OFDI can lead to enhancements in home country productivity, as a result of the greater capital intensity in production (see A2) Exports and production and A3) Domestic investment), enhanced technological processes (see A4) Know-how and technology and A6) Industrial upgrading) and other benefits it generates (UNESCAP 2020).
SDG 8.2 aims at achieving higher levels of economic productivity, including through technological upgrading, innovation and a focus on high value-added sectors. OFDI can contribute to this goal.
Key insights
- There is particularly strong evidence of a positive impact of OFDI on productivity in the home country (Chen, Lin, and Yabe 2019, Jäckle and Wamser 2010, Yang, Lancheros, and Milner 2019, Wang, Zheng, and Yu 2019, Huang and Zhang 2017, Li et al. 2017, Yang 2017, Driffield, Love, and Yang 2016, Cozza, Rabellotti, and Sanfilippo 2015, Tang and Altshuler 2015, Bodman and Le 2013, Hijzen, Jean, and Mayer 2011, Zhao, Liu, and Zhao 2010, Egger, Pfaffermayr, and Wolfmayr-Schnitzer 2001, Van Pottelsberghe de la Potterie and Lichtenberg 2001).
- The impact of OFDI on home-country productivity can vary substantially depending on company characteristics, destination countries and other factors.
- Evidence of the productivity-enhancing effect of OFDI is particularly strong, making this a viable area on which to focus OFDI policy. Government policies and measures aimed at nurturing this home-country effect should promote OFDI by private companies and in advanced economies. They should also aim at strengthening home-country absorptive capacity.
Interactions
B1) Company characteristics: The impact of OFDI on domestic productivity is greater for private firms than for SOEs (Liu and Manzoor 2020, Huang and Zhang 2017, Li et al. 2017).
B2) Industrial sector: In the manufacturing sector, a few studies find a positive impact of OFDI on home-country productivity (Chen, Lin, and Yabe 2019, Huang and Zhang 2017, Li et al. 2017).
B6) Investment destination: OFDI, especially in advanced economies, enhances home country productivity (e.g. Liu and Manzoor 2020, Chen, Lin, and Yabe 2019, Huang and Zhang 2017, Li et al. 2017, Cozza, Rabellotti, and Sanfilippo 2015, Zhao, Liu, and Zhao 2010).
B7) Absorptive capacity: Absorptive capacity strengthens the positive relationship between OFDI and productivity (Chen, Lin, and Yabe 2019, Li et al. 2017, Huang and Zhang 2017, Tang and Altshuler 2015, Bodman and Le 2013).
B9) Time since investment: The positive impact of OFDI on home country productivity tends to happen in the long term (Cozza, Rabellotti, and Sanfilippo 2015, Herzer 2011b).
B8) Transmission channels: Scale and scope effects could increase the productivity of the parent firm in the home country. Competition effects, indirect transfers and labour mobility could facilitate innovation that results in productivity gains.
Available Research Findings
Liu and Manzoor (2020): In a dataset of 1,208 cases of Chinese OFDI between 2004 and 2015, OFDI has had a mixed effect on productivity that varied by ownership and destination country.
Chen, Lin, and Yabe (2019): Chinese OFDI in the food industry between 2005 and 2013 improved the productivity of the parent firm, but only in the short term.
Jäckle and Wamser (2010): Newly established German MNEs between 1996 and 2001 had higher total factor productivity, labour productivity and capital intensities than domestic firms.
Yang, Lancheros, and Milner (2019): Indian OFDI from 1999 to 2010 facilitated firms’ productivity growth.
Wang, Zheng, and Yu (2019): OFDI between 2000 and 2007 has a positive effect on the productivity of Chinese industrial enterprises.
Huang and Zhang (2017): OFDI by Chinese manufacturing firms between 2002 and 2007 led to an increase in parent firm productivity.
Li et al. (2017): Chinese manufacturing MNEs in the period from 2002 to 2008 became more productive having engaged in OFDI.
Yang (2017): Chinese OFDI from 2000 to 2011 enhanced the productivity of the parent company.
Driffield, Love, and Yang (2016): In a sample of 1,600 MNEs with 4,000 subsidiaries in 46 home and host countries, parent firm productivity was shown to be enhanced as a result of subsidiary performance.
Cozza, Rabellotti, and Sanfilippo (2015): Chinese OFDI into European advanced economies between 2003 and 2011 enhanced the productivity of Chinese firms.
Sun, Fulginiti, and Chen (2010): In a sample of Taiwanese OFDI undertaken in 15 industries between 1991 and 2001, the impact of OFDI on efficiency and productivity has been mixed.
Tang and Altshuler (2015): United States OFDI between 1999 and 2009 resulted in productivity spillovers from MNEs to home country suppliers.
Bodman and Le (2013): OFDI contributes to productivity in the home country, via technology transfers.
Herzer (2011b): In a sample of 33 developing countries between 1980 and 2005, OFDI had a positive long-run effect on total factor productivity, although there were considerable differences in the effects across individual countries, with some experiencing a negative impact.
Zhao, Liu, and Zhao (2010): Chinese OFDI in eight developed countries between 1991 and 2007 improved total factor productivity growth in China, due to technical efficiency gains.
Egger, Pfaffermayr, and Wolfmayr-Schnitzer (2001): Austrian OFDI in Eastern European transition economies from 1990 to 1998 enhanced domestic growth in total factor productivity.
Van Pottelsberghe de la Potterie and Lichtenberg (2001): OFDI in R&D-intensive countries increases home country productivity.