and strategic asset-seeking OFDI – have the theoretical potential to generate positive home-country effects. This is confirmed empirically only for market- and strategic asset-seeking OFDI.
- Strategic asset-seeking OFDI has generated several positive home-country effects, especially increasing innovation (e.g. Fu, Hou, and Liu 2018, Anderson, Sutherland, and Severe 2015). This kind of investment was also found to have an impact on productivity (Huang and Zhang 2017) and employment (Hong, Lee, and Makino 2019).
- Market-seeking OFDI contributed to improvements in employment (Hong, Lee, and Makino 2019, Hijzen, Jean, and Mayer 2011).
- The findings for efficiency-seeking were mixed – some studies found positive effects while others found negative effects (Hong, Lee, and Makino 2019, Chen and Yang 2013, Sun, Fulginiti, and Chen 2010).
- Conclusive evidence on resource-seeking OFDI still needs to be developed (Chen 2011, Hong, Lee, and Makino 2019).
- OFDI policy and HCMs could focus on market- and strategic asset-seeking OFDI, for which home-country effects are well documented. Support for efficiency-seeking and resource-seeking OFDI needs to be carefully managed, to make sure that it promotes positive home-country effects.
Interactions
A1) Financial earnings: 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.
A2) Exports and production: Given the focus of market-seeking OFDI on expanding business opportunities, and the fact that efficiency-seeking OFDI often sets up factories to which the home country can supply intermediate products, both have the potential to increase financial earnings.
A4) Know-how and technology: Strategic asset-seeking OFDI has positive effects on know-how generation and innovation (e.g. Fu, Hou, and Liu 2018, Anderson, Sutherland, and Severe 2015).
A6) Industrial upgrading: Efficiency-seeking activities can result in home country industrial upgrading as low-end activities are moved offshore.
A8) Resources capacities: Resource-seeking activities potentially enhances the availability of natural resources in the home country and improve domestic resources security.
A10) Employment: Market-seeking OFDI can enhance employment (Hong, Lee, and Makino 2019, Hijzen, Jean, and Mayer 2011).
D3) Investment motivation: Home-country measures can be targeted at investments with specific motivations.
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.
Hong, Lee, and Makino (2019): Japanese OFDI undertaken from 1996 to 2010 enhanced domestic employment when it was natural resources- and strategic-asset-seeking, but reduced employment when it was labour resource seeking. Market-seeking OFDI had a positive impact when it expanded scale and scope, but negative when it was associated with declines in home country demand.
Fu, Hou, and Liu (2018): The positive impact of OFDI on the innovation performance of Chinese MNEs was enhanced by the knowledge-seeking orientation of the companies.
Huang and Zhang (2017): OFDI made by Chinese manufacturing firms between 2002 and 2007 led to increases in parent firm productivity, especially among firms seeking advanced technologies abroad.
Yang (2017): Chinese production oriented OFDI from 2000 to 2011 enhanced the scale of production, exports and productivity of the parent company.
Anderson, Sutherland, and Severe (2015): Acquisitions made by Chinese companies in advanced markets for the purpose of seeking strategic assets lead to a significant rise in parent company patents.
Chen and Yang (2013): OFDI made by Taiwanese manufacturing firms between 1992 and 2005 was positively associated with domestic R&D expenditure, especially when firms shifted production overseas to take advantage of lower labour costs.
Borini et al. (2012): A survey of 66 subsidiaries of 30 emerging market multinationals found that reverse knowledge transfers primarily depended on the strategic orientation of the R&D function in the subsidiaries, focusing on the creation of new products and processes, rather than merely product and process adaptation.
Chen (2011): Chinese national oil companies have enhanced their international energy coffers and reserves, but it is unclear whether this has contributed to Chinese energy security, especially as the diversity and reliability of Chinese overseas sources of oil are questionable.
Hijzen, Jean, and Mayer (2011): OFDI undertaken by French manufacturing and services firms between 1987 and 1999 created jobs when it was market-seeking. Factor-seeking OFDI had no effect on employment, but it was associated with greater capital-intensity and efficiency, and larger exports.
Sun, Fulginiti, and Chen (2010): In a sample of Taiwanese OFDI in fifteen industries between 1991 and 2001, efficiency-seeking (“defensive”) OFDI had a negative effect on Taiwanese competitiveness due to reduced innovative activity.