The Home Country Effects of Fdi in Developed Economies

This paper surveys the effects of outward foreign direct investment on the developed home countries of multinational corporations. The focus is on the production interactions arising from outward investment – what is the impact on home country exports and production structure – but the paper also discusses effects on investment, the balance-of-payments, technology and knowledge, and political decision-making in the home country. The main conclusion is that outward FDI is beneficial to the investing firm, but that the effects on the home country vary depending on the characteristics of the investment project and the business environment in the home and host countries. In most cases, there is only a small impact on total exports and production in the developed home countries, but the net effect on employment may be mildly negative. This is related to a shift in production structure, whereby labor intensive activities are outsourced to host countries with lower wage levels, and more advanced operations are kept at home. Most home countries encourage outward investment, but the fear for negative effects (particularly on the balance-of-payments) has at times motivated restrictions on FDI. The final part of the paper discusses effects on developing home countries, and notes that these are likely to coincide with the effects on developed home countries. One exception is technology-sourcing investments, which may be more important than in developed home countries, and which may, at least in theory, provide an alternative to inward FDI as a source of technology for the more advanced developing economies.