The nature and characteristics of the host economy where the investment is made can have an impact on the existence and extent of any home-country effects.
A key distinction can be made between OFDI in developing and advanced economies or, put differently, in economies that are more or less advanced than the home country. For example, access to foreign technological, managerial, marketing and other know-how as well as R&D and innovation is usually more feasible in advanced economies, as is access to large markets that promise greater financial earnings and exports. Host countries that are relatively developed will also require investing MNEs to adopt higher labour, environmental, accounting and other standards, and as a result some MNEs might consider introducing these standards into their global operations. Low-cost, labour-intensive production tends to be more feasible in developing countries, with the associated financial earnings from cost savings, exports of intermediary products from home to host country, and potential industrial upgrading and employment effects in the home country. Yet, despite this distinction, many home-country effects can be generated from OFDI made in both more and less advanced host countries (Knoerich 2017, Stephenson 2018b, UNESCAP 2020).
Related host country characteristics that may impact on the generation of home-country effects are size of the host country market, local labour and other costs, technological advancement, product and process standards, integration into global value chains, natural resources endowments etc. The distance between home and host country may also play a role.
Moreover, the policy context in host countries, especially the ways in which their governments regulate, facilitate and promote inward investment, will affect investment patterns and, by extension, the generation and extent of any impacts back in the home country (UNESCAP 2020).
The exact mechanisms through which these properties of host countries may support the generation of home-country effects will further depend on the precise nature of the investment made.
Key insights
- In a large number of studies, OFDI to advanced economies has a positive effect on home country know-how and innovation (e.g. Chen, Pan, and Xiao 2020, Hong et al. 2019, Zhou et al. 2019, Fu, Hou, and Liu 2018, Anderson, Sutherland, and Severe 2015, Chen, Li, and Shapiro 2012, Pradhan and Singh 2008). A few studies find a corresponding negative effect for investments in developing countries (Zhou et al. 2019, Hong et al. 2019, Sun, Fulginiti, and Chen 2010).
- Many studies find a positive effect on home country productivity, especially when OFDI is made in advanced economies (Chen, Lin, and Yabe 2019, Huang and Zhang 2017, Li et al. 2017, Cozza, Rabellotti, and Sanfilippo 2015, Zhao, Liu, and Zhao 2010).
- The findings for the impact of OFDI on home country employment are more mixed (Debaere, Lee, and Lee 2010, Harrison and McMillan 2010, Navaretti, Castellani, and Disdier 2010, Castellani, Mariotti, and Piscitello 2008, Masso, Varblane, and Vahter 2008, Konings and Murphy 2006, Blomström, Fors, and Lipsey 1997). The effect tends to be more positive for OFDI in advanced economies (Cozza, Rabellotti, and Sanfilippo 2015, Liu, Tsai, and Tsay 2015, Debaere, Lee, and Lee 2010).
- OFDI to more advanced economies generates various home-country effects, including know-how, technology and productivity gains. Policies and HCMs could therefore promote such OFDI.
Interactions
A2) Exports and production: OFDI made in large markets, which tend to be advanced economies, has great potential to enhance home country exports and production. OFDI in developing countries aimed at reducing costs could enhance the exports of intermediary products.
A4) Know-how and technology: OFDI undertaken in more advanced home countries results in greater home country innovation and know-how generation (e.g. Chen, Pan, and Xiao 2020, Hong et al. 2019, Zhou et al. 2019, Fu, Hou, and Liu 2018, Anderson, Sutherland, and Severe 2015, Chen, Li, and Shapiro 2012, Pradhan and Singh 2008). Such effects in developing countries tend to be negative (Zhou et al. 2019, Hong et al. 2019, Sun, Fulginiti, and Chen 2010).
A5) Improved standards and practices: As advanced economies tend to have higher labour, environmental, managerial, accounting and other standards and practices, OFDI in such countries could lead to improvements of such standards and practices in the investing MNE and, ultimately, the home country.
A6) Industrial upgrading: 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.
A7) Productivity: OFDI, especially in advanced economies, enhances home country productivity (e.g. Liu and Manzoor 2020, Chen, Lin, and Yabe 2019, Huang and Zhang 2017, Li et al. 2017, Cozza, Rabellotti, and Sanfilippo 2015, Zhao, Liu, and Zhao 2010).
A10) Employment: OFDI in more advanced economies tends to have more promising employment effects (Cozza, Rabellotti, and Sanfilippo 2015, Liu, Tsai, and Tsay 2015, Debaere, Lee, and Lee 2010, Harrison and McMillan 2010, Blomström, Fors, and Lipsey 1997), though this is not consistent across all studies (Konings and Murphy 2006, Navaretti, Castellani, and Disdier 2010).
D6) Investment destination: Home-country measures can be targeted at investments undertaken in a particular investment destination or specific type of host country, such as developing or advanced economies.
Available Research Findings
Chen, Pan, and Xiao (2020): Chinese OFDI made from 2003 to 2015 had a positive impact on industrial upgrading in Chinese provinces. This was driven by reverse technology transfer when OFDI was made in developed countries, and by marginal industrial transfer when it was directed to developing countries.
Liu and Manzoor (2020): In a dataset of 1,208 cases of Chinese OFDI undertaken between 2004 and 2015, investments in Belt and Road Initiative (BRI) countries, developing economies, and in sub-regions like the Middle East, South Africa, East Asia and the Pacific, and Latin America and the Caribbean had larger, positive effects on productivity.
Chen, Lin, and Yabe (2019): Chinese OFDI made in the food industry between 2005 and 2013 improved the productivity of the parent firm only in the short term. This effect is stronger for investments in “non-tax havens” and high-income destinations and non-existent for low- and middle-income destinations and tax havens.
