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Impact of outward FDI on home country exports
Article in International Journal of Emerging Markets · July 2020

DOI: 10.1108/IJOEM-05-2017-0160
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Impact of outward FDI on home Impact of

outward FDI on
country exports home country
exports
Niti Bhasin and Kanika Kapoor
Department of Commerce, Delhi School of Economics, University of Delhi,
New Delhi, India
Received 14 May 2017
Abstract Revised 15 August 2018
Purpose – The relationship of outward foreign direct investment (OFDI) with home country’s exports has 21 January 2019
significant implications for policymakers as well as business managers of MNEs. Since BRICS nations have 10 February 2019
23 April 2019
emerged as important sources as well as destinations of FDI, this paper aims to study the impact of OFDI from Accepted 29 April 2019
these countries on home country exports by using panel data for BRICS for time period 1993–2015.
Design/methodology/approach – The author use panel unit root tests, panel cointegration, VECM and
causality tests in the study.
Findings – The results reveal that OFDI has a negative and significant impact on home country exports
indicating that outward FDI is a substitute for exports in these countries. It also indicates long-run causality
from exports towards OFDI. There is no long-run causality running from OFDI to exports, suggesting that
MNEs do not “connect” with home economies’ firms through forward and backward linkages in value chain.
Practical implications – From the point of view of policymakers, it implies a net outflow of capital as the
outflow of foreign investment would not be matched by any incremental export earnings since exports are
getting substituted by production abroad. For business managers, it is indicative of a growing foreign market
that warrants large scale production and justifies the high cost and risk involved in FDI as a mode of entry
compared to exports.
Originality/value – To the best of authors’ knowledge, this is the first attempt to deal with the relationship
between home country exports and OFDI, for an important group of emerging market economies, i.e. BRICS.
The understanding of this relationship allow us to identify whether factors contributing to OFDI from
emerging economies are “tied” to their home economies thereby making exports necessary or are rather based
on firm specific competencies which are leveraged in different locations to cater to expanding markets.
Keywords Exports, Outward FDI, Cointegration, VECM, Causality
Paper type Research paper
1. Introduction
The relationship between exports and OFDI has been an area of research interest in
international business literature in recent times. Conventionally, developed countries have
been the main source of outward foreign direct investment (OFDI) mainly due to superior
technology and their financial capability to undertake production in large foreign markets.
However, the last two decades have seen emerging economies become a major source of FDI
with an increase in both absolute and relative OFDI. Within the emerging economies,
majority of OFDI is accounted for by BRICS nations.
The impact of OFDI on the exports of home country merits attention as it is important to
understand whether the production undertaken abroad will substitute or complement home
country exports. Where OFDI results in substitution of home country exports, it will
negatively impact the balance of payments of an economy as there will be a net movement of
resources and funds out of the economy. This implies that the economy would not benefit
from the possible increase in demand that could have happened if their MNEs abroad got
their inputs from the home country. On the other hand, if OFDI is complementary to home
country exports, it will boost exports through forward and backward linkages with home
country firms. This, in turn, would generate foreign exchange for the economy, stimulate International Journal of Emerging
Markets
domestic investment and boost economic growth. The results remain mixed as there is no © Emerald Publishing Limited
1746-8809
consensus on the nature of relationship between OFDI and exports. Studies have shown both DOI 10.1108/IJOEM-05-2017-0160
IJOEM complementary and substitutive relationship between OFDI and exports. (Helpman, 1984;
Lipsey et al., 2000; Cuyvers and Soeng, 2011; Bhasin and Paul, 2016; Ahmad et al., 2016).
A large amount of literature related to this theme has focused on developed economies
thereby making the applicability of their results difficult in the context of developing and
emerging economies. Further, there are limits to generalization of results due to the
heterogenous nature of FDI across countries and firms as demonstrated in some papers (Paul
and Singh, 2017). Our paper examines the relationship between OFDI and exports for a
similar group of emerging nations, BRICS, so as to generalize the findings for countries with
similar characteristics. The need to examine the relationship between OFDI and home
country exports of developing and emerging nations arises for a number of reasons. First,
FDI inflows and outflows are two major drivers stimulating economic growth of these
nations. Second, the increase in export and FDI implies rising integration with the world
economy. Third, it can benefit the home country firms through backward and forward
linkages with their home country MNEs abroad.
The rest of the paper is structured as follows: Section 2 gives the trends of outward FDI
flows. Section 3 presents the theoretical framework and section 4 reviews the existing
literature on this topic. Section 5 discusses the research methodology along with sample and
data sources. Section 6 discusses and analyses the results obtained and Section 7 presents the
conclusions of the paper along with the theoretical and practical implications of the study.
2. Trends in outward foreign direct investment from developing and emerging

nations
Since the last two decades, developing and emerging economies have become important
sources of FDI. The share of global outward FDI flows from developing nations has increased
from 5.6% in 1991 to 25.6% in 2015 (Figure 1). While the global outward FDI flows exhibited
considerable volatility with significant fall during 2007–2009 (due to recession), OFDI from
developing economies was largely resilient (Figure 1). Emerging nations from Asia continue
as a prime source of FDI as compared to other developing regions constituting almost 75% of
the total FDI flows from the developing nations (Figure 2). The emerging economies group of
BRICS has shown consistent rise as a source of OFDI, with the rise being particularly
US dollars (in million)

1600000
1400000
1200000
1000000
World
800000
Developing
600000 economies
400000
200000
Figure 1. 0
Share of developing
economies in world 1991 1994 1997 2000 2003 2006 2009 2012 2015
OFDI flows
Source(s): Prepared from UNCTAD online database
discernible after 2003 (Figure 3). In 2015, BRICS accounted for almost 12% of world FDI Impact of
outflows and constituted over 45% of total developing country outflows (Figure 3). OFDI outward FDI on
from the BRICS countries has multiplied speedily over the last few years, while still remaining
moderate as compared to many developed nations (Figure 3). Outward FDI stock from BRICS
home country
has also increased over the last two decades (Figure 4). exports
Today transnational companies from emerging nations are increasingly making outward
investment. Companies such as Hyundai and Samsung (Korea), Petrobras and Embraer
(Brazil), Mittal and Tata (India), SABMiller (South Africa), Acer and Tatung (Taiwan),
National Offshore Oil Corporation (China), Haier and Lenovo (China), and Cemex (Mexico)
have become fully mature transnational firms and are rapidly making outward investments.
A combination of various factors, such as growing wealth, trade and investment policy
reforms, fast growing regional integration, relaxing of capital controls and procedures,
growing industrialization, and development of firm-specific benefits and capabilities of firms
of developing nations have made these nations an important hub of OFDI, particularly to
other developing countries (Battat and Aykut, 2005).
Foreign investments from these emerging nations have enlarged considerably in
quantitative terms and there also have been significant qualitative changes in its composition
as well as structural properties. Since most of the developing countries are typically labor
intensive and short on capital, there have been strong economic arguments against large
capital outflows and the focus has traditionally been on import of capital. Consequently,
governments of these economies devised policy measures to attract foreign investment in
their countries. Up to 1980, FDI by developing nations was primarily done to establish trade
supporting links and networks so as to get easy access to these foreign markets. Other
significant factors responsible for these investments were shortage of resources domestically
or strict bureaucratic conditions at home. The target countries for FDI by emerging MNEs
were those with short psychic distance. These firms used greenfield investment as mode of
entry with minority ownership and in most of the host nations, the firms engaged in foreign
investment were state owned. Further, investments were made in those industries with less
intense competition from other developed economies counterparts.

