Outward FDI and home-country governments 3...2019/12/03 · Outward FDI and home-country governments Consider promoting IFDI, OFDI, and exports together, but with different weights

9th Meeting of the Asia-Pacific FDI Network

UNESCAP, Bangkok

4 December 2019

Outward FDI and home-country

governments

PRESENTATION OVERVIEW

Outward FDI and home-country governments01

How can governments increase the development benefits from OFDI for home economies?

1. What’s happening? Recent trends regarding OFDI

2. Why may this be this happening? Theoretical explanations for trends

3. What may governments wish to consider doing? Policies, institutions, measures







TRENDS

0

10

20

30

40

50

60

70

80

90

100

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

FDI Outflows, 2000-2018 (% total world)

Developing economies Transition economies Developed economiesSource: UNCTADStat

03Outward FDI and home-country governments

TRENDS

Source: own elaboration, based on UNCATD Stat

04

Outward FDI and home-country governments

Falling OFDI restrictions…

Between 2005 and 2015, developing countries

with OFDI restrictions fell from 91 to 77, a decrease of 15%

(IMF data)

Growing number of OFDI institutions…

Between 2000 and 2015, outward investment agencies

in developing and transition economies increased from

~15 to ~28, an increase of 86%

(UNCTAD data)

TRENDS

05


Growing empirical evidence of

positive home effects from OFDI

for developing economies across numerous economic dimensions

(productivity, jobs, exports, etc.)

TRENDS

05


Growing empirical evidence of

positive home effects from OFDI

for developing economies across numerous economic dimensions

(productivity, jobs, exports, etc.)

Prof. Jan Knoerich will discuss these next







FOUR THEORETICAL FRAMEWORKS


❖ Springboard Theory: emerging market firms use OFDI as a ‘springboard’ to acquire capabilities.

❖ Linkage, Leverage, Learning (LLL) Framework: emerging market firms use OFDI to link with existing

players, leverage resources from them (technologies, assets, market positions), and learn from

doing this repeatedly.

❖ Institutional Advantage Theory: emerging market firms use OFDI to ‘turn disadvantages into

advantages’ by investing in markets with poor infrastructure, regulation, and governance, as they

have an advantage in these markets vis-à-vis developed market firms, having learned to deal with

these challenges in their home markets.

❖ Investment competitiveness (IC) Framework: emerging market policymakers use OFDI to increase

their economy’s investment competitiveness, and emerging market firms use OFDI to increase their

competitiveness.

FOUR THEORETICAL FRAMEWORKS


❖ Springboard Theory: emerging market firms use OFDI as a ‘springboard’ to acquire capabilities.

❖ Linkage, Leverage, Learning (LLL) Framework: emerging market firms use OFDI to link with existing

players, leverage resources from them (technologies, assets, market positions), and learn from

doing this repeatedly.

❖ Institutional Advantage Theory: emerging market firms use OFDI to ‘turn disadvantages into

advantages’ by investing in markets with poor infrastructure, regulation, and governance, as they

have an advantage in these markets vis-à-vis developed market firms, having learned to deal with

these challenges in their home markets.

❖ Investment competitiveness (IC) Framework: emerging market policymakers use OFDI to increase

their economy’s investment competitiveness, and emerging market firms use OFDI to increase their

competitiveness.

❖ Short version: policymakers support and firms undertake OFDI to acquire or exploit capabilities.

DIFFERENT MOTIVATIONS FOR OFDI

10

Market Seeking Efficiency Seeking (GVC consolidation)

Natural Resource SeekingStrategic Asset Seeking

Geopolitical

Escape

Tax Benefit Seeking


DIFFERENT MOTIVATIONS FOR OFDI

11

Market Seeking Efficiency Seeking (GVC consolidation)

Natural Resource SeekingStrategic Asset Seeking

Geopolitical

Escape

Tax Benefit Seeking


Home governments

may wish to support

different types of

OFDI differently…

TRANSMISSION CHANNELS FOR HOME EFFECTS


17

OFDI transmission

channels

Scale and scope effects

Labor mobility

Competition

effects

Indirect knowledge transfers

(spillovers)

Direct knowledge transfers

Stephenson (2017)

Home governments may wish to help create

effective transmission channels

Home effects involve 3 movements

1. Firms carry out OFDI

2. Transmission channel activated

3. Economic development benefits

diffused for home economy

2

TRANSMISSION CHANNELS FOR HOME EFFECTS


17

OFDI transmission

channels

Scale and scope effects

Labor mobility

Competition

effects

Indirect knowledge transfers

(spillovers)

Direct knowledge transfers

Stephenson (2017)

Home governments may wish to help create

effective transmission channels

Home effects involve 3 movements

1. Firms carry out OFDI

2. Transmission channel activated

3. Economic development benefits

diffused for home economy

Prof. Jan Knoerich will discuss these next

2







OFDI POLICY PATH

19

There seems to be a sequence of stages when it comes to OFDI policy reform and measures, what can be

called the OFDI Policy Path*.

