Home Country Effects of Outward Foreign Direct Investment: Theoretical Approach and Empirical Evidence

Abstract

Given their ability to transfer knowledge across borders, academic research has in large numbers highlighted the role of the Multinational Corporation (MNC) and Foreign Direct Investment (FDI) as a channel for the international diffusion of knowledge. Pioneering works explain one of the motivations of firms to engage in FDI based on their firm-specific ownership advantages and the chance to exploit them abroad. It is assumed that MNCs transfer their strategic assets and knowledge capital across international borders. As a result, a large empirical literature has emerged, which examines the spillover effects and the general impact of inward FDI on the host economy, in particular with regards to productivity and economic growth. Newer research has shifted the focus and has considered MNCs and outward FDI not just as a means to “exploit” home country knowledge, but has increasingly focused on outward FDI as an instrument to “explore” and to tap into foreign sources of knowledge. In this context, it is assumed that outward FDI may give access to modern technological products and processes as well as organizational, managerial and marketing skills of host country knowledge sources. So far, however, academic studies have come up with a limited understanding of the home economy effects of outward FDI, in particular with regards to reverse knowledge transfer processes and its effect on home country economic growth. The thesis sets out to fill these research gaps from a theoretical and empirical perspective. The thesis contributes to academic research in various ways. First, it formalizes the linkage between outward FDI and home country economic growth and describes how advanced foreign knowledge acquired by domestic MNCs may spill over to other home country firms. Second, it adds to the discussion by giving a comprehensive overview of the potential reverse knowledge transfer channels and its determinants. A third novelty of the thesis is the data and method used in analyzing the effects of outward FDI on the home economy. It is among the first empirical analyses to include outward FDI stock data in a cross-country analysis. Moreover, it is the first empirical approach which takes into account reverse knowledge transfer and the host country knowledge pool when analyzing the economic growth effects of outward FDI in the home economy.