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Can a home country benefit from FDI? A theoretical analysis

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  • Chang, Chia-Ying

Abstract

The effects of outward FDI on home country’s growth remain an open question. The growth of outward FDI has renewed this attention. By allowing for endogenous decisions of firms on both whether to conduct FDI and whether to flow capital returns back to the home country, we have found several interesting results. First, as long as the probability of conducting FDI is positive, a higher proportion of entrepreneurs may harm economic growth of the home country in short-run and long-run. The ambiguous effects of transaction costs and MRS between domestic and foreign consumption on the home country’s economic growth result from the role of financial intermediaries. If the effect via inflow probability dominates, conducting FDI in a host country with a more liberalized capital account, or with a higher capital return rate may promote the home country’s economic growth rate. This is consistent with the findings in the outward FDI in European Union since 1970s.

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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2067
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Bibliographic Info

Paper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 2067.

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Date of creation: 2012
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Handle: RePEc:vuw:vuwecf:2067

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Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand
Phone: +64 (4) 463-5353
Fax: +64 (4) 463-5014
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Web page: http://www.victoria.ac.nz/sef
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Keywords: outward FDI; economic growth; capital returns; financial intermediaries;

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  1. Champ, B. & Smith, B.D., 1991. "Currency Elasticity and Banking Panics: theory and Evidence," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
  2. Blomström, Magnus & Kokko, Ari, 1994. "Home Country Effects of Foreign Direct Investment: Evidence from Sweden," CEPR Discussion Papers 931, C.E.P.R. Discussion Papers.
  3. Magnus Blomstrom & Ari Kokko, 2003. "The Economics of Foreign Direct Investment Incentives," NBER Working Papers 9489, National Bureau of Economic Research, Inc.
  4. Stacey L. Schreft & Bruce D. Smith, 1994. "Money, banking, and capital formation," Working Paper 94-05, Federal Reserve Bank of Richmond.
  5. Riess, Armin & Uppenberg, Kristian, 2004. "The internationalisation of production: moving plants, products, and people," EIB Papers 1/2004, European Investment Bank, Economics Department.
  6. Bruno Van Pottelsberghe De La Potterie & Frank Lichtenberg, 2001. "Does Foreign Direct Investment Transfer Technology Across Borders?," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 490-497, August.
  7. Barry Eichengreen, 2004. "Capital Flows and Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550598, December.
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