400000
350000 Developing
economies
300000
250000 Developing
economies:
200000 Africa
150000
Developing
economies:
100000
America
50000
Developing
0 economies: Asia Figure 2.
1991 1994 1997 2000 2003 2006 2009 2012 2015 Regional patterns of
FDI outflows among
developing nations
IJOEM US dollars (in million)
400000
350000
300000
Developing
250000 economies
200000
150000 BRICS
100000
50000
Figure 3.
Share of BRICS 0
economies in 1991 1994 1997 2000 2003 2006 2009 2012 2015
developing countries
OFDI flows

2000000
1800000
1600000
1400000
1200000
1000000
BRICS - OFDI stock
800000
600000
400000
200000
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Figure 4.
BRICS OFDI stock
from 1991–2015
Source(s): prepared from UNCTAD online database
Since 1990s there have been significant changes in the motives of investments, modes of
entry, sectoral composition and main destinations of outward investments. While many firms
were largely privately owned, but sometimes there is huge state ownership in some
investments for example in case of natural resources. In case of modes of entry, mergers and
acquisitions have increased in the last two decades along with greenfield investments.
Sectoral compositions for these investments have changed from manufacturing sector to
service sector. It has become the leading sector in OFDI (e.g. finance and business services)
and has overtaken other sectors such as manufacturing and natural resources.
While earlier the firms from developing nations generally targeted other developing
nations for their foreign investment, now they have started investing in developed nations as
they get access to latest technology, builds brands and reputation and acquire marketing and Impact of
management skills from these developed nations. The scale and magnitude of outward FDI of outward FDI on
these developing nations has also increased substantially. While the primary motive of FDI
remains getting access to new and existing markets, the efficiency seeking motive and the
home country
strategic asset seeking motive have also gained prominence as firms from emerging nations exports
invest in advanced nations to get access to latest technology, R&D capabilities along with
marketing skills and distribution networks, managerial competencies (Gammeltoft, 2008).
Following the investment development path framework (IDP) of John Dunning, these firms
first invest in neighboring and emerging nations to fulfil their resource and market-seeking
motives of investment. Later on, these firms acquire the skills and experience to spread
globally and then expand to other markets including developed country markets. As per
literature, there have been two types of waves of OFDI from emerging nations: one from
1960s until early 1980s, and the second thereafter. The first-wave firms were driven mainly
by market- seeking and efficiency-seeking factors and investments were mainly directed
towards other developing countries, most often neighboring countries. In the second wave,
driven by a combination of pull and push factors, strategic-asset seeking also became a
motive and investments into developed countries and developing countries outside the
investor’s own region became more important (Gammeltoft, 2008).
3. Theoretical framework
Whether production abroad and exports are complements or substitutes has been a question
of debate since long. While the standard trade theory states that they are substitutes rather
than complements, recent empirical literature indicates that there could be a complementary
relationship between the two. Hence, the net impact of OFDI on home country’s export is
not clear.
Mundell (1957) studied the relationship between trade and FDI, and concluded that capital
movements between the countries would result in relocation of the trading of goods between
these nations and as a result, FDI would substitute exports. There are other theories of FDI
such as the internalization theory developed by Buckley and Casson (1976) and OLI paradigm
developed by Dunning (1980), which sees foreign production and exports as alternative
modes of serving the foreign markets. According to Internalization theory of Buckley and
Casson (1976), when a firm can more efficiently organize its economic activity than the
market, it should internalize its economic activities as transaction cost would be much lower.
Thus, as mentioned in Forte (2004), FDI would rather substitute exports when internalization
cost is lower than the costs of exporting. Also, according to Buckley and Casson (1981) per
unit costs of exports is higher due to higher transportation costs, tariffs ad taxes, etc. whereas
outward FDI involves higher fixed cost of production. This means that for lower levels of
production/sales, firms will opt for exports in order to avoid high fixed cost of foreign
production, and in case of higher level of sales, firms will opt for foreign production as a mode
of entry rather than exports. According to OLI paradigm developed by Dunning (1980), a firm
will opt for FDI as an entry mode if three types of benefits occur simultaneously, i.e.
ownership (O), location (L), and internalization (I). If the locational benefits are missing, then
the firm will go for exports (Dunning and Lundan, 2008). Thus, FDI and exports are
considered as alternatives or substitutes according to this paradigm (Markusen, 1984, 1995).
The motivation behind the FDI also has an impact on the location choice of investments as
well as kind of relationship that exists between exports and OFDI (Lee, 2010). When the
investment is to be made in a less developed economy as compared to the home economy (for
example, resource-seeking vertical FDI), the relationship between the two variables will be
complementary because the production subsidiary may not be able to get necessary
intermediate products from the local suppliers, so it will be imported from the home country
IJOEM (Lim and Moon, 2001). Investment made in developing nations is more of vertical FDI, seeking
access to cheap and abundant resources whereas investment in developed nations is done to
cater to the demands of the growing markets (Lee, 2010; Beugelsdijket et al., 2009). The
relationship between them also depends upon whether there is horizontal or vertical
relationship between operations at foreign location and operations at home country
(Markusen and Maskus, 2001). In addition, it needs to be seen whether operations abroad are
in manufacturing sector or service sector, developed or developing economy, and whether
type of industries involved have plant level economies of scale or firm level economies of scale
(Lipsey, 2002). Horizontal OFDI has been found to have a substitutive relationship with
exports in manufacturing sector but it might not be possible in service sector. Further, there is
also a possibility that vertical OFDI has a complementary relationship with parent exports.
Horizontal FDI is motivated by an urge for increasing the market share by replicating
production facilities at a foreign location in search for new markets creating a substitutive
relationship between FDI and exports (Mariotti and Piscitello, 2009).
Brainard (1997) postulated the proximity-concentration trade off, i.e. proximity
advantages of being located near to the customers versus concentration of production at
one place to take benefits of economies of scale. He argued that firms are likely to incur
horizontal FDI if two conditions are fulfilled: high cost of transportation and high trade and
non-trade barriers, lower barriers to investment and small economies of scale at the plant
level as compared to the corporate level. So, this type of production facility will disrupt the
export flows from the home country (Head and Ries, 2004). Vertical FDI on the other side, has
less impact on prevailing export flows, it has a lesser negative affect on home country
exports. According to Helpman (1984), Markusen and Maskus (1999a, b), vertical FDI is
undertaken to get the advantage of differences in factor endowments as well as availability of
cheap labor. According to Forte and Silva (2017), quoting Marriotti and Piscitello (2009),
resources seeking vertical FDI will increase the flow of trade, i.e. inter-firm and intra-firm,
thus creating a complementary relationship between OFDI and exports. And also where the
control is in the hands of home country and production facility is relocated at a foreign
location due to cheap labor, there are greater chances of parent company exporting
intermediate products and other parts to foreign subsidiary (Head and Ries, 2001, 2004). For
example, Swenson (1997) observes that Japanese transplanted automakers import a major
portion of its components from Japan only and are much less interested to substitute these
imported inputs for US parts. According to Lipsey and Weiss (1984) and Rugman (1990), a
foreign production facility with one product may increase total demand for all its other
products too through number of ways. Vertical OFDI will create new markets which will
increase export of finished goods and it will also reduce the cost of production through
economies of scale so the parent company will be able to export more of finished goods as the
cost of production will be lower now (Tyson et al., 2012). Further, proximity to consumers will
create a stronger connection between the firm and the consumer through increased
consumer’s loyalty and satisfaction. This may then lead to increased demand for company’s
other products too creating spill overs benefits for other exported products (Belderbos and
Sleuwagen, 1998).
According to Hirsch (1976); Horst (1972) if the FDI is undertaken in non-productive
activities like direct sales and distribution, advertising and promoting, wholesaling and
retailing of products through customizing products according to the target markets, this will
create a complementary relationship between FDI and exports. For instance, OFDI in
distribution sector will be a support for exports as now domestic firms will export products to
these foreign distribution subsidiaries and they will further sell and distribute these products.
This concept is related to proximity-concentration trade-off condition, so for neighboring
markets firms will export the products and in case of distant location, firms will go for
horizontal FDI (Krautheim, 2013). As per Bergsten et al. (1978), the age of subsidiaries also
affects the relationship between the two variables as the new subsidiaries that are highly Impact of
dependent on the parent firm lead to greater chances of a complementary relationship outward FDI on
between FDI and exports.
However, it is very different to support these notions theoretically, as there may be some
home country
activities performed by foreign affiliates which are similar to home country operations while exports
there are other activities which may be performed by parent company for the foreign affiliates
due to certain conditions in the host country such as inadequate infrastructure or non-
availability of similar suppliers. Host country characteristics such as government policies,
trade and non-trade barriers, cost of investments and size of the market also impacts the
location decision as well as their mode of entry. If the host country has stringent conditions
and is following restrictive trade regime, the home country firms may opt for FDI as a mode of
entry so as to circumvent the barrier thus creating a substitutive relationship between FDI
and exports (Belderbos and Sleuwagen, 1998). If conditions in the host country require the
subsidiary to use host country’s inputs for production, this will stop them from using home
country’s intermediate products thus leading to a substitutionary relationship (Blonigen,
2001). Even in case of horizontal OFDI if investment is done in another country to expand
market share where the parent company or home country did not have any prior export, then
this type of outward investment will not disrupt the export flow because it did not exist. It is
basically called as market co-creation by Pitelus and Teece (2010).
Various scholars have attempted to analyze the internalization process of firms from
emerging markets. For many of these papers, the economy in focus is China (Latterman et al.,
2012; Paul and Benito, 2018; Alon et al., 2018) which accounts for a sizeable portion of both
inward and outward FDI in the case of emerging economies. Analyzing the internalization
process of Chinese firms in particular, Latterman et al. (2012) find market seeking as the most
important motive behind their OFDI, other than strategy and resource-seeking FDI. They
find “networking” and business-tie-ups as an important part of their internalization process.
They hold the view that OLI paradigm is not applicable to EMNEs as they lack ownership
advantages. These firms start with indirect exports and as their network gets stronger they
foray deeper into the markets through direct exports and finally undertake OFDI. They
develop strong relationships with host nations having similar and predictable culture.
Another study conducted by Park and Row (2018) have added a new motivation to the OLI
paradigm, i.e. knowledge-seeking motive and by suggesting a new theory, which is the OILL
paradigm. Emerging multinationals try to invest in developed nations with the motivation to
seek sophisticated foreign host knowledge that is not available domestically. They are likely
to apply IMA strategies in order to learn from heterogeneity (i.e. inter-industry mergers and
acquisitions) and get latest technologies from these developed multinationals.
Paul and Benito (2018) review major studies on OFDI from emerging nations particularly
China and study three aspects of internalization process: the antecedents (“why” OFDI is
undertaken), the decision aspect (“how” investment is undertaken) and the outcome aspect
(performance of investment). They also mention the various theories which have been
developed lately to explain the internalization process by firms of emerging markets such as
the LLL (linkage, leverage and learning) model by Mathews (2002, 2006), Luo and Tung’s
(2007) spring board framework, and Ghemavat’s (2001) CAGE (Cultural, Administrative,
Geographic, Economic) model. Mathews (2002) says firms from emerging markets are
undertaking OFDI are late entrants in the competing industry, thus they rapid their
internalization process to get access to resources, capabilities, skills, technology and strategic
assets which are not present in their domestic markets. Oliveira et al. (2017) have also revealed
how some elements of LLL theory explain the emerging firms’ internalization process. They
have demonstrated how private public sharing issues firms in China undertake OFDI to get
access to various external resources which are not available to them. And for this they acquire
firms in foreign markets using their own resources (leveraging) so as to get a competitive
IJOEM advantage. This is a resource based view also mentioned in (Paul and Benito, 2018). Oliveira
et al. (2017) also demonstrated how Chinese private firms internalized without the
government support through their own networks reflecting the role of “linkage” element of
LLL theory. Institutional factors are important and responsible for a firm to internalize
(Lattermann et al., 2012) but it depends upon the ownership structure of the firm and nature of
host country nationals (Olivieira et al., 2017).
To sum up, from the theoretical point of view, there is no agreement on relationship
between FDI and exports. It is somewhat clear that OFDI may be horizontal or vertical but it
replaces some production and exports of home country (Feldstein, 1995; Kokko, 2006). Even if
OFDI displaces export of finished goods, it may increase the demand for intermediate goods.
This shows even if the affiliate is incurring horizontal OFDI, they are not able to handle their
operations independently. It depends basically on the impact of OFDI on the total sales of the
affiliate. If the sale increases as a result of OFDI the loss in terms of exports displacement of
finished goods will be compensated by a similar rise in export of intermediate goods to that
affiliate. However, it is very difficult to support these notions theoretically, as it is often not
easy to categorize operations abroad into these theoretically defined classifications.
4. Literature review
The existing literature on the relation between OFDI and exports deals with both the facets of
this relationship, i.e., as substitutes as well as complements. The product life cycle theory of
Vernon (1966) postulates exports as a substitute for OFDI where a firm starts international
