OFDI can enhance home country exports when the overseas operations of MNEs create trade, resulting in greater output and production activities in the home country. Ultimately, increased exports and output promotes further home country industrialisation and greater business opportunities for investing MNEs, their suppliers and other firms in the home country.
OFDI has the potential to promote exports particularly if the investment is trade-supporting and vertical in nature, i.e. involving a different activity along the supply chain to the activity undertaken in the home country (Lipsey 2004). This complementary relationship between OFDI and exports occurs when the investment involves backward vertical integration, such as production overseas (often in another developing country) to which the MNE or one of its suppliers from the home country ships intermediary goods. It also occurs when OFDI involves forward vertical integration, such as by promoting the sales of final goods (often in advanced markets) produced by the MNE in the home country.
SDG 17.11 aims to “increase the exports of developing countries”. Exports are important for economic growth and sustainable development. Not only do exports contribute to greater export earnings and more domestic production. In the medium- to long-term, large-scale exports and production increases even have the potential to facilitate broader industrialization and contribute to SDG 9.2 (promote inclusive and sustainable industrialisation). For this reason, finding ways to increase exports is important for developing countries, and OFDI offers one additional opportunity to enhance exports and associated expansions in domestic production.
Key insights
- Most studies find OFDI to be trade-supporting and export-promoting (UNESCAP 2020, Tham et al. 2018, Yang 2017, Ahmad, Draz, and Yang 2016, Nishitateno 2013, Hijzen, Jean, and Mayer 2011, Lipsey and Ramstetter 2003, Lipsey, Ramstetter, and Blomström 2000, Kim 2000, Pfaffermayr 1996, Pfaffermayr 1994), or to have a positive impact on domestic output (Navaretti, Castellani, and Disdier 2010).
- Some OFDI can have a trade-substituting effect, reducing domestic production and exports (see 2) Offshoring). (Gu 2018).
- Policies aimed at nurturing positive home-country effects should focus on export-promoting OFDI.
Interactions
B2) Industrial sector: In the manufacturing sector, a few studies have found a positive impact of OFDI on exports (Tham et al. 2018, Lipsey and Ramstetter 2003, Pfaffermayr 1996).
B3) Investment motivation: 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.
B5) Entry mode: Greenfield OFDI can expand home-country production and exports of intermediary and final goods (Cozza, Rabellotti, and Sanfilippo 2015, UNESCAP 2020). The establishment of sales and representative offices overseas also has the potential to enhance home country exports and production, due to the business opportunities such offices facilitate.
B6) Investment destination: 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.
B8) Transmission channels: Infrastructure that facilitates the direct transfers of goods and services could promote home-country exports and production. Scale and scope effects may also enhance domestic production.
E2) Offshoring: Horizontal and trade- substituting OFDI can reduce exports from the home country. (Gu 2018, Liu, Tsai, and Tsay 2015). However, most studies find a complementary relationship between OFDI and exports (UNESCAP 2020, Tham et al. 2018, Yang 2017, Ahmad, Draz, and Yang 2016, Nishitateno 2013, Hijzen, Jean, and Mayer 2011, Navaretti, Castellani, and Disdier 2010, Lipsey and Ramstetter 2003, Lipsey, Ramstetter, and Blomström 2000, Kim 2000, Pfaffermayr 1996, Pfaffermayr 1994).
Available Research Findings
UNESCAP (2020, 24-33): OFDI from 53 UNESCAP member states from 1960 to 2018 has had a positive effect on exports from home countries.
Tao et al. (2019): The relationship between Chinese OFDI in 63 countries between 2004 and 2015 and exports follows an inverted U-shaped curve.
Gu (2018): Japanese OFDI up until 2014 has a negative impact on domestic production. The export substitution effect was larger than the export promotion effect of OFDI.
Tham et al. (2018): OFDI from Malaysia since 2007 complements exports in the services, mining and manufacturing sectors.
Yang (2017): Chinese OFDI from 2000 to 2011 enhanced the scale of production and exports of the parent company.
Ahmad, Draz, and Yang (2016): OFDI complements exports from Malaysia, the Philippines, Singapore and Thailand, outweighing any substitution effects.
Bhasin and Paul (2016): OFDI from 10 major Asian economies between 1991 and 2012 had no long-run impact on home-country exports.
Liu, Tsai, and Tsay (2015): OFDI undertaken by a sample of 1084 Taiwanese manufacturing firms between 2000 and 2010 has had a favourable impact on domestic production when it is made in high-wage countries but tends to result in hollowing out when made in low-wage economies.
Nishitateno (2013): Japanese OFDI in the automobile industry by firms further upstream in the value chain resulted in additional exports of intermediate products from the home country. The study examined 32 products in 49 host countries from 1993 to 2008.
Hijzen, Jean, and Mayer (2011): OFDI undertaken by French manufacturing and services firms between 1987 and 1999 increased exports when it was factor-seeking or in the services sector.
Navaretti, Castellani, and Disdier (2010): French OFDI has a positive effect on the size of domestic output.
Lipsey and Ramstetter (2003): Japan’s manufactured exports to a country are positively associated with the level of employment in foreign manufacturing affiliates of Japanese MNEs.
Lipsey, Ramstetter, and Blomström (2000): Foreign production of affiliates of Japanese firms is associated with exports from the Japanese parent company. These findings are seen to replicate similar observations of Swedish and United States MNEs.
Kim (2000): OFDI has resulted in an increase in exports from South Korea, particularly of intermediate goods.
Pfaffermayr (1996): OFDI undertaken by Austrian manufacturing firms in the 1980s and 1990s was found to be complementary to exports.
Pfaffermayr (1994): Austrian OFDI is associated with greater exports.