The impact of outbound foreign direct investment on export and private investment: Comparative analysis of emerging and developed countries

Abstract

AbsractOutbound foreign direct investment (OFDI) was traditionally the realm of developed countries. However, recently OFDI originating from emerging countries has increased rapidly but hardly any study noticed its impact on the economic activities in emerging source countries. Therefore, this study explores the impact of OFDI on exports and private investment in emerging source countries by employing cross‐sectional dependence autoregressive distributed lag model. The findings in this paper suggest that OFDI contributes significantly to exports in the emerging countries both in the long and in the short run; however, OFDI contribution to private investment in emerging countries is limited to long run only. Moreover, the findings suggest that the positive impact of OFDI on exports and private investment in emerging countries requires quality institutions. The positive impact of OFDI on exports and private investment in emerging countries is low when compared with developed countries. However, the significant and high values of a dummy variable for the 2007–2008 financial crisis show that emerging countries are converging on developed countries in terms of gains from OFDI in post‐crisis era. We find that OFDI is an effective policy tool for emerging countries to diversify and kick start the local economy.