business with exports, because export as a mode of entry is less risky and less costly.
Thereafter, once the foreign market demand increases substantially, it warrants production
in the host country leading the firm to undertake FDI. Sometimes, firms in certain sectors may
skip exporting altogether and proceed directly to FDI as cited by (Cantwell and Narula, 2001).
The complementarity in this relationship may emerge subsequent to undertaking OFDI,
through forward and backward linkages of the investing firms with home country firms. For
example, firms undertaking OFDI may choose to import inputs or raw materials from home
country if the home country firms offer them a competitive advantage. This, in turn, boosts
exports. Trade associations between the parent MNC and its affiliates are also significant to
examine the impact of outward FDI. These associations may include export substitution
because of OFDI; and FDI-related exports and co-creation of demand for goods which were
not produced by parent firm before.
While there is considerable literature on association between inward FDI and other
macroeconomic variables (Sharma, 2000; Aggarwal, 2002; Banga, 2003; Basu et al., 2003;
Dritsaki et al., 2004; Das and Sharma, 2011), the literature on OFDI, especially from
developing countries, has gained prominence more recently. A major portion of literature on
OFDI focuses on the determinants of OFDI, drivers of OFDI or the motives of
internationalization of MNEs from developed as well as developing countries (Hejazi and
Pauly, 2003; Buckley et al., 2007; Morck et al., 2008; Rasiah et al., 2010; Singal and Jain, 2012;
Wei, 2010; Azmeh and Nadvi, 2014; Goh et al., 2013). In the literature, vast amount of studies
have focused on developed nations (Stevens and Lipsey, 1992; Feldstein, 1995; Goedegebuure,
2006; Herzer and Schrooten, 2008). Outward FDI from developing nations is a more recent
phenomenon with limited studies (Herzer, 2010; Al–Sadiq, 2013; Dasgupta, 2014; Ahmad
et al., 2016). Rasiah et al. (2010) analyzed the drivers of outward foreign direct investment
(OFDI) from the emerging economies and the main basic motives have remained significant
but the technology-seeking motive became all the more important during the third wave of
OFDI and it also concluded that home countries government should liberalize regulations on
OFDI to take the broader interest of enhancing and encouraging capital flows to safeguard
the long-term development of nations instead of narrow national interests. The existing
literature on home country macroeconomic variables covers variables such as economic Impact of
growth, domestic investment, productivity, domestic employment to wages, trade and outward FDI on
exports (Stevens and Lipsey, 1992; Kim, 2000; Desai et al., 2005a, b; Kokko, 2006; Herzer,
2010). However, the literature on home country effects of OFDI from emerging nations is
home country
relatively scarce. The few studies that examine the OFDI-export nexus (Head and Ries, 2001; exports
Liu et al., 2001; Lim and Moon, 2001; Falk and Hake, 2007; Goh et al., 2012; Bhasin and Paul,
2016; Ahmad et al., 2016) are single source-country based studies (Chen and Zulkifli, 2012).
Studies at the national or industry level include (Lipsey and Weiss, 1984; Blomstrom et al.,
1988; Clausing, 2000; Al–Sadiq, 2013; Ahmed et al., 2016). Very few studies have empirically
tested the relationship between OFDI and exports. Further, majority of the early studies
focused on the mode of foreign market entry focusing on the choice between exporting,
licensing, and FDI (Root, 1987; Young et al., 1989; Buckley and Ghauri, 1993).
Some studies investigating the relationship between OFDI and exports have been
explained below.
Kim and Rang (1997) studied the link between OFDI and exports using cross-sectional
data in South Korea and Japan. In both countries, outward FDI did not result in fall of exports.
It did not either reflected any significant positive effects on exports. The Japanese firms
showed greater tendency of investing abroad in order to retain market share abroad than
firms in South Korea, implying that outward FDI in Japan is market seeking while OFDI in
South Korea is more of a cost-oriented type.
Head and Ries (2001) employed panel data for 25 years on 932 Japanese manufacturing
firms to study the impact of foreign direct investment on exports. The results indicate
complementarity between the two variables. The relationship, however, varies across firms.
However the home countries’ firms which are not catering to the demand of intermediate
components of the foreign affiliates exhibit substitution.
Blonigen (2001) have gone one step further and have used product level data to study the
relationship between FDI and exports for Japanese production of automobiles and
automobiles parts in USA They have found both a positive as well as a negative
relationship between production and exports of Japanese parts for the US market.
Bajo-Rubio and Montero-Mu~ noz (2001) used Spanish quarterly data for the time period
1997–1998 and analyzed the relationship between OFDI and exports. They have employed
Granger causality tests in a cointegration framework. The results indicated a complementary
relationship between the two variables with evidence of unidirectional causality from OFDI to
exports in the short run and bidirectional causality in the long run.
Girma et al. (2005) further investigated the HMY hypothesis which states that only most
productive firms which can bear the high cost associated with foreign production opt for
OFDI, while less productive firms find it profitable to opt for exporting and least productive
firms serve only domestic market. They have taken United Kingdom as a sample as it is the
fifth largest exporter and second largest destination for FDI and tested this hypothesis using
Kolmogrov–Smirnov test. They have used the concept of stochastic dominance associated
with mode of entry. The results supported the HMY hypothesis that the productivity of
MNC’s dominates the productivity of exporting firms dominates the productivity of non-
productivity firms.
Wagner (2005) studied the relationship between mode of entry, i.e. exports or FDI and
productivity for German firms using their firm level data. They have used first order
stochastic dominance to test the HMY hypothesis that whether productive firms dominates
domestic suppliers and opt for exports and more productive firms dominates exporters and
opt for foreign investment as an option to enter foreign markets. The results are in line with
the hypothesis that most productive firms chooses to serve the foreign markets via FDI and
less productive firms opt exports as an mode of entry in foreign markets and show their
dominance over domestic suppliers.
IJOEM Falk and Hake (2007) studied the links between exports and the outward FDI using panel
data of industries from seven European Union nations for the time period from 1973–2004.
They have employed panel causality tests and GMM estimators. The result showed a one
way causality running from exports to OFDI. But this result is found to be significant only for
the CEE countries and other developed countries (i.e. United States, Japan, Canada,
Switzerland, Norway). The long-run elasticity of the OFDI stock in relationship with exports
was highly significant.
T€
urkcan (2007) explored the relationship between OFDI and intermediate goods exports
for United States using gravity models for the time period 1989–2003 taking into
consideration product level data. They bifurcated the data into final and intermediate
goods for the trade between US and 25 selected OECD nations. The results revealed a strong
complementary relationship between US intermediate exports and OFDI and weak evidence
of substitutionary relationship between finished goods exports from US and OFDI.
Oberhofer and Pfaffermayr (2008) used firm-level data for ten countries and 19,079 firms.
They have employed bivariate probit model with maximum likelihood approach and the
results reveal complementary relationship between the two variables. They stated that firms
use a combination of both FDI and exports to serve foreign markets depending upon the
deterministic characteristics.
Martin (2010) provides the relationship between exports and OFDI flows in Spain using a
multivariate cointegrated model (VECM) for the time period 1993–2008. The results provide
evidence of a positive and strong granger causality relationship running from FDI to exports
of goods and weak and positive granger causality running from FDI to exports of services in
the long run. This reflects the complementarity relationship which is consistent with vertical
FDI. In the short run, however, only exports of goods are positively affected by FDIs.
Chiappini (2011) have evaluated heterogeneous panel data from eleven European nations
for the time period from 1996–2008. They investigated granger causality between OFDI and
exports of goods and services from these nations. There is bidirectional causality between
FDI and exports in case of Austria, Germany and Netherlands. In case of France and Italy
there is no causality running from exports to FDI. There is presence of strong heterogeneity in
the results of causality analysis. The countries having bi-directional causality especially
Germany gets an advantage as exports leads to OFDI through backward and forward
integration promotes further exports. That is why Germany has over performed its
counterparts in the world market.
Chen et al. (2012) uses a six-year panel data set of manufacturing firms from 15 industries
from Taiwan ranging between 1991 and 2007. The results showed a complementary
relationship between the variables under study. This impact is much stronger for Taiwanese
FDI in China than in other countries and in traditional sectors than in modern sectors. The
location-and industry-specific features have moderate impact on the intensity of this
relationship.
Bhasin and Paul (2016) empirically studied the link between OFDI and its home country
exports. They have employed panel data for ten major emerging nations from Asia over the
period 1991–2012. Employing panel vector auto regression, panel cointegration and causality
tests, the result indicates long-run causality running from exports to OFDI. There is no long-
run causality running from OFDI to exports, suggesting that there are no backward and
forward linkages in the production process.
Ahmad et al. (2016) investigated the impact of OFDI on the home country exports for
selected ASEAN countries for the time period 1981–2013. They have employed OLS
regression, unit root analysis, and some specification tests on annual time series data. The
results showed the complementary relationship between the two variables. And also other
factors such as trade openness, currency fluctuations and inward FDI are also significant
factors for gradual increase of home country exports.
Perez and Nogueira (2016) examined the impact of OFDI and their firm-level strategies and Impact of
the home-country effects in a small developing economy, i.e. Costa Rica. The main findings outward FDI on
were that OFDI is not only for large and mature firms, as medium and small-sized firms are
actively investing abroad; most firms pursue a market-seeking strategy; the benefits for the
home country
firm and the home country are stronger when companies follow a clear outward investment exports
strategy and there is a positive relationship between international trade and OFDI.
There are country level studies focusing only on the relationship between FDI and
exports. These studies also find lack of consensus on whether there is substitutionary
relationship (Pain and Wakelin, 1998; Fonseca et al., 2010; Mitze et al., 2010; Bhasin and Paul,
2016) or complementary relationship (Camarero and Tamarit, 2004; Hejazi and Safarian, 2001;
Camarero and Tamarit, 2004; Alguacil and Orts, 2002; Turkcan, 2007; Chiappini, 2011;
Dritsaky and Dritsaky, 2012; Pourshahbi et al., 2013) between the two variables, sometimes
even non-significant relationship have been found (Mullen and Williams, 2011; Goh et al.,
2013). But for USA be it any methodology, the relationship is found to be complementary.
T€urkcan (2007) says this is due to forward and backward linkages between MNC’s and firms
due to export of intermediate goods. Similar results were found in (Clausing, 2000) showing a
strong complementary between intra firm trade and MNCs. One reason could be that during
this time period, MNCs supported imports of intermediate goods from parent firms.
All the above country level studies have taken export as a dependent variable and their
main explanatory variable is FDI. Gravity models have been mostly used to study this
bilateral relationship. Some authors have used disaggregated data (Clausing, 2000; T€ urkcan
2007) as they have differentiated between intermediate exports and final product exports.
Clausing (2000) have found a positive relationship for both the exports of intermediate goods
as well as final goods while T€urkcan (2007) found a positive relationship only in case of export
of intermediate goods. And also the results differ for FDI in manufacturing sector and FDI in
service sector. Most of the studies have found a negative relationship in case of service sector
and a positive relationship in case of manufacturing sector (Hejazi and Safarian, 2001; Ji-Feng
and Ping, 2012).
In case of industry level studies and firm level studies there is some consensus in their
results obtained. Most of the studies have found a complementary relationship (Kim, 2000;
Head and Ries, 2001; Lim and Moon, 2001; Lipsey and Ramstetter, 2003; Chen et al., 2012;
Chow, 2012; Kang, 2012; Engel and Procher, 2013). The number of industries with
complementary relationship is more than the negative ones (Forte and Silva, 2017). Firm level
studies which have found substitute relationship are (Belberdos and Sleuwaegen, 1998). It is
surprising to see such complementary relationships even at firm level. The reason behind
such relationships may be demand complementariness’ or vertical relationship (Blonigen,
2001). There are various reasons given for these results. It may be because of endogeneity
bias. Grubert and Mutti (1991); Graham (2000) tried to control endogeneity bias using country
level data to study the relationship between affiliate sales and trade. Head and Ries (2001) and
Swedenborg (2000) also controlled for endogeneity bias using firm level data for Japanese and
Swedish firms respectively. Graham (2000), Swedenborg (2000) and Head and Ries (2001)
found a complementary relationship. And various studies have found vertical relationships
responsible for this complementary relationship (Lipsey and Weiss, 1984; Yamawaki, 1991;
Head and Ries, 2001).
As evident from review of literature, there is no consensus on whether exports and OFDI
are substitutes or complements. While some studies find that the relationship between OFDI
and home country exports is complementary (Head and Ries, 2001; Martin, 2010; Chen et al.,
2012), others find OFDI to be negatively associated with home country exports (Bhasin and
Paul, 2016). There seems to be consensus in results with regard to intermediate products in
that OFDI enhances export of intermediate products at country level as well as product level
studies. This paper adds value to the existing literature in the following ways. First, the larger
IJOEM body of literature have focused mostly on developed nations which have conventionally been
important sources of FDI. This paper focuses on emerging countries which are slowly
displacing developed countries as important sources of FDI. Second, of the studies examining
the export OFDI relationship in developing economies, most of them are country-based
studies limiting the applicability of the results. By focusing on five emerging economies
(BRICS) that have become significant sources of FDI, this paper attempts to derive results for
the exports-OFDI relationship that could be applied in a wider context to economies with
similar characteristics.
The primary objective of this paper is to empirically examine the relationship between
exports OFDI for the case of BRICS economies. In addition, we look at whether any long-term/
short-term relationship exists between exports and OFDI of BRICS economies.
In accordance with the discussion above, the hypotheses of the study are as follows:
H01. There is a long run relationship between exports and OFDI.
H02. Exports and OFDI are substitutes for each other.
H03. There is a long run causality running from OFDI towards home countries’ exports.
H04. There is a long run causality running from home countries’ exports towards OFDI.
5. Data and research methodology

