The effects of outward FDI on home‐country productivity. Do location of investment and market orientation matter?
| Published date | 21 June 2011 |
| Date | 21 June 2011 |
| DOI | https://doi.org/10.1108/17544401111143445 |
| Pages | 99-116 |
| Author | Wen‐Chung Hsu,Xingbo Gao,Jianhua Zhang,Hsin Mei Lin |
| Subject Matter | Economics |
The effects of outward FDI
on home-country productivity
Do location of investment and market
orientation matter?
Wen-Chung Hsu
Department of International Business Studies, National Chi Nan University,
Puli, Taiwan
Xingbo Gao
School of Statistics, Central University of Finance and Economics,
Beijing, China
Jianhua Zhang
School of Economics, Huazhong University of Science and Technology,
Wuhan, China, and
Hsin Mei Lin
National Chi Nan University, Puli, Taiwan
Abstract
Purpose – The paper aims to examine the effects of outward foreign direct investment (O-FDI) on
home-country productivity.
Design/methodology/approach – A panel data set for 15 Taiwanese manufacturing industries
over the period between 1991 and 2007 is employed for a model in which productivity is regressed on a
measure of O-FDI.
Findings – The study finds no significant positive or negative effect of O-FDI on productivity.
Breaking down the data by location of the investment, however, we find that O-FDI in other countries
enhances productivity in Taiwan, while O-FDI in China does not. We interpret the positive role of
O-FDI in other countries as relating to the outcome of strategic asset-seeking nature of Taiwanese
investments in these countries.
Research limitations/implications – In order to analyse the productivity effect of O-FDI more
precisely, one would need to compare the firm outcomes in the presence of multinational production
with the outcomes that would have prevailed in the absence of multinational production.
Unfortunately, we cannot observe what would have happened to firms that did engage in
multinational production had they not done so.
Practical implications – The findings suggest that the Taiwanese Government should distinguish
the level of liberalization towards O-FDI for different locations and in different types of industries. In
particular, the government should channel more investment towards export-oriented industries
especially those in “other countries”.
Originality/value – The paper employs a contingency approach, examining the conditions under
which O-FDI impacts upon home productivity.
Keywords Outward foreigndirect investment, Productivity, Manufacturing, Taiwan,China,
Manufacturingindustries, Market orientation
Paper type Research paper
The current issue and full text archive of this journal is available at
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Outward FDI
99
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 4 No. 2, 2011
pp. 99-116
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401111143445
1. Introduction
It is often argued that going offshore is one mechanism to increase productivity at
home (Damijan et al., 2007). Yet, the home country productivity effect of outward
foreign direct investment (O-FDI) has received only scant attention in the empirical
literature. This is surprising given that a large body of work has investigated whether
O-FDI would cost production, employment, export, domestic investment and R&D that
would have taken place in the home country to instead take place abroad. We argue in
this paper that the home country effect of O-FDI might be more appropriately judged
on the basis of its long-run effects on industry productivity at home. Productivity is a
particularly useful barometer not only because O-FDI’s numerous effects will be
directly or indirectly reflected (Chung et al., 2003) but also because of its particular
importance in driving a country’s long-term economic growth.
The literature on inward FDI suggests that the presence of multinational firms
bring benefits to host countries, such as transfer of new technologies and management
know-how, which should potentially enhance the performance and competitiveness of
locally owned industries (Caves, 1974; Feinberg and Majumdar, 2001). As such,
numerous studies have examined the productivity effect of FDI on local firms in the
host country (Caves, 1974; Globerman, 1979; Liu et al., 2000, Zhao and Zhu, 2000;
Buckley et al., 2007). Inward FDI is, however, only half of the story. Theory suggests
that home country productivity effects may also arise as a result of relocation of
production abroad (Head and Ries, 2003; Helpman et al., 2004). Hence, a logical
extension of the study on the effect of O-FDI on host country productivity is to examine
the effect of O-FDI on home country productivity. Although the empirical literature has
recently begun to weigh in on this issue, the research has only produced mixed results.
While some studies find that O-FDI is positively associated with productivity at home
(van Pottelsberghe de la Potterie and Lichtenberg, 2001; Barba Bavaretti and
Castellani, 2004; Bitzer and Go
¨rg, 2005; Herzer, 2008), other studies show either
negative or no association between the two (Andersson and Fredriksson, 1996;
Barba Navaretti et al., 2006).
Although prior studies have improved our understanding of the home country
productivity effects of O-FDI, we still understand less about the heterogeneity that may
exist in these productivity effects across industries. A common drawback of the
existing studies is that they treat location- and industry-specific effects as external to
the effect of O-FDI on productivity. For these reasons, previous studies find only
average effects, which hide more than they reveal and mask significant heterogeneity
across different locations of investment and different types of industries. To our best
knowledge, there have been no published empirical studies on the analysis of the home
country productivity effects of FDI, where such location- and industry-specific effects
have explicitly been taken into account. This study aims to fill this gap.
2. Theoretical framework
A stream of literature argues that productivity is a key determinant of O-FDI. Head
and Ries (2003) and Helpman et al. (2004) describe the relationship between firm
productivity and the engagement in different stages of internationalization of the firm.
They suggest that highly productive firms become multinationals because they find it
profitable to expand abroad through FDI, while less-productive companies serve
foreign markets by exports, and the least productive firms stay on their domestic
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