9th Meeting of the Asia-Pacific FDI Network
UNESCAP, Bangkok
4 December 2019
Outward FDI and home-country
governments
PRESENTATION OVERVIEW
Outward FDI and home-country governments01
How can governments increase the development benefits from OFDI for home economies?
1. What’s happening? Recent trends regarding OFDI
2. Why may this be this happening? Theoretical explanations for trends
3. What may governments wish to consider doing? Policies, institutions, measures
PRESENTATION OVERVIEW
Outward FDI and home-country governments02
How can governments increase the development benefits from OFDI for home economies?
1. What’s happening? Recent trends regarding OFDI
2. Why may this be this happening? Theoretical explanations for trends
3. What may governments wish to consider doing? Policies, institutions, measures
TRENDS
0
10
20
30
40
50
60
70
80
90
100
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
FDI Outflows, 2000-2018 (% total world)
Developing economies Transition economies Developed economiesSource: UNCTADStat
03Outward FDI and home-country governments
TRENDS
Source: own elaboration, based on UNCATD Stat
04
Outward FDI and home-country governments
Falling OFDI restrictions…
Between 2005 and 2015, developing countries
with OFDI restrictions fell from 91 to 77, a decrease of 15%
(IMF data)
Growing number of OFDI institutions…
Between 2000 and 2015, outward investment agencies
in developing and transition economies increased from
~15 to ~28, an increase of 86%
(UNCTAD data)
TRENDS
05
Outward FDI and home-country governments
Growing empirical evidence of
positive home effects from OFDI
for developing economies across numerous economic dimensions
(productivity, jobs, exports, etc.)
TRENDS
05
Outward FDI and home-country governments
Growing empirical evidence of
positive home effects from OFDI
for developing economies across numerous economic dimensions
(productivity, jobs, exports, etc.)
Prof. Jan Knoerich will discuss these next
PRESENTATION OVERVIEW
Outward FDI and home-country governments07
How can governments increase the development benefits from OFDI for home economies?
1. What’s happening? Recent trends regarding OFDI
2. Why may this be this happening? Theoretical explanations for trends
3. What may governments wish to consider doing? Policies, institutions, measures
FOUR THEORETICAL FRAMEWORKS
08Outward FDI and home-country governments
❖ Springboard Theory: emerging market firms use OFDI as a ‘springboard’ to acquire capabilities.
❖ Linkage, Leverage, Learning (LLL) Framework: emerging market firms use OFDI to link with existing
players, leverage resources from them (technologies, assets, market positions), and learn from
doing this repeatedly.
❖ Institutional Advantage Theory: emerging market firms use OFDI to ‘turn disadvantages into
advantages’ by investing in markets with poor infrastructure, regulation, and governance, as they
have an advantage in these markets vis-à-vis developed market firms, having learned to deal with
these challenges in their home markets.
❖ Investment competitiveness (IC) Framework: emerging market policymakers use OFDI to increase
their economy’s investment competitiveness, and emerging market firms use OFDI to increase their
competitiveness.
FOUR THEORETICAL FRAMEWORKS
09Outward FDI and home-country governments
❖ Springboard Theory: emerging market firms use OFDI as a ‘springboard’ to acquire capabilities.
❖ Linkage, Leverage, Learning (LLL) Framework: emerging market firms use OFDI to link with existing
players, leverage resources from them (technologies, assets, market positions), and learn from
doing this repeatedly.
❖ Institutional Advantage Theory: emerging market firms use OFDI to ‘turn disadvantages into
advantages’ by investing in markets with poor infrastructure, regulation, and governance, as they
have an advantage in these markets vis-à-vis developed market firms, having learned to deal with
these challenges in their home markets.
❖ Investment competitiveness (IC) Framework: emerging market policymakers use OFDI to increase
their economy’s investment competitiveness, and emerging market firms use OFDI to increase their
competitiveness.
❖ Short version: policymakers support and firms undertake OFDI to acquire or exploit capabilities.
DIFFERENT MOTIVATIONS FOR OFDI
10
Market Seeking Efficiency Seeking (GVC consolidation)
Natural Resource SeekingStrategic Asset Seeking
Geopolitical
Escape
Tax Benefit Seeking
Outward FDI and home-country governments
DIFFERENT MOTIVATIONS FOR OFDI
11
Market Seeking Efficiency Seeking (GVC consolidation)
Natural Resource SeekingStrategic Asset Seeking
Geopolitical
Escape
Tax Benefit Seeking
Outward FDI and home-country governments
Home governments
may wish to support
different types of
OFDI differently…
TRANSMISSION CHANNELS FOR HOME EFFECTS
Outward FDI and home-country governments
17
OFDI transmission
channels
Scale and scope effects
Labor mobility
Competition
effects
Indirect knowledge transfers
(spillovers)
Direct knowledge transfers
Stephenson (2017)
Home governments may wish to help create
effective transmission channels
Home effects involve 3 movements
1. Firms carry out OFDI
2. Transmission channel activated
3. Economic development benefits
diffused for home economy
2
TRANSMISSION CHANNELS FOR HOME EFFECTS
Outward FDI and home-country governments
17
OFDI transmission
channels
Scale and scope effects
Labor mobility
Competition
effects
Indirect knowledge transfers
(spillovers)
Direct knowledge transfers
Stephenson (2017)
Home governments may wish to help create
effective transmission channels
Home effects involve 3 movements
1. Firms carry out OFDI
2. Transmission channel activated
3. Economic development benefits
diffused for home economy
Prof. Jan Knoerich will discuss these next
2
PRESENTATION OVERVIEW
Outward FDI and home-country governments18
How can governments increase the development benefits from OFDI for home economies?