5.1 Data
With exports as the dependent variable, three macroeconomic variables have been taken to
explain the dependent variable – outward foreign direct investment (OFDI) stock, official
exchange rate (EXR), and trade openness (TRD). TRD is the sum of exports of goods and
services divided by gross domestic product of the country. The main variables of the study
are exports and OFDI and the other variables are the control variables of the model. These
variables, according to the literature, have a robust influence on exports and are essential to
control. The nature and direction of expected relationships between exports and control
variables is explained below.
Exchange rate fluctuations can affect exports considerably. The empirical results of the
effect of exchange rates on exports are mixed. While it endorses that the impact of the
exchange rate varies across different time periods and economies, it is generally assumed
that exchange rate fluctuations are negatively related with trade. However, the real impact
of exchange rates on exports can be found only after taking into account other factors such
as exposure, competitiveness and value of trade. Overall, empirical analysis validates that
exchange rate fluctuations will affect earnings and the value of the firms involved in
international business (Du and Zhu, 2001; Grambovas and McLeay, 2006; El-Masry and
Abdel-Salam, 2007).
In case of trade openness (TRD), a significant positive impact of openness on OFDI is seen
in some studies (Kravis and Lipsey, 1982; Edwards, 1990; Pantelidis and Kyrkilis, 2005) while
more cautious weak positive link is found in others (Schmitz and Bieri, 1972).
5.2 Data source
Data on OFDI and trade openness is obtained from UNCTAD Statistics. The rest of the data is
procured from the World Development Indicators of World Bank’s database.
5.3 Research methodology

