OFDI can lead to improvements and advancements in know-how in the home country. Such know-how includes technological capability, managerial skills, marketing know-how and innovation. Many MNEs undertake OFDI to obtain or generate know-how overseas, in order to enhance their firm-specific capabilities. When they transfer (some of) this know-how back to their home country, and it is further disseminated among local firms, technological capabilities, innovation and managerial competency improves in the home country, enhancing national competitiveness and potentially upgrading industries.
Mergers and acquisitions (M&As) allow the investing firm to gain access to proprietary knowledge and assets of the partner or acquired firm, after conclusion of the deal. Another option is through the establishment of research and development (R&D) centres to tap into host country research clusters and employ local talent with the aim of generating new know-how and patents (UNESCAP 2020). In addition to such direct acquisition and generation of know-how, overseas subsidiaries – greenfield, R&D facilities and M&As – can further benefit from reverse spillovers (Driffield and Love 2003, 2005, Driffield, Love, and Yang 2016, 2014, De Propris and Driffield 2006). These can be separated into the following categories (see Knoerich 2017, Stephenson 2018b):
- Reverse horizontal linkages result from the exposure to competitors in the host country. This includes reverse competition effects inducing subsidiaries to adjust and enhance their performance to compete with local competitors, and reverse demonstration effects resulting from subsidiaries improving their capabilities by observing firms in the home country and imitating or adopting their technologies and practices.
- Reverse vertical linkages result from interaction with local suppliers or customers. Reverse forward linkages occur when subsidiaries receive information, know-how, technical assistance or training from their customers in the host country. Reverse backward linkages occur when subsidiaries interact with their suppliers in the host country and procure advanced products and high-technology inputs from them.
- Reverse labour turnover occurs when subsidiaries hire high-skilled employees locally in the host country who provide new foirmns of know-how and expertise to the investing MNE’s subsidiary.
After they have been transferred back to the home country, the know-how and technological gains from OFDI can result in an enhancement of scientific and technological capabilities, technology development, upgrading and innovation in home countries, thus contributing to SDG 9.5 (“enhance scientific research, upgrade the technological capabilities of industrial sectors”), SDG 9.B (“support domestic technology development, research and innovation in developing countries”), SDG 12.A (“support developing countries to strengthen their scientific and technological capacity”) and SDG 17.16 (“mobilize and share knowledge, expertise, technology and financial resources”). OFDI can assist developing countries catch up technologically by complementing other forms of know-how transfer, such as those that occur through trade. These benefits from OFDI can be generated in different sectors, including those particularly relevant to sustainability, such as the clean energy sector emphasised in SDG 7.A.
Key insights
- Most studies find evidence for reverse knowledge transfers to the home country, or increased domestic innovation as a result of OFDI (Chen, Pan, and Xiao 2020, Hong, Lee, and Makino 2019, Li et al. 2016, Anderson, Sutherland, and Severe 2015, Driffield, Love, and Yang 2014, Chen and Yang 2013, Mani 2013, Rabbiosi and Santangelo 2013, Borini et al. 2012, Chen, Li, and Shapiro 2012, Huang and Wang 2009, Pradhan and Singh 2008, Herstad and Jónsdóttir 2006, Globerman, Kokko, and Sjoholm 1996), though most solely examined Chinese OFDI.
- The potential for OFDI to increase knowledge resources in the home country can be beneficial for countries in the process of technological catch-up.
- OFDI policies and measures should promote forms of OFDI that promise to generate know-how and technology transfers to the home country. This includes strategic asset-seeking OFDI, overseas M&A and R&D centres and investments in more advanced economies than the home-country. Attention would need to be paid to potential concerns about this in host countries and issues of competitive neutrality (3) Competitive neutrality). Moreover, to facilitate know-how and technology transfers from OFDI, governments should promote domestic absorptive capacity.
Interactions
B1) Company characteristics: The capabilities of parent company management, such as international experience and entrepreneurial orientation, can influence the extent to which OFDI generates know-how and technology gains for the home country (Fu, Hou, and Liu 2018, Borini et al. 2012).
