The impact of foreign direct investment on host country exports: A meta‐analysis

• Published date: 01 December 2020
• Author: Radovan Kastratović
• DOI: http://doi.org/10.1111/twec.13011
• Date: 01 December 2020

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wileyonlinelibrary.com/journal/twec World Econ. 2020;43:3142–3183.

© 2020 John Wiley & Sons Ltd

Received: 11 October 2019

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Revised: 2 April 2020

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Accepted: 14 July 2020

DOI: 10.1111/twec.13011

ORIGINAL ARTICLE

The impact of foreign direct investment on host

country exports: A meta-analysis

RadovanKastratović

University of Belgrade Faculty of Economics, Belgrade, Serbia

KEYWORDS

export, foreign direct investment, international trade, meta-analysis

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INTRODUCTION

Decades of the contemporaneous surge in foreign direct investment flows and international trade and

the subsequent instability of their flows following the 2008–9 global economic crisis spurred consid-

erable interest in their relationship, as evidenced by the growing theoretical and empirical literature. In

addition to this, many countries realised the potential benefits of foreign direct investment. The gov-

ernments thus increasingly compete to attract the investment, offering substantial incentives as part of

their efforts. This is fast becoming a key instrument in promoting exports, particularly in developing

countries. However, the evidence of export effects of foreign direct investment remains ambiguous

and so does the justification of the aforementioned host country policies.

The theory predicts both positive and negative export effects, mainly depending on the initial

assumptions regarding the motives of the investors and characteristics of host and home countries.

Therefore, the problem comes down to an empirical question. The theoretical controversy and the

interest of policymakers consequently led to the proliferation of the empirical work investigating this

problem.

Several attempts have been made so far to review the state of the existing empirical literature in-

vestigating the relationship between foreign direct investment and exports. For instance, Forte (2004)

provided one of the first systematic reviews of the studies examining the relationship between foreign

direct investment and export on a macro-level. However, the author focused mainly on the theoretical

models, covering only five relevant empirical studies in her review. A more comprehensive review of

the empirical literature analysing the impact of foreign direct investment on exports was conducted

by Tsaurai (2013). The review chronologically described the 22 empirical studies which the author

considered to be the most relevant. However, the author provided no objective criteria for including

the particular studies in his literature review. Moreover, neither a robust analytical framework (such as

meta-analysis) nor a qualitative synthesis of the empirical results of the studies covered was provided.

Finally, Bayar (2018) presented a general and comprehensive review of all the determinants which

were shown by the existing empirical results to significantly affect exports. One of the determinants

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KASTRATOVIĆ

considered in the review was foreign direct investment. However, this literature review is plagued by a

limited coverage of the relevant empirical literature (only four empirical studies analysing the impact

of foreign direct investment on exports were considered) and the lack of a systematic and analytical

approach.

All the aforementioned literature reviews are partially or fully comparable to our meta-analysis in

terms of the research problem of the reviewed empirical studies. Still, these literature reviews remain

inadequate, because of a number of drawbacks. None of the related literature reviews focus on the

perspective of the host country. Furthermore, the existing literature reviews are unsatisfactory, as they

cover only a fraction of relevant empirical literature. Besides, most of them, with the exception of

Forte (2004), do not review the theoretical underpinnings of the empirical studies. The reviews were

exclusively descriptive in nature, not taking advantage of new research synthesis methodologies, such

as meta-regression analysis, which makes them less transparent and more prone to subjective bias.

Finally, the existing reviews lack concrete suggestions for future research. We seek to address these

drawbacks in this paper.

The aim of this paper was to provide a synthesis of the existing empirical research examining the

impact of foreign direct investment on host country exports, as well as to examine the reason behind

the variations in their results, expanding upon the existing literature reviews in several ways. First,

we summarised the theories which serve as a basis for the analysed empirical research. Second, we

collected the data from 117 relevant empirical studies. This makes our meta-analysis the most compre-

hensive, comparing to the most closely related literature reviews. Furthermore, the data were analysed

using meta-regression methodology, which minimises the subjectivity and biases of the review while

allowing us to quantify the general macro-level impact of foreign direct investment on exports. Unlike

the existing literature reviews, with the exception of Tsaurai (2013), this paper observes the problem

from the host-country perspective. We additionally covered micro-level empirical studies, providing

more details on how the general macro-level effects occur in the host country from the firm perspec-

tive. Finally, the analysis resulted in important suggestions for future research of this topic, identifying

some important methodological issues.