We have employed a “balanced panel” of five countries – Brazil, Russia, India, China and
South Africa for the time period of 23 years from 1993 to 2015. The nature of dataset is
longitudinal in nature, so the techniques for panel data analysis will be appropriate.
The methodology used in this research can be divided into five main parts. Impact of
(1) Descriptive statistics such as mean, median, maximum and minimum values, std. outward FDI on
dev., skewness, kurtosis and probability has been employed to quantitatively home country
summarize the patterns and general trends of the dataset. exports
(2) Panel unit root tests have been conducted to check if the data is stationary. This is
important because if the variables are non-stationary, we cannot directly apply
ordinary least square (OLS) or generalized least square (GLS) otherwise it will lead to
spurious results (Granger and Newbold, 1974).
(3) If the series are integrated of the same order, then we apply heterogeneous panel
cointegration tests to study the long run relationship between the variables as it is the
most suitable method in such a case. We need to check whether or not there exists at
least one linear combination of the non-stationary variables that is cointegrated i.e.
I(0) (Dasgupta, 2014). In other words, if the variables are cointegrated a linear
combination of I(1) variables will be I(0), i.e., stationary (Brooks, 2008). Two variables
can be cointegrated only when they share a common stochastic trend, and they are
non-stationary at level and their first difference is stationary i.e. I(1) (Dasgupta, 2014).
(4) If the series are cointegrated, then this long run relationship is to be estimated. Lastly,
we check for long run causality using vector error correction model (VECM) and short
run causality using Wald test.
5.4 Panel unit root tests

