*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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"International Investment Facilitation: By Whom and for What?", "Moving the
G20's Investment Agenda Forward", "Emerging Markets and the International
Investment Law and Policy Regime", "Sustainable FDI for Sustainable
Development", "Towards an Investment Facilitation Framework: Why? What?
When?", "Beware of FDI Statistics!", "Towards an Indicative List of FDI
Sustainability Characteristics", “The Importance of Negotiating Good
Contracts", "A New Challenge for Emerging Markets: the Need to Develop an
Outward FDI Policy”, "China Moves the G20 toward an International
Investment Framework and Investment Facilitation", "The Next Step in
Governance: The Need for Global Micro-regulatory Frameworks", and "The
Evolving International Investment Law and Policy Regime: Ways Forward"
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 234  September 10, 2018
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])
*Do developing countries benefit from outward FDI?
Jan Knoerich** <#m_1963959459884613574__edn2>

Research and policy analysis on the relationship between FDI and economic
development have until now focused almost exclusively on the impact that
advanced economy multinational enterprises (MNEs) have when they operate in
developing countries. Analyses of the opposite direction – how emerging
markets benefit from the outward FDI (OFDI) undertaken by their own
“emerging MNEs” (EMNEs) – have, however, been largely non-existent. As
EMNEs have greatly expanded their share of global FDI stock over the past
decade, the impact their international activities have on their home
economies in the developing world has likely become more pronounced. For
this reason, Karl P. Sauvant, in his recent *Perspective*,[1]
<#m_1963959459884613574__edn3> encouraged emerging markets to develop OFDI
policies. However, the shortage of research on the impact of such
investments on home economies inhibits the formulation of such policies.

Developing countries can benefit from OFDI in at least three ways:[2]

   - OFDI generates income in the developing home economy, both when EMNEs
   repatriate foreign-earned profits and when OFDI increases the exports of
   EMNEs and other firms in the home economy (such as an EMNE’s suppliers).
   - OFDI has the potential to enhance knowledge, skills, technologies, and
   other capabilities in the home economy. Many EMNEs investing in advanced
   economies acquire strategic assets, conduct overseas R&D and/or benefit
   from “reverse” linkages, spillovers and competition effects. Some of the
   capabilities acquired abroad are transferred back to company headquarters.
   In addition to benefiting investing firms, these acquired capabilities can
   spill over to other firms and the broader home economy. This facilitates
   economic and technological catch-up. Moreover, OFDI that transfers
   lower-end production to other developing countries can induce home economy
   industrial upgrading by freeing up capacities to focus on higher-end
   - OFDI facilitates access to resources, raw materials and capital goods
   available in host economies. Transferring these to the home country may,
   for example, ease shortages of natural resources, increase production
   capacities, enhance resources security, and raise productivity in the
   developing home economy.

Unfortunately, empirical evidence on the extent of these benefits is scant,
and there are limitations. For example, many EMNEs struggle with their
international expansion and may not generate profits; their ability
successfully to acquire, absorb and transfer foreign know-how may be
limited; and OFDI may not effectively enhance security of access to natural

There may also be outright harmful effects. As OFDI involves an outflow of
capital, it may exacerbate capital shortages, come at the cost of
much-needed domestic investment, harm the balance-of-payments, and
facilitate capital flight. While the above list illustrated how EMNEs and
their home countries jointly benefit from OFDI, corporate interests can
diverge from countries’ economic interests. For example, offshoring through
OFDI may, under some circumstances, reduce production, exports, employment,
and tax revenues in the home economy. And export-oriented OFDI that builds
on low-cost production in the home economy may delay industrial upgrading
and could have unexpected side effects in the home economy, such as
enhancing industrial pollution and perpetuating low labor standards.

Past empirical research on the development impact of *inward* FDI has
mostly produced, on balance, either positive or mixed findings. Similarly,
many types of OFDI may, again on balance, benefit home economies, while
some OFDI may have weak or even negative effects.

