Exports from developing countries and outward foreign direct investment: An empirical analysis

Abstract

This empirical study investigates how exports from developing countries are influenced by outward foreign direct investment. By classifying developing economies into subgroups based on income (low-income countries, lower-middle-income countries, upper-middle-income countries), as well as at the regional level (Africa, Asia, Latin America, and the Caribbean), this study also tries to analyze the variation in this association at different levels of development and across different geographical regions. The study uses imbalanced panel data from 64 developing countries spanning the years 1990 to 2019 for estimation purposes and employs panel estimation techniques of fixed and random effects model. The results suggest that at the aggregate level, outward foreign direct investment has a complementary impact on the home country export performance of developing countries. Moreover, middle and upper middle-income groups of developing countries also indicate the complementary effect of investing abroad on home country exports. At the regional level, results indicate that in Asia, this complementary effect is more vital than in any other region of developing countries. It may be due to the high share of outward FDI from Asian developing countries, which leads to more exports of intermediate goods and headquarter activities from home countries. On the contrary, results indicate that OFDI substitutes for home country exports in the group of Latin America and the Caribbean countries, and these countries have a smaller and relatively more volatile share in total world outward FDI. The general complementary type relationship between OFDI and the home country's exports highlights the need to consider OFDI as a part of national development plans to attract much-needed foreign exchange reserves for the growth and development of developing countries.