1. What’s happening? Recent trends regarding OFDI
2. Why may this be this happening? Theoretical explanations for trends
3. What may governments wish to consider doing? Policies, institutions, measures
OFDI POLICY PATH
19
There seems to be a sequence of stages when it comes to OFDI policy reform and measures, what can be
called the OFDI Policy Path*.
Remove OFDI restrictions
Facilitate OFDI
Support OFDI
Promote sustainable OFDI
Calibrate OFDI
A number of economies have followed a version of the OFDI Policy Path (e.g. China, India, Rep. of Korea)
Outward FDI and home-country governments
* See framework in Stephenson (2017)
OFDI POLICY PATH
20
Importantly, OFDI can include policies for home firms to invest sustainably.
Outward FDI and home-country governments
Promote sustainable OFDI
Guidelines for Good Business Practice
by South African Companies Operating
in the Rest of Africa
OECD Guidelines for
Multinational
Enterprises
MOFCOM Guidelines for
Environmental Protection in Foreign
Investment and Cooperation
E.g. 1 E.g. 2 E.g. 3
OFDI support (e.g. insurance) & promotion (e.g. financial) can be made conditional on sustainable investment practices
E.g. 4
U.S. OPIC Environmental
and Social Policy Statement
NATIONAL DEVELOPMENT STRATEGY
21
OFDI objectives
Investment policies
Institutional arrangements
Home-country
measures OFDI targets
To integrate OFDI into national development strategies
requires alignment of five elements:
Outward FDI and home-country governments
22
OFDI objectives
Investment policies
Institutional arrangements
Home-country
measures OFDI targets
To integrate OFDI into national development strategies
requires alignment of five elements:
INSTITUTIONS
Outward FDI and home-country governments
23
Ministries IPAs and TPOsSubnational
IPAs and TPOs
Guarantees and Insurance
Agencies
Development Finance
Institutions
Private sector organizations
❖ Consider OFDI institutional arrangements as an ecosystem
❖ Focus on key functions, and not necessarily where function is placed,
given heterogeneity of institutional arrangements across economies
6 TYPES OF INSTITUTIONS
Outward FDI and home-country governments
24
THE INSTITUTIONAL ECOSYSTEM – DEVELOP A CLUSTER
Outward FDI and home-country governments
Example 1. Polish Development Fund Group
(PFR Group)
Example 2. South Africa Dep. of Trade and Industry (DTI)
Key Partners
HOME-COUNTRY MEASURES (HCMs)
25
OFDI objectives
Investment policies
Institutional arrangements
Home-country
measures OFDI targets
To integrate OFDI into national development strategies
requires alignment of five elements:
Outward FDI and home-country governments
6 TYPES OF HCMs
26
Treaties
Political risk insurance
Sauvant et al. (2014)
Outward FDI and home-country governments
THE ‘HCM HOUSE’ – BUILD FROM THE BOTTOM, ALIGN THE BRICKS
27
Information
Financial measures
Fiscal measures
Political risk insurance
Treaties
Support services
Outward FDI and home-country governments
28
Special industrial or service zones in host countries
Open offices in host markets
Fiscal advantages on profits abroad
Financial measures (loans, equity capital, guarantees)
Information and pre-investment support services
Bilateral Investment Treaties (& other IIAs)
Insurance of political and other non-commercial risk
Tax treaties to avoid double taxation
Tax credits or exemptions for taxes in host markets
TIME
PR
OM
OT
ION
‘SEQUENCE OF STAGES’ FOR HCMs
De Beule & Van Den Bulcke (2010)
Outward FDI and home-country governments
EMERGING PRACTICES BASED ON CASE STUDIESMEXICO, POLAND, SINGAPORE, SOUTH AFRICA… UNESCAP studies to be added when ready
29Outward FDI and home-country governments
Consider promoting IFDI, OFDI, and exports together, but with different weights in different markets.
Consider identifying priority sectors for OFDI, selected based on both existing sectoral strength and desired sectoral development.
At the same time, be open to providing OFDI support to firms outside of those sectors.
Consider OFDI support as an ecosystem with different institutions working together in a complementary manner, with a lead
agency.
Consider using IIAs to open markets for OFDI and protect home investors.
Consider placing the function of supporting OFDI within an existing institution, but create a clearly separated department for OFDI.
Consider employing offices in host economies to serve as the platform through which support services are provided.
Consider tailoring OFDI support services according to firm size, given that the needs of large and small firms will be very different.
Carefully consider whether or not to adopt financial HCMs, and if so adopt clear guidelines to avoid subsidizing firms inefficiently.
Consider establishing mechanisms for coordination on internationalization with the private sector.
Consider training program and talent/skills development geared to OFDI.
Consider collecting OFDI data, such as through a questionnaire.