The Complementarity of Foreign and Domestic Investment by Emerging Market Multinationals

Abstract

We analyse the impact of foreign direct investment on domestic investment by emerging market firms. This relationship underlies a key policy debate on whether and how home-country governments should support outward foreign direct investment. While some governments are strongly in favour of supporting their firms’ overseas expansion, many are hesitant as outward foreign investment is considered to replace domestic investment and thus harmful for the home economy. We argue that emerging market firms’ foreign expansion complements rather than substitutes their domestic investment because foreign direct investment enables these firms to increase their efficiency and improve their value chain positioning.

The ability to arbitrage different home and host countries’ comparative advantages improve the efficiency and sophistication of home operations, ultimately contributing to further domestic investment and growth.

Keywords: Outward foreign direct investment, domestic investment, emerging economies, industrial policy, economic development, global value chains, upgrading

JEL Classification: F23