The Effect of Outward FDI on Home Country Exports: A Framework for Analysis

Outward foreign direct investment (FDI) by US multinational corporations (MNCs) is regularly the subject of discussion in the debate over off-shoring of US manufacturing activity and its implications for US exports and employment. The debate reflects a concern that MNCs substitute foreign activities for their home country activities; that US production, employment, and investment are moving abroad; and that the sales of foreign affiliates substitute for exports from the United States. One distinct question within this debate is the effect of outward FDI on home country exports. The relationship between outward FDI and exports is the subject of this paper.

The key to addressing this question is to recognize that FDI comes in many shapes and sizes, and that each investment must be evaluated on a case-by-case basis. However, it is possible to draw some general conclusions on the likely effect on exports of different types of FDI. In this paper, we propose a framework consisting of four distinct groupings of FDI. The groups differ based on the motivation underlying the foreign investment decision and structure that the foreign investment can take. The expected impact of FDI can then be predicted based upon which group best fits a particular foreign investment. We subsequently employ this framework to evaluate the empirical studies that, over the last thirty years, have attempted to determine the effect of outward FDI on home country exports.

There are four basic motivations for FDI: market-seeking, natural resource-seeking, efficiency-seeking, and strategic asset-seeking. Our focus here is on the market-seeking and efficiency-seeking motivations: FDI motivated to better serve or expand an existing foreign market and/or expand to, or create, new markets versus FDI motivated to reduce production costs. Market-seeking and efficiency-seeking FDI both result from firms’ profit-maximizing behavior. This behavior can be in response to normal market forces, or it can be induced by government policy or trade barriers such as tariffs, quotas, or local content requirements. FDI decisions based on normal market forces are considered “voluntary,” while FDI that results from government actions is considered “policy-induced.”