B2) Industrial sector: In the manufacturing sector, a few studies find a positive impact of OFDI on home-country know-how and technologies (Chen and Yang 2013, Rabbiosi and Santangelo 2013). OFDI in knowledge-intensive sectors could also enhance know-how and technology in the home country.
B3) Investment motivation: Strategic asset-seeking OFDI has positive effects on know-how generation and innovation (e.g. Fu, Hou, and Liu 2018, Anderson, Sutherland, and Severe 2015).
B5) Entry mode: M&As (and Joint Ventures) can be particularly promising vehicles for know-how acquisition and transfer (Pradhan and Singh 2008, Cozza, Rabellotti, and Sanfilippo 2015, Rabbiosi and Santangelo 2013). Investments in R&D centres also aim to enhance home country know how.
B6) Investment destination: 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).
B7) Absorptive capacity: Absorptive capacity should strengthen the potential of OFDI to enhance home-country know-how and technologies.
B8) Transmission channels: Indirect transfers and labour mobility can facilitate the transfer of know-how and technologies to the home country. Specifically, greater socialisation and integration between subsidiary and parent companies facilitate reverse know-how transfers (Borini et al. 2012, Rabbiosi and Santangelo 2013).
B9) Time since investment: Older subsidiaries tend to transfer more know-how (Rabbiosi and Santangelo 2013, Borini et al. 2012).
Available Research Findings
Chen, Pan, and Xiao (2020): Chinese OFDI undertaken in developed countries between 2003 and 2015 had a positive impact on industrial upgrading in China through reverse technology transfer.
Fu, Hou, and Liu (2018): Chinese OFDI results in increases in innovation performance of Chinese companies. However, there is a substitution effect between OFDI and in-house R&D, especially in high-technology industries.
Hong et al. (2019): Chinese OFDI in developed markets promotes innovation performance, especially the larger the technology gap with the host country.
Zhou et al. (2019): Chinese OFDI in advanced economies is positively associated with domestic innovation performance, but there is a negative association for OFDI in transition economies and emerging markets.
Li et al. (2016): OFDI from China between 2003 and 2010 had a positive impact on domestic innovation.
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 significantly increase.
Driffield, Love, and Yang (2014): In an international sample of multinational enterprises, the reverse spillovers associated with technology sourcing by 4,500 subsidiaries are significant but tend to be concentrated within the same regions.
Chen and Yang (2013): OFDI undertaken by Taiwanese manufacturing firms between 1992 and 2005 was positively associated with domestic R&D expenditure, especially in R&D-intensive industries.
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. However, growth in overseas earnings did increase growth in parent company R&D investment.
Mani (2013): The OFDI made by three leading Indian companies in the automotive industry involved knowledge transfers to the parent company in India.
Rabbiosi and Santangelo (2013): A database of 84 surveyed Italian MNEs showed that, among 301 parent company-subsidiary dyads, 94 exhibited evidence of reverse knowledge transfers, corresponding to an incidence rate of 31 percent.
Borini et al. (2012): A survey of 66 subsidiaries of 30 emerging market multinationals found evidence of reverse transfers of knowledge, contingent on several organisational factors.
Chen, Li, and Shapiro (2012): The OFDI undertaken by 493 MNEs from emerging economies between 2000 and 2008 was associated with stronger technological capabilities at home, when investments were made in advanced economies with richer technological resources.
Huang and Wang (2009): Chinese OFDI between 1985 and 2007 had a positive relationship with patent applications and patent licensing in China.
Pradhan and Singh (2008): OFDI by Indian MNEs in the automotive sector between 1988 and 2008 had a favourable impact on in-house R&D performance and R&D intensity.
Herstad and Jónsdóttir (2006): Large Nordic multinationals function as global knowledge pipelines that feed into innovation systems domestically, in sectors where technological specialisation is already high.
Globerman, Kokko, and Sjoholm (1996): Swedish OFDI channelled foreign technology to Sweden.