Motivations for FDI and domestic capital formation
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Motivations for FDI and domestic capital formation W Hejazi and P Pauly Joseph L. Rotman School of Management, University of Toronto, Toronto, Ontario, CA, Canada M5S 3E6 Correspondence: Walid Hejazi, Joseph L. Rotman School of Management, University of Torono, 105 St. George Street, Toronto, Ontario, CA M5S 3E6, Canada. Tel: þ 1 416 287 7318; Fax: þ 1 416 978 5433; E-mail: [email protected]
Abstract Changing patterns of foreign direct investment (FDI) stock have raised important questions about their impact on domestic economies. For example, it is often thought that increased inward FDI contributes to domestic capital formation, whereas increased outward FDI reduces it. We demonstrate that such generalizations are inappropriate. We develop hypotheses linking the impact of FDI to the underlying motivation for investment. These hypotheses are tested using available Canadian industry-level data. The implication of our results is that rapid growth in outward FDI, relative to inward growth, should not be considered as a negative development, and may reflect success. Journal of International Business Studies (2003) 34, 282–289. doi:10.1057/palgrave.jibs. 8400030 JEL classification: F2 Keywords: foreign direct investment; domestic capital formation
Received: 7 May 2001 Revised: 13 September 2002 Accepted: 17 September 2002 Online publication date: 1 May 2003
Introduction There have been significant changes in foreign direct investment (FDI) patterns over the past 20 years. For example, in 1980, relative to GDP for all developed countries, the stock of inward FDI was 4.7% and that of outward FDI was 6.4% (Table 1). By 1999, these ratios had tripled to 14.5 and 19%, respectively. These changes have raised important questions regarding their impact on aspects of domestic economies, including international trade, gross fixed capital formation (GFCF), employment, productivity, the balance of payments and overall welfare. These impacts have been discussed extensively in Rugman (1990). This note builds on previous work by formalizing hypotheses linking FDI to GFCF, and undertaking formal tests using a full model of GFCF. It has been argued that increased inward FDI enhances domestic GFCF, whereas increased outward is tantamount to the export of domestic production, and thus the reduction of domestic GFCF. If accurate, such arguments would be of special concern to countries experiencing faster growth in outward than inward investment. Table 1 indicates that 14 countries of those listed fit this description. We demonstrate that such generalizations are inappropriate. To understand the link between FDI and GFCF, one must address the underlying motivation for investment. We discuss three motivations: market access; factor endowment differences; and access to natural resources. We also consider the effect of trade within the MNE on these hypotheses. These hypotheses are tested using
Motivations for FDI and domestic capital formation
W Heja
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