Monday, November 4, 2013

Investment Abroad Isn’t A Negative

It turns out direct investment abroad isn’t exactly a zero sum game (excerpt):

Do multinationals that expand abroad invest less at home?
Theodore H. Moran, Lindsay Oldenski, 31 October 2013

There is a long history of politicians accusing US MNCs of “shipping jobs overseas” when they invest outside the US…This line of attack implicitly assumes that expansion abroad by US firms substitutes for domestic expansion, harming US workers. It is equally possible that foreign expansion increases the productivity and market share of firms in a way that benefits US workers….

…Figure 1 summarises the relationship between US MNC activities at home and abroad…The first thing to note about the relationships between FDI and domestic growth presented in Figure 1 is that they are all positive. By any measure, rising FDI by a US firm is associated with an increase in domestic US activities by that same firm. When a US firm increases employment at its foreign affiliates by 10%, employment by that same firm in the US goes up by an average of 4%. Capital expenditures and exports from the US by that firm also increase by about 4%. R&D spending – which is associated not just with overall US employment but with employment in highly skilled and highly paid jobs – increases by 5.4%. The results are similar when increases in FDI are measured by affiliate sales or capital expenditures instead of employment. All of these positive relationships are significant at the 1% level.

What about a counterfactual scenario? What would happen at home if MNC expansion abroad were limited or made more difficult?…On the basis of our findings of positive interactions between increases in measures of firm activity at home and firm activity abroad, it appears plausible that increasing foreign-affiliate activity increases the overall productivity of an MNC in a way that leads to higher employment in all locations. In this case, inhibiting overseas expansion would have negative consequences for the US economy…

Our findings do not mean that certain aspects of overseas expansion never diminish similar aspects of home-country MNC activity. Quite the contrary: the spread of investment and R&D – like trade in general – is likely to reshuffle economic activity within as well as across sectors on both sides of borders….

…But the evidence presented here shows clearly that when a US MNC increases its R&D abroad, it also increases its R&D, capital expenditures, exports, sales, and employment in the US. Indeed, what is notable is the discovery that US firms that do not increase their R&D abroad do not tend to increase it at home, either….

...On the basis of the findings presented here, US policymakers can expect that measures taken to impede or retard US MNC expansion abroad will weaken job creation, investment, R&D, and exports at home, rather than strengthen or enhance domestic economic activity.

There’s been some noise over the last few years about the flow of investment by Malaysian firms abroad, usually with the explicit or implicit connotation that these firms are investing abroad because opportunities for investing in the domestic economy are limited.

If this new research outlined above has it right (and if these results carry over for Malaysian firms), then this viewpoint is false. Higher investment overseas is associated with higher investment in the local economy.

But if that’s true, why has private investment been so poor in Malaysia in the 00s? I suspect we’ll need to segment the market here – Malaysian firms investing overseas are also overwhelmingly the larger, better-capitalised, and regionally ambitious companies like Sime and Axiata. The ones staying home are the ones who’ve really pulled back on investment.

Technical Notes:

  1. Moran, Theodore H. & Lindsay Oldenski, "Do multinationals that expand abroad invest less at home?", VoxEU article, 31 October 2013 (online, accessed November 4, 2013)
  2. Hufbauer, Gary Clyde, and Theodore H. Moran & Lindsay Oldenski, "Outward Foreign Direct Investment and US Exports, Jobs, and R&D: Implications for US Policy", Peterson Institute for International Economics, August 2013


  1. Dear hisham

    Whats exactly the discretionary funds talked about here. Is it as sinister as the lawmaker make it out to be.

    1. @anon

      You could take it that way. Personally, I see it more as a commentary on the effectiveness (or lack thereof) of the other ministries. It's a trend towards centralisation of power and funds under the PM's office, because it's the "only way to get things done".

    2. Hishamh,
      To a certain extend. Plus it must bring benefits to the nation. See the difference between Felda spending money in buying properties in UK & Singapore spend fortune in joint venture with China in setting suzhou park.......Ok, that park ended up more or lessa disaster. But it's with a good course

  2. Dear Sir,

    I couldn't agree more. OFDI has positive long-run effects on domestic output. In some research conducted, the results of OFDI showed that the long-run causality is bidirectional, suggesting that increased in domestic output allow firms to invest more abroad. Consequently, increased OFDI is both a cause and a consequence of increased domestic output.

    Due to this, a few emerging Asian countries have embarked on policies encouraging firms (including SMEs) to venture into OFDI. Look at China where they have this "Go Global" policy to the extent that a special "international market developing" fund is provided for local firms to go abroad. Again this fund is not limited to larger firms and/or MNCs only, SMEs also included.

    Nearer to us, Singapore also has its "Global Reach" program encouraging its firms (again including SMEs) to invest abroad. Their govt provide assistance in the form of tax incentives & financial support so much so that their SMEs have similar OFDI motivation as those of their larger firms.....and we invited those SMEs with arms wide open to invest in Iskandar Johor!

    In our efforts to woo FDI, we are giving special privileges to foreign SMEs at the expense of our own. We don't have any policy encouraging our firms investing abroad thus missing opportunities to increase domestic output via OFDI. Like you said, only a handful few of our firms dare to venture into this multifaceted OFDI endeavors, and if we stay firm with the present policy, I can only wonder how much longer can the present pool of Malaysian MNCs be increased.

    Thank you.

    1. @Azman

      Actually there is a Malaysian policy of encouraging outward investment, though it's more in the vein of cheerleading than anything concrete like tax incentives. That's why many GLCs tag along on high level trade missions.

      But you're right, this doesn't really extend to smaller firms, who would probably benefit more. To add to what you've said, research shows that SMEs that venture abroad also tend to be more innovative, and that this effect isn't limited to manufacturing, but also to services.

    2. Well, it must brings more returns to the nation. Perhaps, it's time to hand over the chairmanship to true professionals......Look at all the UMNO chairmen, you think they got the brain. Why not hire George Yeo for a start?

  3. Sorry, lah. I think that George Yeo is now based in Hong Kong and working for the Kuok Group.

    What about Hassan Marian? Why isn't he working in Malaysia after his Petronas stint? Instead he is working in Singapore for Temasek Holdings' Pavilion Energy.

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