To check for stationarity in panel data and avoid spurious regression, we conduct panel unit
root tests. Panel unit root tests have high power than single unit root tests and they also
minimize problems related to structural breaks and regime shifts. Further, panel unit root
tests have less chances of committing a type two error because they have the benefit of
increased sample size and they also include heterogeneous cross sectional information which
univariate time series dataset does not have (Baltagi, 2008). We have used LLC, Breitung, IPS,
ADF–Fisher and PP – Fisher to test for stationarity. The lag order for the unit root processes
have been selected by the Schwarz Information Criterion (SIC) automatic lag order selection
procedure introduced in EViews 9.0.
5.5 Cointegration test

After checking for stationarity, the next step is to apply panel cointegration method to check
whether variables have a long run relationship which is also stable and non-spurious across
the time period (Granger, 1980). If the variables are cointegrated, they are likely to move
together in the long run correcting the short run disturbances. If the variables are not
cointegrated they are likely to move arbitrary from each other (Dicky et al., 1991). Pedroni
(1999; 2004) take into account cross-sectional dependency among group members by
allowing for heterogeneity as much as possible. It is based on residues so that it can take into
account heterogeneity in the intercept, the slopes and individual linear trends between the
economies (Abbes et al., 2015). It also has an additional benefit of overcoming the limitation of
small samples.
The Pedroni’s method has different statistics for the test of null hypothesis of no
cointegration in the heterogeneous panels. They are of two types. The first type is called
“within dimension” which includes four statistics, which are panel-v, panel rho(r), which is
analogous to the Phillips and Perron (1988) test, panel non-parametric (PP) and panel
parametric (ADF) statistics. The PP statistic and the panel parametric statistic are similar to
the single-equation ADF-test (Dasgupta, 2014). The other group is “between dimension.” This
IJOEM includes three tests group: group-rho, group-PP and group-ADF statistics. All the seven tests
are carried out with no deterministic trend.
5.6 Vector error correction model (VECM)

The next step is to find the direction of causality between the two cointegrated variables. For
testing long-run causality, we use an error correction model (ECM). It has been shown by
Engle and Granger (1987) that when two series, x and y, are cointegrated, a standard Granger-
causality test is mis-specified because it does not take into account the difference between the
short-run and the long run-effect. Instead, at this point an ECM should be used (Bhasin and
Paul, 2016). In the first step of this method, we obtain an error correction term and in the
second step, the ECM with the included error correction term is estimated. We estimate the
ECM using ordinary least squares method as done in Bhasin and Paul (2016).
The equation for Dependent Variable will be:
5.6.1 Model 1.
DðEXPOÞ ¼ Cð1Þ*ðEXPOð-1Þ 1:45371649975*OFDIð-1Þ 178775:462317Þ
þ Cð2Þ*DðEXPOð-1ÞÞ þ Cð3Þ*DðOFDIð-1ÞÞ þ Cð4Þ (1)
C(1) is the coefficient of the cointegrating equation for long term causality. In the above
equation, the coefficient C(1) gives the speed of adjustment toward long-run equilibrium. If
the coefficient C(1) is negative and significant, then a long-term causal relationship exists
between the two variables.
For testing short-run causality, we use the Wald test. The coefficient C(3) measures the
short term causality. The null hypothesis is that the coefficients of lagged values of the
explanatory variables are equal to zero. If the null hypothesis is rejected, there is evidence of
short-term causality from the explanatory variable to the dependent variable.
As noted by Granger et al. (2000), the long-run causality can be measured by the
significance of the error correction term, while the short-run causality can be measured using
the Wald test for the joint significance of the lagged explanatory variables.
5.6.2 Model 2.
DðOFDIÞ ¼ Cð1Þ*ðOFDIð-1Þ 0:687892034086*EXPOð-1Þ þ 122978:216418Þ
þ Cð2Þ*DðOFDIð-1ÞÞ þ Cð3Þ*DðEXPOð-1ÞÞ þ Cð4Þ (2)
As before, C(1) gives the speed of adjustment toward long-run equilibrium. If the coefficient
C(1) is negative and significant, then a long-term causal relationship exists between the two
variables. The coefficient C(3) measures the short term causality.
6. Results and analysis