Hong et al. (2019): Chinese OFDI made in developed markets promoted innovation performance, while OFDI in emerging markets hampered innovation performance. A larger observed technology gap with the host country and lower expected technology gap increases the benefits for innovation performance.
Tao et al. (2019): The relationship between Chinese OFDI in 63 countries between 2004 and 2015 and exports followed an inverted U-shaped curve. The study focused on BRI countries.
Zhou et al. (2019): Chinese OFDI undertaken in advanced economies is positively associated with domestic innovation performance, but there is a negative association for OFDI in transition economies and emerging markets.
Fu, Hou, and Liu (2018): OFDI made in developed countries enables Chinese MNEs to acquire advanced know-how and strengthen their innovation capabilities. Such OFDI in advanced economies also substitutes for in-house R&D.
Huang and Zhang (2017): OFDI undertaken by Chinese manufacturing firms between 2002 and 2007 led to increases in parent firm productivity, especially among those firms investing in developed countries.
Li et al. (2017): Chinese manufacturing MNEs between 2002 and 2008 became more productive once they had engaged in OFDI, especially those investing in OECD countries.
Driffield, Love, and Yang (2016): In a sample of 1,600 MNEs with 4,000 subsidiaries, covering 46 home and host countries, productivity of the parent firm is enhanced as a result of the subsidiary performance, especially through investments in countries with strong institutional and economic performance (intellectual property protection, rule of law, technological sophistication).
Anderson, Sutherland, and Severe (2015): Acquisitions by Chinese companies in advanced markets for the purpose of seeking strategic assets does not increase the number of patents in the acquired subsidiary, though patents in the parent company rise significantly. The study focused on Chinese OFDI made in Europe, Japan and the United States.
Cozza, Rabellotti, and Sanfilippo (2015): Chinese investments into advanced economies between 2003 and 2011 enhanced the productivity, sales and employment of the Chinese MNEs. The study focused on Chinese OFDI in Europe.
Liu, Tsai, and Tsay (2015): OFDI undertaken by a sample of 1,084 Taiwanese manufacturing firms between 2000 and 2010 had a favourable impact on domestic employment, production and investment when it was made in high-wage countries, but tended to result in job losses and hollowing out when made in low-wage economies.
Driffield, Love, and Yang (2014): Reverse spillovers associated with technology sourcing by 4,500 MNE subsidiaries across a wide range of countries were significant, but tended to be concentrated within the ‘triad’ regions, rather than across them.
Huang (2013): An analysis of a sample of Taiwanese information and electronics firms between 1993 and 2008 revealed that rising OFDI reduced growth in R&D investment in the parent company, especially when the wage gap between home and host countries was large.
Chen, Li, and Shapiro (2012): OFDI made by 493 emerging economy MNEs between 2000 and 2008 was associated with stronger technological capabilities in the home country when investments were directed to advanced economies with richer technological resources.
Debaere, Lee, and Lee (2010): South Korean OFDI undertaken between 1968 and 1996 decreased the employment growth rate, especially in the short term, when it was made in developing countries. There was no effect when OFDI was destined to advanced economies.
Harrison and McMillan (2010): Evidence from United States manufacturing MNEs indicates that offshoring to low-wage countries substitutes for domestic employment. Yet, foreign and domestic employment complement each other when the activities undertaken by parent and subsidiary are significantly different.
Navaretti, Castellani, and Disdier (2010): French and Italian OFDI made in developing countries had no negative impact in home countries. In Italy, OFDI enhanced efficiency, value added and employment growth. In France, OFDI increased output and employment, with no significant effect on productivity. OFDI undertaken by both countries to developed economies had no impact on home country productivity.
Sun, Fulginiti, and Chen (2010): In a sample of Taiwanese OFDI in fifteen industries between 1991 and 2001, efficiency-seeking (“defensive”) OFDI to developing countries, particularly China, had a negative effect on Taiwanese competitiveness, due to reduced innovative activity.
Zhao, Liu, and Zhao (2010): Chinese OFDI made between 1991 and 2007 improved total factor productivity growth in China, due to gains in efficiency. The study focused on eight developed countries.
Castellani, Mariotti, and Piscitello (2008): OFDI undertaken by Italian manufacturing MNEs in developing and advanced economies from 1998 to 2004 did not reduce parent company employment. Only companies investing in Central and Eastern European countries experienced some skill upgrading.
Masso, Varblane, and Vahter (2008): Estonian OFDI made between 1995 and 2002, most of which is made in economies with similar levels of development, had a positive impact on home country employment growth.
Pradhan and Singh (2008): OFDI undertaken by Indian MNEs in the automotive sector between 1988 and 2008 had a favourable impact on R&D intensity. This impact was stronger in developed host countries.
Konings and Murphy (2006): In OFDI made by 1,067 EU MNEs from 1993 to 1998, affiliate and parent employment were substitutes when investment occurred among advanced (Northern) EU countries. There was no impact from affiliates in low wage EU regions.
Lipsey and Ramstetter (2003): Japanese manufactured exports to a country are positively associated with the level of employment in foreign manufacturing affiliates of Japanese MNEs, but negatively associated with the level of employment by affiliates of United States firms in that country.
Van Pottelsberghe de la Potterie and Lichtenberg (2001): OFDI in R&D-intensive countries increases productivity.
Blomström, Fors, and Lipsey (1997): United States OFDI in developing countries is associated with reduced home country labour intensity, whereas Swedish OFDI in advanced and developing countries is associated with greater domestic employment.