It is possible to target HCMs at investments which promise to generate home-country effects. Such targeting could also make sure that HCMs do not support investments that have unfavourable effects on the home country, with a neutral effect set as the minimum requirement. For this to work, it would be necessary to anticipate the likely impact of an OFDI project on the home country, for example by drawing on information related to the characteristics of the investing firm and its specific investment project.
A more general way to promote home-country effects is to target investments that might not occur without specific encouragement and support by the government. Generally, the relaxation of restrictions on OFDI is a means to encourage greater OFDI flows that could eventually lead to greater home-country effects. Another way to increase investments is to enhance awareness of investment opportunities among domestic companies, such as through early support services and information provision. Some companies could also be supported in their efforts to explore the possibility of an overseas investment through feasibility studies, investment missions, etc. Such assistance is often valued by SMEs, who can find themselves in a situation where OFDI might be viable, but they lack (financial) resources for feasibility assessments of foreign investment. These expenses can be risky for SMEs when they cannot guarantee whether feasibility studies will lead to eventual investment.
Key insights
- HCMs can be targeted at investments that explicitly promise to generate home-country effects and are not anticipated to have unfavourable effects on the home economy.
- HCMs can promote the creation of new investments that promise to generate home-country effects in the future.
Interactions
C1) Institution: The mandate bestowed on institutions relating to OFDI could be tailored towards, or focused on, the realisation of specific home-country effects. For example, export promotion agencies could focus OFDI promotion on investments that generate exports.
C2) Regulations: In general, relaxing restrictions enhances OFDI flows and creates new investments. Some regulations could be employed to specifically promote home-country effects. For example, investment approval, foreign exchange controls and tax laws could require or induce companies to repatriate their overseas financial earnings. Regulations are also used to minimise financial losses and control the extent of offshoring.
C4) Financial support: Financial support can be targeted at projects that are expected to generate specific home-country effects, or more generally help increase the competitiveness of national firms.
C5) Fiscal support: Fiscal support can be targeted at the generation of specific home-country effects, especially the repatriation of earnings.
C9) Maximizing benefits: Governments can aim to maximize benefits from OFDI by directly encouraging the generation of specific home-country effects, such as encouraging overseas subsidiaries to procure products from home-country suppliers.
Existing Country Practices
Targeting home-country effects in Belgium: BMI-SBI only supports projects that demonstrate a favourable impact for the Belgian economy.
Targeting home-country effects in Canada: EDC’s structured and project finance scheme supports projects with clear economic benefits for Canada.
Targeting home-country effects in the Republic of Korea: K-Sure’s Overseas Natural Resources Development Fund Insurance supports the Korean economy by helping it secure strategic resources in a stable manner.
Targeting home-country effects in Malaysia: MIDA’s tax incentive for acquiring a foreign company is aimed at projects that result in improved technological performance or better technological capabilities and processes in investing firms’ Malaysian operations.
Targeting home-country effects in Singapore: Enterprise Singapore’s Internationalisation Finance Scheme (IFS) requires that the overseas operations of the company complement its core business in Singapore and result in clear economic spin-offs in Singapore.
Targeting home-country effects in Spain: ICO’s direct funding is available to projects where there is a Spanish interest.
Targeting home-country effects in the United States: The United States tax reform of 2017-18 included measures to encourage its MNEs to return funds to the United States. The Homeland Investment Act (HIA) of 2005 offered tax breaks on the repatriation of investment funds.