6.1 Descriptive statistics
Table 1 presents the snapshot of the descriptive characteristics of the four variables of BRICS
economies for the total study period.
6.2 Unit root tests

Table 2 presents the results of all the unit root tests. All the four variables (exports, OFDI,
exchange rate and trade) are non- stationary at level while their first difference is stationary.
Hence the four variables are I(1).
6.3 Cointegration test results

Table 3 reports the results of Pedroni residual cointegration test.
Overall, most of the test statistics are found to be significant implying that there is Impact of
cointegration between exports and OFDI. In each of the tests the results were significant. So, outward FDI on
we reject the null hypothesis of no cointegration and we can say that there is long run
relationship among the variables. The test result indicates for all the BRICS nations taken
home country
together into a panel data, that there is cointegration among the variables reflecting the exports
presence of a long run relationship.
6.4 Vector error correction model (VECM)

The results of the estimated ECMs are reported in Table 4. For long run causality to be there
between two variables, the coefficient of the error correction term needs to be negative and
significant. As the coefficient of the error correction term is found to be positive and
significant in the model where exports is the dependent variable, so there is no long run
causality running from OFDI to exports in the long run. This means foreign affiliate do not
connect with home country firm once OFDI is undertaken. The coefficient of the error
correction term for causality in the other direction from exports to OFDI is found to be
negative and significant. Therefore, there is evidence of long-run causality from exports
to OFDI.
For testing the presence of short-run causality between the two variables we use the Wald
test. The test statistic is found to be insignificant in both the directions, and therefore, the null
hypothesis of coefficients of lagged values of the explanatory variables to be equal to zero is
not rejected. Hence, there is no presence of bidirectional short-run causality between exports
and OFDI. Results are reported in Table 4.
7. Conclusion
An examination of the impact of outward FDI on home country exports done for BRICS
economies over the period 1993–2015 shows the existence of long run relationship between
exports and OFDI. As mentioned earlier, since BRICS are significant emerging economies and
FDI is an important driver of growth in these economies, we try to gauge whether outward
FDI from these countries is benefitting home country exports through creating a demand for
intermediary products; or whether it is acting as a substitute mode of foreign entry implying
that FDI may be a cheaper or better entry mode than exporting.
The results indicate long-run causality from exports to OFDI. Further, exports are
adjusting downward in the long run as depicted by VECM results (negative sign of the
coefficient) so exports and OFDI are found to have a substitutive relationship. This result
provides insights into the FDI motives of firms emanating from BRICS. The FDI from these
countries could be market-seeking horizontal FDI which is driven by the desire to expand the
EXPO OFDI TRD EXR
Mean 336326.4 112020.0 43.45 17.32

Median 122367.6 49551.48 46.90 8.27
Maximum 2524238 1,010,202 75.58 64.15
Minimum 27,122.92 294.24 14.11 0.038
SD 528899.8 162400.6 0.16 17.52
Skewness 10.59627 15.50 1.91 0.99 Table 1.
Kurtosis 10.59627 14.89 1.91 2.67 Results of descriptive
Source(s): Authors own statistics
IJOEM Unit root
Variable methods Level First difference Decision
Individual
Intercept Individual intercept and
Intercept & trend intercept trend
EXPO LLC t-Statistic 0.93 0.42 6.04 5.14 I(1)

Probability 0.82 0.66 0.00*** 0.00***
BREIT-ANG t-Statistic – 1.79 – 1.6 I(1)
Probability – 0.96 – 0.04**
IPS W-Statistic 2.76 0.78 5.75 4.20 I(1)
Probability 0.99 0.78 0.00 0.0000
ADF- Chi-square 1.76 4.51 48.06 32.91 I(1)
FISHER Probability 0.99 0.92 0.00*** 0.00***
PP-FISHER Chi-square 1.76 4.58 47.66 31.86 I(1)
Probability 0.99 0.91 0.00*** 0.00***
OFDI LLC t-Statistic 3.84 0.81 0.96 2.92 I(1)
Probability 0.99 0.79 0.16 0.00***
BREIT-ANG t-Statistic – 2.93 – 3.46
Probability – 0.99 – 0.99
IPS W-Statistic 4.22 2.28 1.16 2.24 I(1)
Probability 1.00 0.98 0.12 0.012**
ADF- Chi-square 1.48 4.46 33.00 33.18 I(1)
Probability 1.00 0.97 0.00*** 0.00***
EXR LLC t-Statistic 3.37 2.56 15.87 12.87 I(1)
Probability 0.99 0.99 0.00*** 0.00***
BREITANG t-Statistic – 2.33 – 0.71
Probability – 0.00*** – 0.76
IPS W-Statistic 3.32 0.11 9.99 7.92 I(1)
Probability 0.99 0.54 0.00*** 0.00***
ADF- Chi-square 0.96 8.46 241.06 178.37 I(1)
Probability 0.84 0.02** 0.00*** 0.00***
TRD LLC t-Statistic 1.28 0.45 7.64 4.99 I(1)
Probability 0.10 0.67 0.00*** 0.00***
BREIT-ANG t-Statistic – 0.62 – 3.35 I(1)
Probability – 0.73 – 0.00***
IPS W-Statistic 0.44 0.47 6.83 5.18 I(1)
Probability 0.32 0.68 0.00*** 0.00***
ADF- Chi-square 9.80 8.32 58.49 41.07 I(1)
Table 2. PP-FISHER Chi-square 11.89 10.78 66.75 54.76 I(1)
Results of panel unit Probability 0.29 0.37 0.00*** 0.00***
root tests for BRICS Source(s): Authors’ own
nations Note(s): **significant at 5%; ***significant at 1%
market base of the MNE. If this FDI goes to countries which are either at roughly the same
stage of development or more advanced than the home country of the MNE, then it will not
require the MNE to engage in backward/forward linkages as similar or better quality
products or services would be available in the host countries. As factor conditions, processes,
and resources are almost similar in nature so low cost inputs can be acquired from the host
Pedroni residual cointegration test
Impact of
Series: EXPO OFDI TRD EXR outward FDI on
Sample: 1992 2014 home country
Included observations: 115
Cross-sections included: 5
exports
Null hypothesis: no cointegration
Trend assumption: no deterministic trend
Automatic lag length selection based on SIC with a max lag of 3
Newey–west automatic bandwidth selection and Bartlett kernel
Alternative hypothesis: Common AR coeffs. (Within-dimension)

