Report on OFDI

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Table of Content

Introduction…………………………………………………………………………………1

FDI theories …………………………………………………………………………………5

The costs to the home economy of this outward FDI…………………………………….5

South-South and South-North OFDI………………………………………………………5

References…………………………………………………………………………………….6

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Introduction
FDI has changed international trade trends. The wave of globalization has catalyzed FDI
activities all around the world. The investment streams from developed economies to the
developing economies; it is a major source of opportunity generation in the host country. Various
economic benefits were reaped by the host country due to FDI. Home countries use this outflow
of capital to increase their competitive advantage as well as to expand their international market.
For a couple of decades, the flow of investment moves outwards of the developing economies.
This phenomenon is called outward FDI. The developing countries are taking part in making
investments in other country’s low-cost production sectors for an increase in their profitability.
Outward FDI helps the home country to enjoy a competitive lead in a marketplace with a
potential of growth but has weak corporations.
Developing countries undertake outward FDI: FDI theories approach
Although developed economies are a great source of outward FDI, since 1990, emerging
and developing economies are taking outward FDI seriously and emerged as a greater source of
outward FDI. Nowadays there is more attention is being paid on FDI at domestic as well as at the
international level. Various theoretical papers have examined different aspects of FDI. It has
been believed that for the economic development, FDI is an important element in all countries.
But the impacts of outward FDI are more significant over the economy of developing countries.
Several empirical research studies have concluded that the complex type of the connection
between outward FDI and economic development. On the macro-level one can see an increase in
the employment level, an increase in the level of production, and technological development are
all the results of FDI in a developing country (Caves and Caves, 1996).

On the other hand, for a developed country FDI results in a higher level of exports,
expansions of international markets, an increase in access to more foreign currencies; a major
source of financing in the market rather than a bank loan. There are various positive impacts of
outward FDI over the economic development of a country like increased productivity level,
allocation of technology and human resources, reduction in unemployment, excess to the
international markets, etc, (Lipsey et al., 2002). But at the same time, it has been observed that
the relationship between outward FDI and economic growth is not consistent. The local
industries of developing countries may crowd out, which will result in negative consequences of
FDI on development of economy (Hosseini, 2005).

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 The positive or negative impacts of OFDI over the development of the economy totally
depends upon the sector in which investment is made, for example, the effects of FDI on the
growth of agricultural as well as mining sector are limited. Failure of the local industry
encourages foreign investors to make an investment in the country which gives them a
competitive edge over local industries all because of high skill knowledge, large capital, and
superior technology. Although the effects of FDI on the developing economies are studied
empirically there is no such single theory accepted by the researchers for the explanation of
relationships between economic development and Outward FDI (Schneider and Frey, 1985).

Recently, there is a growing trend of outward FDI (outward FDI) in emerging economies
mainly. It is evident that outward FDI (outward FDI) can raise the investment competitiveness
for the sustainable growth of a country. For the sake of catch-up strategies and new
developments emerging countries are using outward FDI (outward FDI) as a channel. Outward
FDI (outward FDI) can increase a country’s supplement administrative skills, competitiveness,
up-gradation of the manufacturing process, and technological development. The report of the
World Bank Global Investment Competitiveness examined the increase in the level of outward
FDI in developing countries. There was just 4% outward FDI in developing countries in 1995,
while in 2014 there was an increase of 27% in outward FDI. There were 87 counties involved in
outward FDI in 1995, while in 2017 the number of countries using outward FDI increased up to
109.

There are different theories that can explain this growing trend of outward FDI mainly by
emerging multinational companies. According to the internationalization theory, the main
reasons for outward FDI include a firm’s motivation to get some unique advantages of a revenue
generation potential abroad with the concept of globalization and local advantages (Denisia,
2010). In the industrialized countries, the enterprises emerged as transnational companies due to
their strength of ownership advantage over inventory activities based in other countries (Wang et
al., 2012). When an economy is matured, the corporation of this economy tries to expand its
operations to the developing countries to maximize their profits through their competitive
advantage over the foreign market. The theory if internationalization totally supports the concept
of outward FDI. But it has been observed that some emerging economies are performing outward
FDI functions in developing economies as well (Jaklic and Svetlicic, 2017).

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 It has been found that outward FDI can support the development in the local economies
regarding technology and innovation which would result in an increase in productivity level.
outward FDI can help a domestic economy to achieve the source knowledge and technology
which is not present in the domestic economy (Amann and Virmani, 2015). The growth of an
emerging economy is positively correlated with the level of outward FDI by the emerging
economy (Herzer, 2010).

According to the structural theory, the differentiation in the market structure and
openness to foreign markets are the only variables that cause outward FDI. The marginal
efficiency of capital is a compelling force for emerging economies for outward FDI. The other
variables like human capital, technological advances, and exchange rates effects only affect the
outward FDI position of developed economies (Pantelidis and Kyrkilis, 2005).

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The costs to the home economy of this outward FDI

The impacts of OFDI on the domestic economy have attracted researchers’ attention
already for the past two decades. There is an empirical evidence base of positive effects of
outward FDI on the domestic economy, no, doubt there is a rise in technological advantages over
the competitive firm with an increased level of exports of domestic economy (Al-sadiq, 2013).
But the negative impacts of OFDI on the domestic economy cannot be ignored. The outward FDI
by developing economies can cause an outflow of capital which leads to a capital shortage in the
local industry. The shortage of capital might affect the balance of payment of the economy as
well as local industry operations. The outward FDI causes off-shoring of major competitive
MNC’s to other economies, this would result in the decrease in the level of tax collection,
employment, capital formation, production, and exports of a domestic country. When the
outward FDI is done for the purpose of low-cost production, it may cause technological lagging
of the domestic industry as well (Tang and Altshuler, 2015). Simply it can be said that outward
FDI has a lot of positive impacts for a home country in the short run, as far in the long run, the
home country might suffer a lot in the global market if proper policies are not formulated
regarding outward FDI

Comparison of South-South and South-North outward FDI

Over the years the FDI is done from developing economies that have been full-grown
ghastly. Outward FDI is mostly done in other developing countries. The flow of investment from
developing economies to other developing countries is called south-south outward FDI. But the
flow of capital investment form developing economies to developed countries is called south-
North outward FDI. By the term north, it is meant to address developed countries and for
developing countries, the term south is used in literature. North comprises of thirty OECD
member countries and high-income non- OECD countries. There is a gaining trend of outward
FDI towards the north but the cost-benefit analysis has shown that major outward FDI is still
biased towards the south, for example, India being a developing country interested to invest more
in Indonesia, Thailand rather than America and Netherland. Countries are willing to invest in the
low import intensity sector irrespective of north and south. There is more potential for growth in
the northern sector as compared to the southern sector (Narula, 2011). Several emerging

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countries like BRICS; Brazil, Russia, India, China and South Africa and MINT; Mexico,
Indonesia, Nigeria, and Turkey are mainly focused on the north-north outward FDI. For
example, BRICS investment inward and outward in various countries of Africa(de Mello et al.,
2015).

So, it can be simply said that the decision of outward FDI totally depends upon the sector
in which investment is made. As far as northern economies are concerned, they are already
competent enough. The entry barriers in these economies are high for emerging economies. But
the amount of capital investment can decide the fate of outward FDI towards the north side.

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References
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