Climbing the economic ladder: the role of outward foreign direct investment

ABSTRACT

This paper argues that, under certain conditions, outward foreign direct investment (FDI) can promote economic development in the home economies from which the investment originates. It presents a conceptual framework incorporating simultaneously the complex interrelationships between the three main tenets shaping the developmental outcomes of outward FDI – the home economy conditions that induce firms to invest abroad; the role of the state in linking outward investment to economic development back in the home economy; and the investment returns which stimulate catching-up. The framework helps researchers and policymakers assess particular characteristics of outward FDI and their impacts on the home economies.

KEYWORDS:

• Developing country
• foreign direct investment
• industrialization
• late development
• upgrading
• East Asia

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. This paper acknowledges that some firms adopt a reckless and even predatory approach when they invest abroad. In extreme cases, outward FDI has served as a conduit through which well-connected executives receive huge kickbacks from their collaborators (Yeung & Liu, 2008). Nevertheless, the subsequent portions of the paper will illustrate how outward FDI can be properly managed to reduce inefficiencies, intensifying economic catching-up.

2. Hatch (2010) enriches and updates Akamatsu’s (1962) ‘Flying Geese Model’. This model depicts Japan as the driving force for economic innovation in Asia. As such, when labour and other manufacturing costs rose in Japan, the imperative is to relocate the more labour-intensive activities to the less developed parts of Asia, mainly the first- and second-tier economies (Thailand, Malaysia, Indonesia and the Philippines). This will allow Japanese firms to focus on more sophisticated activities such as R&D while the less-developed economies on relatively primitive and labour-intensive activities. Despite its popularity, the Flying Geese Model has been critiqued and reinterpreted by several scholars (e.g. Bernard & Ravenhill, 1995; Whittaker, Zhu, Sturgeon, Tsai, & Okita, 2010; Wong & Cheong, 2014). Their critique emphasizes two main issues – the supposedly stable development hierarchy between Japan and the less-developed economies as well as the failure to recognize the possible existence of impediments to latecomer upgrading. For the former, a cohort of latecomer firms from South Korea (e.g. Samsung in consumer electronics) and Taiwan (e.g. Giant in bicycle manufacturing) has caught up with and even usurped the once-superior Japanese lead firms. For the latter, the failure to uplift labour quality in many of the second-tier economies since the late 1990s has locked them in a de facto low wage-cum-low productivity competition with economies boasting even lower wages (such as Vietnam and Cambodia) (see Wong & Cheong, 2014).

3. To some extent, Taiwan’s investment into Southeast Asia from the 1980s to the early 2000s also furthered its comparative advantage vis-à-vis the subcontinent (Chu et al., 1999; Dent, 2003).

4. China became a net oil importer in 1993. While China has partially offset its dependence on oil by developing alternative energy sources (with coal at the forefront), it must be stressed that coal is utilized almost entirely to generate electricity for households and factories. Oil remains difficult to substitute because it is a raw material for several major manufactured products (e.g. plastic components), in addition to an almost indispensable fuel to power vehicles. BP (2017) illustrates this situation well, showing that oil continues to contribute close to 20% of China’s total energy portfolio. Trailing only coal (63% of total portfolio), it is the second most consumed energy source in China.

Additional information

Notes on contributors

Guanie Lim

Guanie Lim is a postdoctoral fellow at the Nanyang Centre for Public Administration, Nanyang Technological University, Singapore.

Jie Khan Teo

Jie Khan Teo is an assistant director at the Life Sciences and Medical Technology Division, Malaysian Investment Development Authority, Malaysia.