Foreign Direct Investment from Developing Countries and Its Implications for Domestic Investment Rates

Abstract

Developing countries are becoming important contributors, not only recipients, of global foreign direct investment (FDI) flow. In 2000, only 8.7 percent of global outward FDI was originated from emerging markets; however, the percentage rose sharply to 26.9 percent in 2011 (UNCTAD 2012). Such a robust trend is not predicted by classical investment theories and remains largely under-investigated, especially in terms of its impact on economic activities of origin countries. From a macroeconomic perspective, outbound FDI drains away domestic capital, a precious factor in supporting investment and economic development at home. Nevertheless, such investment may also bring back brands and technologies, which in turn benefits domestic production. Using data form 93 developing economies during 2001 – 2011, this study aims to empirically analyze how developing countries’ domestic investment environments respond to outward FDI.

My results indicate that there is no one-directional impact of outward FDI, and different investment objectives have off-setting effects that can lead to almost no impact on domestic investment environments at an aggregated level. Further, I find that the outflow FDI from developing countries to high-income countries and tax havens can have a negative effect both on domestic capital formation and corporate tax revenue, but these effects are rather small. In order to further investigate this relationship, I suggest collecting more disaggregated sector-level or firm-level data – that is capable of removing shadow investments in tax havens – from gross calculation.