B8. Transmission Channels

The generation of home-country effects can depend on the existence and strength of transmission channels from host to home economy. Transmission channels can be internal to the firm, from subsidiary back to parent, or external to the firm, through mechanisms such as trade, transportation and financial transactions. Depending on the relevant home-country effects, the associated transmission channels will differ. It is possible to differentiate between the following types of transmission channels (see Stephenson 2018b, 64-68):

a)  Direct transfers: Some gains from OFDI can be passed directly back to the home economy, through channels such as bank transfers of funds, transfer of (explicit) technologies and machines, production shifting, transportation of goods and assets, shipping of raw materials (by ship, air or pipeline), etc.

b)  Indirect transfers: Some gains from OFDI can only be passed back to the home country implicitly and indirectly, through channels such as sharing of tacit know-how (such as through trainings, communications and instructions), contracts for the production and exports of goods and services from the home country, sharing experiences of international standards and practices, ‘crowding-in’ (e.g., overseas production freeing up labour at home for skills upgrading), etc.

c)  Scale and scope effects: OFDI enables firms to grow and become larger than they might have been had they not ventured beyond the home country. This growth can bring about gains of scale and scope, for example pushing down production and operation costs, including back in the home economy. In addition, OFDI may be an enabler for companies to also expand further in their home market.

d)  Competition effects: OFDI might put multinationals under pressure to upgrade their capabilities in order to effectively confront the competition they face by host country firms. Especially emerging economy multinationals might find themselves in this situation. This competition effect may subsequently induce improvements in the operations of the multinationals in their home economy.

e)  Labour mobility: In the context of most OFDI, some employees move back and forth between the parent company and subsidiaries to facilitate personnel exchanges, job rotation etc. These employees can become channels through which the gains from OFDI are transmitted. For example, they might be carriers of know-how and skills.

Most transmission channels do not exist automatically and need to be put in place. The entity putting in place a transmission channel differs depending on the type of transmission channel. It can be the investing multinationals, which might, for example, establish internal mechanisms for the transfer of funds or know-how. The private sector more broadly might also establish transmission channels, such as commercial banks supporting the transfer of funds, or shipping companies and airlines transporting goods, oil and natural resources.

Governments can be involved in creating transmission channels, for example through the construction of supportive transportation and communications infrastructures.

Aspects such as distance, parent-subsidiary integration, institutional similarities etc. can impact on the effectiveness of transmission channels in passing the gains from OFDI back to the home country.

Key insights

• Studies examining transmission channels focused on reverse knowledge transfers and productivity. The findings suggest that various forms of proximity – socialisation, integration and lower physical distance – facilitate knowledge transfer and productivity enhancement (Driffield, Love, and Yang 2016, Rabbiosi and Santangelo 2013, Borini et al. 2012).
• Governments should support the creation of transmission channels, such as through the construction of necessary infrastructure or by encouraging companies to establish associated internal and external structures and procedures.