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