No blueprint exists for an OFDI policy focused on maximizing development
benefits while minimizing any costs. Nevertheless, policymakers in
developing countries have tools at their disposal that can help them
develop appropriate policies:

   - They can learn from the policies of developed countries and a few
   emerging economies (e.g. China, India).[3] <#m_1963959459884613574__edn5>
   - They could identify what types of OFDI benefit their economies (e.g.,
   specific kinds of export-promoting, capability-improving or
   resources-securing investments), taking into consideration country-specific
   macroeconomic conditions, industrial structures, development needs, OFDI
   patterns, affected firms, etc.
   - Measures such as financial and fiscal incentives, reduction of
   regulatory barriers, OFDI insurance and guarantee schemes, and advice from
   ministries and embassies can be employed selectively to support or promote
   OFDI activities identified as beneficial.
   - OFDI exhibiting proven harmful effects on domestic finance,
   employment, the environment, or society could be addressed through negative
   incentives and tighter regulation in relevant policy areas.
   - An OFDI policy should not result in excessive regulation of associated
   economic activities.

A more complete catalogue of such policy options needs to be developed. It
should be developed out of in-depth research that examines the strengths,
weaknesses and effectiveness of various kinds of OFDI in contributing to
the development of home economies, backed by empirical examinations on the
link between OFDI and development. The findings would enable governments in
developing countries to tailor their policies so that OFDI best supports
development in home economies.

* <#m_1963959459884613574__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_1963959459884613574__ednref2> Jan Knoerich is Lecturer in the
Economy of China at the Lau China Institute and Department of International
Development, School of Global Affairs, King’s College London. The author is
grateful to Ravi Ramamurti, Matthew Stephenson and an anonymous reviewer
for their helpful peer reviews.
[1] <#m_1963959459884613574__ednref3> “A new challenge for emerging
markets: the need to develop an outward FDI policy,” No. 203, July 3, 2017
[2] <#m_1963959459884613574__ednref4> For a detailed discussion, see Jan
Knoerich, “How does outward foreign direct investment contribute to
economic development in less advanced home countries?” *Oxford Development
Studies*, vol. 45 (2017), pp. 443-459*. *
[3] <#m_1963959459884613574__ednref5> For an analysis, see Karl P. Sauvant
et al., “Trends in FDI, home country measures and competitive neutrality,”
in *Yearbook on International Investment Law and Policy 2012-2013* (New
York: OUP, 2014), pp. 3-107
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Jan Knoerich, ‘Do developing countries benefit
from outward FDI?,’ Columbia FDI Perspectives, No. 234, September 10, 2018.
Reprinted with permission from the Columbia Center on Sustainable
Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*. *

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Marion A. Creach, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 233, Meg Kinnear, “Moving with the times: amending the ICSID
   rules,” August 27, 2018
   - No. 232, Kavaljit Singh, “Investment facilitation: Another fad in the
   offing?” August 13, 2018
   - No. 231, Theodore H. Moran, “CFIUS reforms must be reformed,” July 30,

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *On September 27-28, 2018*, CCSI will hold its 13th Annual Columbia
   International Investment Conference (CIIC) on “Rethinking International
   Investment Governance: Principles for the 21st Century.” This conference
   seeks to elaborate principles of a progressive investment agenda. It will
   reflect on the current investment regime – of the network of over 3,000
   investment agreements – and the extent to which the regime aligns with or
   undermines the principles. We will then re-imagine investment governance,
   and consider the role that international cooperation could play to advance
   sustainable, development-oriented investment. *Registration is free but
   required...for more information, and to register, please visit our
   website here
   - *On September 26, 2018*, CCSI and the UN Sustainable Development
   Solutions Network (SDSN), under the guidance of Prof. Jeffrey Sachs,
   Special Advisor to the UN Secretary-General on the SDGs, and
   Laurent Fabius, President of the Constitutional Council of the French
   Republic, will host a conference to discuss the Global Pact for the
   The Global Pact for the Environment aims to unify international
   environmental governance and codify a human right to the environment in
   international law. *For more information, and to register, please see
   our website here
   - *On September 26, 2018*, CCSI and the Sabin Center for Climate Change
   Law will host a conference on "Climate Change, the Courts, and the Paris
   Agreement." In recent years citizens, sub-national governments and NGOs
   have turned to litigation to hold governments and corporations accountable
   for their contributions to climate change. *For more information about
   this event, including registration, please see our website here
   - *On September 24, 2018*, CCSI, the UN Sustainable Development
   Solutions Network’s Thematic Network on Good Governance of Extractive and
   Land Resources (“SDSN Thematic Network”), and other partners will host
   "Renewable Energy and the SDGs: Exploring Links with Extractives,
   Agriculture, and Land Use." *For more information, please see our
   website here
   interested in attending, contact [log in to unmask]
   <[log in to unmask]>.*

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright © 2018 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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