F7. Productivity

There is strong empirical evidence that OFDI can increase productivity in the home country. This makes the promotion of this home-country effect a particularly promising strategy, especially as improvements in productivity are an important objective in the economic development of many countries.

A starting point for such promotion would be to reduce any regulatory hurdles on OFDI in those industries where there is potential for productivity enhancements in the home country. Such regulatory easing could focus on manufacturing sectors, where productivity gains from OFDI have been empirically detected.

Moreover, the Toolkit suggests focusing on private companies and investments in advanced economies to promote productivity effects. Any regulatory hurdles on OFDI could therefore also be eased for private companies, and institutions with the mandate to promote OFDI could focus their efforts on private firms. Financial support could be offered especially to private companies, as is often the case in practice, and operational support could focus on private firms as well. In addition, investments in more advanced economies could be directly targeted, though in practice such investments are not regularly supported by HCMs.

Efforts should also be made to strengthen the absorptive capacity of the home economy and its firms, as well as improve the transmission channels through which enhancements in productivity are facilitated. Focus should be on supporting indirect transfers and labour mobility, which can bring productivity-enhancing know-how and technologies to the home country, as well as competition and scale/scope effects, given that competitive pressures and greater economies of scale could yield productivity gains. Institutions could be established whose objective would be to build up relevant domestic competitiveness, skills etc. Such prerequisites can then help maximise the know-how and technological gains from OFDI which facilitate productivity increases and are often transmitted through indirect transfers and competition effects. In addition, labour mobility could, for example, be supported through supportive employment and visa regulations.

The productivity gains are likely to accrue in the long term. Thus, financial support measures should have long durations, and efforts to maximise benefits from OFDI should be made with a long-term perspective. Operational support on the ground should also be offered to investments over long periods of time.

Key insights

• The enhancement of home-country productivity can be promoted especially by targeting financial support measures at private companies engaging in OFDI and by promoting investments in more advanced economies. 
• To further nurture such productivity gains, efforts should be made to strengthen the absorptive capacity of the home economy and its firms. This can be achieved especially through efforts at maximising the benefits from OFDI and the establishment of institutions aimed at promoting the build-up of domestic absorptive capacity.
• To facilitate that OFDI enhances productivity in the home country, financial and operational support measures should, in particular, be introduced in a way so they support OFDI over long periods of time.