Remove OFDI restrictions

Facilitate OFDI

Support OFDI

Promote sustainable OFDI

Calibrate OFDI

A number of economies have followed a version of the OFDI Policy Path (e.g. China, India, Rep. of Korea)


* See framework in Stephenson (2017)

OFDI POLICY PATH

20

Importantly, OFDI can include policies for home firms to invest sustainably.


Promote sustainable OFDI

Guidelines for Good Business Practice

by South African Companies Operating

in the Rest of Africa

OECD Guidelines for

Multinational

Enterprises

MOFCOM Guidelines for

Environmental Protection in Foreign

Investment and Cooperation

E.g. 1 E.g. 2 E.g. 3

OFDI support (e.g. insurance) & promotion (e.g. financial) can be made conditional on sustainable investment practices

E.g. 4

U.S. OPIC Environmental

and Social Policy Statement

NATIONAL DEVELOPMENT STRATEGY

21

OFDI objectives

Investment policies

Institutional arrangements

Home-country

measures OFDI targets

To integrate OFDI into national development strategies

requires alignment of five elements:


22

OFDI objectives

Investment policies


Home-country




INSTITUTIONS


23

Ministries IPAs and TPOsSubnational

IPAs and TPOs

Guarantees and Insurance

Agencies

Development Finance

Institutions

Private sector organizations

❖ Consider OFDI institutional arrangements as an ecosystem

❖ Focus on key functions, and not necessarily where function is placed,

given heterogeneity of institutional arrangements across economies

6 TYPES OF INSTITUTIONS


24

THE INSTITUTIONAL ECOSYSTEM – DEVELOP A CLUSTER


Example 1. Polish Development Fund Group

(PFR Group)

Example 2. South Africa Dep. of Trade and Industry (DTI)

Key Partners

HOME-COUNTRY MEASURES (HCMs)

25

OFDI objectives

Investment policies


Home-country





6 TYPES OF HCMs

26

Treaties

Political risk insurance

Sauvant et al. (2014)


THE ‘HCM HOUSE’ – BUILD FROM THE BOTTOM, ALIGN THE BRICKS

27

Information

Financial measures

Fiscal measures

Political risk insurance

Treaties

Support services


28

Special industrial or service zones in host countries

Open offices in host markets

Fiscal advantages on profits abroad

Financial measures (loans, equity capital, guarantees)

Information and pre-investment support services

Bilateral Investment Treaties (& other IIAs)

Insurance of political and other non-commercial risk

Tax treaties to avoid double taxation

Tax credits or exemptions for taxes in host markets

TIME

PR

OM

OT

ION

‘SEQUENCE OF STAGES’ FOR HCMs

De Beule & Van Den Bulcke (2010)


EMERGING PRACTICES BASED ON CASE STUDIESMEXICO, POLAND, SINGAPORE, SOUTH AFRICA… UNESCAP studies to be added when ready


Consider promoting IFDI, OFDI, and exports together, but with different weights in different markets.

Consider identifying priority sectors for OFDI, selected based on both existing sectoral strength and desired sectoral development.

At the same time, be open to providing OFDI support to firms outside of those sectors.

Consider OFDI support as an ecosystem with different institutions working together in a complementary manner, with a lead

agency.

Consider using IIAs to open markets for OFDI and protect home investors.

Consider placing the function of supporting OFDI within an existing institution, but create a clearly separated department for OFDI.

Consider employing offices in host economies to serve as the platform through which support services are provided.

Consider tailoring OFDI support services according to firm size, given that the needs of large and small firms will be very different.

Carefully consider whether or not to adopt financial HCMs, and if so adopt clear guidelines to avoid subsidizing firms inefficiently.

Consider establishing mechanisms for coordination on internationalization with the private sector.

Consider training program and talent/skills development geared to OFDI.

Consider collecting OFDI data, such as through a questionnaire.

Documents

Outward FDI and home-country governments 3...2019/12/03 · Outward FDI and home-country governments Consider promoting IFDI, OFDI, and exports together, but with different weights