The realisation of home-country effects can vary by the entry mode of investment. Five types of entry mode are particularly relevant:
a) Greenfield OFDI: These are investments in a new company, factory or economic activity, where none was present prior to the investment. Such investments, for example building a new factory, are often made in proximity to promising markets, or to produce in overseas locations where costs are lower and trade barriers can be circumvented. They may therefore be well-positioned for the promotion of home-country exports, financial returns, upgrading etc.
b) Mergers and acquisitions (M&A): The company making the investment either merges with a company in the host country, or the investing company acquires a host country firm fully or partially. M&As are considered particularly promising for the acquisition of proprietary knowledge and assets of the partner or acquired firm after conclusion of the deal (UNESCAP 2020).
c) Research and development (R&D) centres: A company sets up an R&D facility in the host country to tap into its research clusters, innovation and local talent with the aim of generating new know-how and patents (UNESCAP 2020).
d) Overseas resources extraction: Such investments involve the extraction of raw materials and natural resources, such as oil, metals and agricultural products, for example through mining concessions or the purchase of agricultural land.
e) Sales and representative offices: Such investments involve the establishment of only a minor representation in the host country for the purpose of exploring new markets or selling products and services produced or generated elsewhere, such as exports from the home country.
Depending on the entry mode, the equity ownership may range between 10 and 100 percent (ownership of less than 10 percent would not count as a direct investment). Wholly foreign-owned enterprises (WFOEs) are owned entirely by the foreign investor, an arrangement that offers the most control over the subsidiary and may maximise any potential gains – and losses – from the investment (UNESCAP 2020). Alternatively, ownership in a company can be shared with a host country firm or another foreign MNE. Finally, joint ventures (JVs) involve the establishment by two partner companies of a separate third company in the host country, for the undertaking of joint projects or production activities.
Key insights
- Home-country effects can be impacted by the entry mode of OFDI.
- There is some indication in empirical studies confirming M&As (and JVs) to be particularly promising vehicles for know-how acquisition and transfer (Pradhan and Singh 2008, Cozza, Rabellotti, and Sanfilippo 2015, Rabbiosi and Santangelo 2013).
- For the generation of other home-country effects, such as increases in home country production and exports, greenfield OFDI appears to be more promising (Cozza, Rabellotti, and Sanfilippo 2015, UNESCAP 2020).
- OFDI policy and HCMs should focus on those entry modes that are known to generate the particular home-country effects that a government seeks to nurture or maximise, such as M&As for know-how and technology transfers, and greenfield OFDI to enhance home-country exports and production.
Interactions
A1) Financial earnings: In theory, the establishment of sales and representative offices as well as manufacturing facilities overseas can enhance financial earnings, as they help expand sales and save costs, respectively.
A2) Exports and production: 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.
A4) Know-how and technology: 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.
A8) Resources capacities: Overseas resources extraction has the potential to enhance the availability of natural resources in the home country and improve domestic resource security.
A9) Tangible assets/products: M&As have the potential to facilitate the acquisition of tangible assets and their return to the home-country.
D5) Entry mode: Home-country measures can be targeted at investments with specific entry modes, such as greenfield investments, M&As, resources extraction, R&D centres or sales offices.
Available Research Findings
UNESCAP (2020, 24-33): The effect of M&As from 53 UNESCAP member states between 1960 and 2018 on various home country variables – exports, inward investment, R&D expenditure and GDP – tended to be stronger than that of greenfield investments.
Cozza, Rabellotti, and Sanfilippo (2015): Among Chinese investments into advanced European economies between 2003 and 2011, M&As transferred valuable resources and intangible assets to parent companies, though this effect diminished over time. M&As resulted in negative financial performance, however. Greenfield OFDI was more likely to increase the size, sales and productivity of Chinese MNEs.
Rabbiosi and Santangelo (2013): A database of 84 surveyed Italian manufacturing MNEs showed that reverse knowledge transfers were more quickly realised in acquisitions and/or majority-owned JVs compared to greenfield investments.
Borini et al. (2012): A survey of 66 subsidiaries of 30 emerging market multinationals finds that reverse knowledge transfers are better supported by greenfield investments.
Pradhan and Singh (2008): OFDI undertaken by Indian MNEs in the automotive sector between 1988 and 2008 had a favourable impact on R&D intensity. This impact was stronger among JVs compared to WFOEs.