Outward FDI, Total Factor Productivity and Domestic Output: Evidence from Germany

Abstract

This paper examines the impact of outward FDI on domestic output and total factor productivity by applying cointegration techniques to macroeconomic time series data for Germany. We find a positive relationship between outward FDI and domestic output as well as between outward FDI and total factor productivity. Furthermore, our results indicate that there is bidirectional causality between outward FDI and domestic output, and outward FDI and total factor productivity, suggesting that increased output and productivity are both a consequence and a cause of increased outward FDI. Overall, the results of this paper can be interpreted as evidence of productivity-enhancing, and thus growth-enhancing, effects of outward FDI, which is inconsistent with the simplistic idea that outward investment represents a diversion of domestic economic activity.