Outward FDI and economic
growth
Dierk Herzer
German Institute for Economic Research (DIW), Berlin, Germany and
University of Wuppertal, Wuppertal, Germany
Abstract
Purpose – The purpose of this paper is to examine the impact of outward foreign direct investment
(FDI) on economic growth.
Design/methodology/approach – Two econometric approaches are used: cross-country
regressions for a sample of 50 countries and time-series estimators for the USA.
Findings – Both approaches tell the same story: outward FDI is positively associated with growth.
This finding is robust to several model specifications, potential outliers, and different estimation
techniques. In addition, Granger-causality tests for the USA indicate that causality is bidirectional,
suggesting that increased outward FDI is both a cause and a consequence of increased domestic
output.
Originality/value – Previous studies have primarily examined the firm- and industry-level effects of
outward FDI – for example, on domestic investment, employment, and productivity. This paper, in
contrast, deals with the effects of aggregate outward FDI on the economy as a whole.
Keywords Economic growth, International investments, National economy, Econometrics
Paper type Research paper
1. Introduction
How does outward foreign direct investment (FDI) affect domestic economic activity?
This question has been the subject of extensive public policy debate in the industrialized
world. Opponents of outward FDI argue that outward investment substitutes foreign for
domestic production when firms shift parts of the production abroad. Accordingly,
outward investment inevitably reduces domestic investment, employment,
productivity, and thereby economic growth. Proponents of outward investment, in
contrast, point out that outward FDI enables firms to enter new markets, to import
intermediate goods from foreign affiliates at lower costs, and to access foreign
technology. From this point of view, the entire domestic economy benefits from outward
FDI due to the increased competitiveness of the investing companies and associated
productivity spillovers to local firms.
Unfortunately, empirical studies do not provide a clear picture of whether and how
domestic economic activity is influenced by outward FDI. Stevens and Lipsey (1992), for
example, analyze the domestic investment behavior of seven US multinational
companies. Their results suggest that that outward investment and domestic
investment are substitutes. Desai et al. (2005), on the other hand, using time-series
data for the US firms, find a positive relationship between domestic and foreign
investment. This finding, in turn, is consistent with a study by Lipsey (1994),
who reports a positive correlation between foreign production and domestic
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JEL classification – F43, F21, C21, C22
The author would like to thank an anonymous referee for helpful comments.
JES
37,5
476
Received 2 January 2009
Accepted 15 July 2009
Journal of Economic Studies
Vol. 37 No. 5, 2010
pp. 476-494
q Emerald Group Publishing Limited
0144-3585
DOI 10.1108/01443581011075424