How does outward foreign direct investment contribute to economic development in less advanced home countries?

Abstract

In view of the rapid increase of outward foreign direct investment (OFDI) from emerging economies in recent years, this study examines how OFDI supports economic development in the world's less advanced home countries. Drawing on theories of FDI, available literature of relevance and some recent evidence from emerging economies, this study finds that the objective of multinational enterprises to pursue assets and advantages abroad through OFDI can yield financial, intangible capability and tangible capacity returns. In the right circumstances, these returns generate important macroeconomic gains, mitigate some of the typical problems of economic development and provide broader benefits to societies. Despite some limitations, OFDI complements, sometimes in distinct ways, the development benefits many countries already realise through trade, migration and inward FDI. Emerging economies are best placed to benefit from the returns generated by OFDI.

Outward Foreign Direct Investment and Economic Growth in China: Evidence From Asymmetric Ardl Approach

“…The traditional theories on the emergence of multinational enterprises are based on the views that firm-specific and oligopolistic advantages already possessed by the MNEs are the essential prerequisite for the happening of FDI (Dunning, 2001). The most common traditional theories regard FDI as an activity to exploit competitive assets (Dunning, 2001;Knoerich, 2017), underscoring the idea that MNEs are economically strong and dominant when conducting investment in the host country. But the recent emergence of MNEs from developing countries have exposed the flaws in traditional theories to fully explain the occurrence of cross border investment.…”

“…These recent advancement in FDI theory posits that, in addition to asset exploitation, firms also conduct overseas investment in order to seek or enhance existence assets (UNCTAD, 2006;Wesson, 1999). Case studies examining the emergence of MNEs from less advanced countries, such as China and Indonesia, suggest that firms from emerging economies are motivated mainly by the natural resources, foreign markets and technology seeking while making cross border investment decisions (Lecraw, 1993;Child & Rodrigues, 2005;Knoerich, 2017). The assets seeking views seem more suitable because it helps foster the development of the home country through direct transfer and utilization of assets in the source country or through indirect linkages of MNEs with parent country.…”

“…But the research on the relationship between outward FDI and economic growth is relatively scarce and focused mainly on industrial countries such as United States, Japan and EU countries (Hsu et al, 2015). These studies suggest that the impact of ODI is small but positive for the source country (Herzer, 2008;Knoerich, 2017). For instance, using cross country and time series data for United States, Herzer (2008Herzer ( , 2010 provides empirical evidence to show that ODI stimulates economic growth and output in the home economies.…”

“…Unfortunately, the empirical evidences on the home country's economic growth effects of ODI are more contentious in empirical studies than in theoretical studies. Some studies reported positive impact of ODI on economic growth (Knoerich, 2017;Lee, 2010), others postulated a negative relationship between these two variables (Stevens & Lipsey, 1992;Goh & Wong, 2014). For example, Hsu, Wang and Clegg (2015) argued that Chinese MNEs have positive impact on its exports and domestic investment through increasing demands for imports from the host country.…”

“…The controversy has mainly arisen due to the notion that if ODI substitutes domestic investment, it will also decelerate economic growth in the source country (Ali & Wang, 2018). However, a more recent review study by Knoerich (2017) has tried to eliminate the controversy by arguing that returns from ODI promote economic growth if they help mitigate certain developmental problems of source country, such as technology constraint or resources shortages. But the empirical evidences on the home country's economic growth effects of ODI has been lacking for developing countries.…”