The effects of outward FDI on home‐country productivity

Abstract

PurposeThe paper aims to examine the effects of outward foreign direct investment (O‐FDI) on home‐country productivity.Design/methodology/approachA panel data set for 15 Taiwanese manufacturing industries over the period between 1991 and 2007 is employed for a model in which productivity is regressed on a measure of O‐FDI.FindingsThe study finds no significant positive or negative effect of O‐FDI on productivity. Breaking down the data by location of the investment, however, we find that O‐FDI in other countries enhances productivity in Taiwan, while O‐FDI in China does not. We interpret the positive role of O‐FDI in other countries as relating to the outcome of strategic asset‐seeking nature of Taiwanese investments in these countries.Research limitations/implicationsIn order to analyse the productivity effect of O‐FDI more precisely, one would need to compare the firm outcomes in the presence of multinational production with the outcomes that would have prevailed in the absence of multinational production. Unfortunately, we cannot observe what would have happened to firms that did engage in multinational production had they not done so.Practical implicationsThe findings suggest that the Taiwanese Government should distinguish the level of liberalization towards O‐FDI for different locations and in different types of industries. In particular, the government should channel more investment towards export‐oriented industries especially those in “other countries”.Originality/valueThe paper employs a contingency approach, examining the conditions under which O‐FDI impacts upon home productivity.