Weighted
Statistic Prob. Statistic Prob.
Panel v statistic 0.986798 0.16 0.815861 0.20

Panel 0.5844452 0.27 0.469996 0.31
rho-statistic
Panel 1.898606** 0.02 2.106338** 0.01
PP-statistic
Panel 1.296987*** 0.09 2.065839** 0.01
ADF-statistic
Alternative hypothesis: individual AR coeffs. (between-dimension)

Statistic Prob.
Group rho-statistics 0.056994 0.47

Group PP-statistic 3.346128* 0.00 Table 3.
Group ADF-statistic 1.684723** 0.04 Results of Pedroni
Source(s): Authors’ own residual
Note(s): *Significant at 10%; **significant at 5%; ***significant at 1% cointegration test
Model Dependent variable

D (exports) D (OFDI)
Cointegrating equation 0.084688** (0.01) 0.116540* (0.00)

D (EXPORTS(-1)) 0.010099 (0.93) 0.030841 (0.56)
D (OFDI(-1)) 0.366685 (0.10) 0.040594 (0.66) Table 4.
Wald test (chi-square statistic) 2.642 3(0.10) 0.338174 (0.56) Result of estimated
Note(s): *Denote significance at 1%, **Denote significance at 5%; p-values in parentheses vector error
Source(s): Authors’ own correction model
economies itself (Bhasin and Paul, 2016). Most of the investment done by BRICS is in
developing nations and getting access to the new markets is their dominant motive
(Gammeltoft, 2006). Market seeking is their main motive whereas efficiency seeking is their
second important motive (UNCTAD, 2006). They try to invest closer to their home country as
they have served these nations before through exports and are familiar with their ethnic and
cultural ties. Other reasons could be restrictive trade environment such as domestic
regulations, high cost of imported inputs and domestic competition (Gammeltoft, 2006).
Over a period of time, however, BRICS economies have started investing in developed
nations to acquire high value assets. Firms from BRICS are increasingly investing in
IJOEM developed nations to acquire monopolistic advantages such as technology, research and
development, marketing capabilities, distribution networks, brands and other managerial
competencies. If OFDI is undertaken in developed nations, then developing nations’ MNEs
look for locational synergies and sources of competitiveness in the host country itself.
Managers of developing nations’ MNEs are able to develop competitive advantage in those
economies, if they are able to identify locational advantages such as improved technology
and R&D facilities, access to high pool of skilled labor force, special taxes and tariffs,
existence of raw materials and so on. If through these resources they are able to develop
competitive advantage then such MNEs might not “connect” with home economies firms
through backward and forward linkages. From the point of view of policy makers such type
of OFDI will not be advantageous in stimulating the exports and production process in the
home economy and do not boost the economic growth of the home country.
Another reason for obtaining a substitutive relationship between exports and OFDI could
be the conventional path followed by many MNEs where the initial mode of entry in the
foreign market is exports which later gets substituted by OFDI if there is sufficient growth in
the demand for products in the host country and hence increased chances of reaping
economies of scale (also postulated by Vernon’s Product Life Cycle theory). FDI can also
emerge as a substitute for exports to overcome the barriers associated with exports such as
high transportation cost, tariff and non-tariff barriers, domestic inefficiencies, and benefits
from tax subsidies at host country.
7.1 Policy implications

While the above relationship (exports and OFDI as substitutes) may find support in some
theories as a natural progression for MNEs, it is a matter of concern for policy makers as large
scale OFDI can have an adverse impact on home country’s export, employment, wages, and
balance of payments. They fear that increased OFDI, apart from having a direct effect on
exports, might result in job losses, reduced foreign exchange reserves, adverse balance of
payments position and dampened economic growth. An indirect effect would be that the
domestic firms are unable to “learn” from the experiences that the home country MNEs get in
their host countries. Since there is no causality from OFDI to exports, it implies that the MNEs
are unable to transfer the benefit of the competences that they have acquired by virtue of their
presence in host country, to their home country domestic firms. These benefits could be in the
form of improved technical know-how, knowledge acquisition or better R&D. As already
pointed out, a possible reason for this could be that a large part of this OFDI goes to other
emerging nations having similar market structure and characteristics; hence there is no or
less need to import intermediate products from home economies. From point of view of
business managers such a relationship reiterates the importance of switching to FDI as a
mode of foreign entry only when the demand in the host country is large enough to warrant
large scale production.
From the point of view of the government, this implies a need to design the FDI policy in
such a way that firms going abroad are able to “connect” with the home country firms and
generate linkages with both the government as well as domestic firms. Policies should focus
on generating efficiency and competitiveness of domestic firms, particularly in case of those
industries which can provide ancillary services for firms going abroad. For instance, a robust
framework of financial markets and institutions is required that could provide ample funds to
domestic firms at low cost. There could also be incentivization for firms undertaking OFDI
that are promoting production or employment in home country through backward linkages
with the home country. These incentives could be in the form of tax benefits for funds that are
repatriated into the home country.
The exercise undertaken in this paper can further be supplemented with firm level Impact of
analysis to go deeper in the understanding of the relationship between exports and OFDI. outward FDI on
Further, while this study is focused on examining the impact of OFDI on exports, this could
further be augmented by studying the impact of OFDI on other factors such as employment
home country
and productivity in home economies of emerging market MNEs. exports
Note
1. Individual cross-section results not reported due to space constraints.
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IJOEM Pesaran, M.H. (2007), “A simple panel unit root test in the presence of cross-section dependence”,
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Corresponding author
Kanika Kapoor can be contacted at: kanikachawla86@gmail.com
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Impact of outward FDI on home country exports

Article in International Journal of Emerging Markets · July 2020

The user has requested enhancement of the downloaded file.

Impact of outward FDI on home Impact of

2. Trends in outward foreign direct investment from developing and emerging

US dollars (in million)

US dollars (in million)

US dollars (in million)

5. Data and research methodology

5.3 Research methodology

5.4 Panel unit root tests

5.5 Cointegration test

5.6 Vector error correction model (VECM)

6. Results and analysis

6.2 Unit root tests

6.3 Cointegration test results

6.4 Vector error correction model (VECM)

EXPO OFDI TRD EXR

Mean 336326.4 112020.0 43.45 17.32

EXPO LLC t-Statistic 0.93 0.42 6.04 5.14 I(1)

Alternative hypothesis: Common AR coeffs. (Within-dimension)

Panel v statistic 0.986798 0.16 0.815861 0.20

Alternative hypothesis: individual AR coeffs. (between-dimension)

Group rho-statistics 0.056994 0.47

Model Dependent variable

Cointegrating equation 0.084688** (0.01) 0.116540* (0.00)

7.1 Policy implications

1. Individual cross-section results not reported due to space constraints.

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