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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])

*The Columbia FDI Perspectives are a forum for public debate. The views
expressed by the authors do not reflect the opinions of CCSI or our
partners and supporters.*

No. 311   August 9, 2021
*The OFDI policy path and the product space*
Matthew Stephenson* <#m_6624000248308644762__edn1>

Outward FDI (OFDI) can be integrated in both national and corporate growth
strategies.[1] <#m_6624000248308644762__edn2> As to the former, the key is
to understand OFDI policy as progressing down a path that informs the
selection of home-country measures (HCMs); target OFDI, to both leverage
existing and develop new capacity; and ensure that investment and trade
policies are aligned and mutually supportive.

*The OFDI policy path.* Economies such as China, India, Mexico, Poland,
Singapore, Thailand, and the US have successfully integrated OFDI into
their national development strategies, by following a four-stage pattern,
characterized by the level of governmental support for OFDI:

   - Removing some OFDI restrictions. As economies develop, policymakers
   start worrying less about capital outflows and more about competitiveness.
   Data show that economies remove OFDI restrictions as they develop, with
   developed economies having almost no restrictions in place.[2]
   - Facilitating OFDI. Governments can facilitate OFDI, including by
   providing information and advice on FDI climates or through negotiating
   treaties, whether double taxation agreements or international investment
   - Promoting OFDI. The level of support ramps up, moving from creating
   conditions for OFDI to actively promoting it. Non-financial support can
   include business missions, matchmaking or project development. Financial
   support can include guarantees, feasibility studies, office space abroad,
   loans, equity, and tax incentives.
   - Calibrating OFDI support. Policymakers can calibrate OFDI support by
   reducing support or re-imposing some restrictions. Changing domestic
   economic priorities or concerns with business practices in foreign markets
   can precipitate this stage.

Visualizing this path can help policymakers identify the right OFDI policy
and HCMs, depending on where an economy is along the OFDI path.

HCMs can range from relatively light to relatively heavy support.[3]
<#m_6624000248308644762__edn4> As economies move along, policymakers can
add new “bricks” (i.e., HCMs) to increasingly support domestic firms to
become outward investors.

To maximize OFDI benefits, policymakers should “lay bricks” both vertically
and horizontally. Horizontal action means providing OFDI support that is
sector agnostic. This opens the door to helping firms capable of investing
abroad, but not operating within targeted sectors. Horizontal HCMs can
include host country market information, match-making services, feasibility
studies, and political-risk insurance.

Vertical action entails targeting sectors for OFDI support. To identify
which sectors to target through vertical support, policymakers can use a
simple exercise and an existing tool:

   - Policymakers should list sectors they aim to grow and use OFDI to
   *develop* *new* capacity and competitiveness. HCMs can help firms use
   OFDI to target products that are closely related but slightly more complex
   than those they currently produce following the Product Space and the
   Product Complexity Index.[4] <#m_6624000248308644762__edn5> Firms will
   be able to absorb the knowledge and technology embedded in the production
   of these goods and services, thereby helping them upgrade.
   - Policymakers should identify sectors in which they are already
   competitive (e.g., using their revealed comparative advantage) and use OFDI
   to *leverage existing* capacity and competitiveness.

It is important to acknowledge that OFDI remains controversial and there
can be trade-offs. Policymakers fear offshoring jobs and foregoing domestic
investment. While benefits are not automatic, the evidence suggests that
OFDI can generate positive effects through increased competitiveness, not
just for outward-investing firms, but also spilling into home economies,
including through increased productivity, innovation, exports, revenue, and
job upgrading.[5] <#m_6624000248308644762__edn6>

As a result, governments are beginning to organize themselves to support
OFDI. Developing economies generally assign inward FDI (IFDI) and export
promotion functions to different institutions. As economies develop, they
often merge these institutions[6] <#m_6624000248308644762__edn7> and add
the OFDI support function[7] <#m_6624000248308644762__edn8> to better
actuate their strategy. For instance, the Polish Investment and Trade Agency
was restructured in 2017 to combine export and investment promotion and a
new department for OFDI was created.

To close with an example, policymakers and firms may develop the microchip
industry by attracting FDI to develop capacity, plug into value chains by
exporting microchips and use OFDI to both leverage existing capacity (e.g.,
opening a plant in an economy whose microchip industry is relatively less
complex) and develop new capacity (e.g., acquiring a plant in an economy
whose microchip industry is relatively more complex).

While this is not easy, with a clear framework in place, policymakers and
firms can better align actions and resources and bring new OFDI tools to
help economic growth and development.

* <#m_6624000248308644762__ednref1> Matthew Stephenson (
[log in to unmask]) is Policy and Community Lead, International
Trade and Investment, World Economic Forum. The author would like to thank
Alvaro Cuervo-Cazurra, Nigel Driffield and Jan Knoerich for their helpful
peer reviews.
[1] <#m_6624000248308644762__ednref2> Matthew Stephenson and Jose Ramon
Perea, “How to leverage outward FDI for development? A six-step guide for
policymakers”, *Columbia FDI Perspective*, no. 242, Dec. 31, 2018
[2] <#m_6624000248308644762__ednref3> Jose Ramon Perea and Matthew
Stephenson, “Outward FDI from developing countries” (Washington D.C.: WBG,
p. 120.
[3] <#m_6624000248308644762__ednref4> Karl P. Sauvant et al., “Trends in
FDI, Home Country Measures and Competitive Neutrality”, in Yearbook on
International Investment Law & Policy 2012-2013 (New York: Oxford
University Press, 2014)
pp. 7-11.
[4] <#m_6624000248308644762__ednref5> C. A. Hidalgo et al., “The product
space conditions the development of nations,” *Science*, vol. 317 (2007)
pp. 482-487.
[5] <#m_6624000248308644762__ednref6> Jan Knoerich, “Do developing
countries benefit from outward FDI?,” *Columbia FDI Perspectives*, no. 234,
Sep. 10, 2018.
[6] <#m_6624000248308644762__ednref7> OECD,* Mapping of Investment
Promotion Agencies in OECD Countries *(Paris: OECD, 2018)
p. 19.
[7] <#m_6624000248308644762__ednref8> Armando Heilbron and Hania Kronfol,
“Increasing the development impact of investment promotion agencies”
(Washington D.C.: WBG, 2020)
pp. 183 and 192.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Matthew Stephenson, ‘The OFDI policy path and
the product space,’ Columbia FDI Perspectives No. 311, August 9, 2021.
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,
Riccardo Loschi, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 310, Mario Mancuso, “CFIUS and China in the post-COVID
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   - No. 309, Rafael Ramos Codeço and Ana Rachel Freitas da Silva, “CSR in
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*All previous FDI Perspectives are available at

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*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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