F2. Exports and Production

There is strong empirical evidence that OFDI can increase exports from the home country and associated domestic production activities. This makes the promotion of this home-country effect a particularly promising strategy, especially as the expansion of exports and associated domestic manufacturing are important elements in the economic development of many countries. Some caution is however necessary when it comes to promoting horizontal, trade-substituting OFDI, as it could potentially reduce home-country exports. It will also depend on whether any potential trade substitution from OFDI is compensated for by other, positive, effects for the home economy.

A starting point for such promotion would be to reduce any regulatory hurdles on OFDI in those industries where the home country has strong potential to grow exports and domestic production. Such regulatory easing could focus on manufacturing sectors, where export gains from OFDI have been empirically detected.

Moreover, the Toolkit suggests focusing on those investment motivations and entry modes that promise to generate and enhance home-country exports. Specifically, these are investments that help expand overseas export markets, such as market-seeking investments, sales offices and many greenfield investments. In line with common practice, all of these can be supported by financial support measures. In addition, it is possible to promote efficiency-seeking OFDI if it establishes overseas factories to which the home country could export intermediary products. However, efficiency-seeking is not regularly supported by HCMs.

OFDI both to economies more and less advanced than the home country could facilitate exports. More advanced and developed countries are often large export markets, whereas less advanced and developing economies, in addition to also being potentially important export markets, can have production facilities to which the home country can export intermediary products. OFDI in less advanced and developing countries can be supported through favourable regulations and financial support measures, in line with common practice, and some institutions have mandates that require them to focus on OFDI in developing host countries. OFDI in more advanced economies can also be supported by HCMs, though this is not common in practice.

In addition, assuring the construction of the cross-border infrastructure and logistics needed to ship goods efficiently can support exports, as can any efforts to help outward investing firms benefit from scale and scope effects. These kinds of activities have the potential to maximise the exports from the home country. 

Key insights

• The generation of exports and domestic production from OFDI can be promoted especially by targeting financial support measures at investment motivations and entry modes that promise to generate exports, most notably market-seeking investments, sales offices and relevant greenfield investments.