The remainder of this paper is organised as follows. The next section summarises the main theo-

ries of the relationship between foreign direct investment and international trade. Section3 outlines

our methodology and describes the sample we used in the research. We present the results of our

meta-analysis in Section4. In Section5, we provide a qualitative review of the relevant micro-level

empirical literature. The final section concludes.

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REVIEW OF THE THEORETICAL LITERATURE

In this section, we discuss the theoretical literature which pertains to the empirical work we analyse

in the remainder of this paper. Part of the theories explains aggregate country-level export effects of

foreign direct investment in host countries. The models in this group mainly belong to one of the more

general theories of international trade, including the classical theory of international trade and the

new trade theory. Equally important are the theoretical models investigating the problem from a more

micro-level perspective. Such models focus not only on direct effects of foreign direct investment

on exports, but also on indirect effects, considering the role of information externalities, imitation,

demonstration effects, skills acquisition, competition and learning by exporting (Aitken, Hanson, &

Harrison,1997; Clerides, Lach, & Tybout,1998; Greenaway, Sousa, & Wakelin,2004). Finally, some

theories integrate micro- and macro-level approach, presenting an eclectic explanation of the impact

of foreign direct investment (Dunning,1977; Dunning & Lundan,2008).

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All the macroeconomic theoretical models predict either a complementary or substitutive rela-

tionship between foreign direct investment and trade. It should be noted that the majority of these

theories are based on general equilibrium models, so the relationship between the two variables can

be analysed from the perspectives of both home and host countries (Kojima,1973; Mundell,1957).

The perspective of the host country is discussed as part of comparative statics analysis in the majority

of the aforesaid models. In most cases, the complementary relationship relates to a positive impact

of foreign direct investment on host country exports, whereas the substitutive relationship relates to

either an insignificant or a negative impact.

The earliest theories on the relationship between foreign direct investment and exports are based

on Heckscher–Ohlin–Samuelson theoretical framework, relaxing some of its underlying assumptions.

The framework allows for the analysis from the perspective of both home and host countries (Jones

& Dei,1983; Kojima,1975). One of the first theories based on this framework was proposed by

Mundell (1957), who relaxed the assumption of factor immobility. According to his theory, the inter-

national factor movement substitutes for international trade. From the perspective of the host country,

his analysis shows that the inflow of capital in the host country expands its production possibility

frontier, changing the equilibrium points of production and consumption and resulting in contraction

of the host country exports. Contrary to this finding, Schmitz and Helmberger (1970) found that in

the case of primary products if the assumption of identical technology and demand in countries is

relaxed, factor mobility and international trade become complements. This implies that the inflows of

foreign direct investment lead to the increased exports of a host country. Similar conclusions are de-

rived from the model of Purvis (1972), which relaxes the assumption of identical factor endowments.

Despite leading to different conclusions, the previously discussed models follow the same logic and

use the same analytical framework. The differences in conclusions are caused by differing assump-

tions (Kojima,1975). The models were generalised by Markusen (1983) and Wong (1986), who de-

termined conditions under which Heckscher–Ohlin–Samuelson framework implies complementarity

or substitutability of factor movement and international trade. The theoretical models based on the

Heckscher–Ohlin–Samuelson framework are among the most commonly used models as a basis of

specifying the empirical models of the impact of foreign direct investment on host country exports

(Camarero & Tamarit,2004; Dash & Sharma,2011; Goldberg & Klein,1997; Jawaid, Raza, Mustafa,

& Karim,2016).

Kojima followed a different approach, basing his models on Ricardo's theory of comparative ad-

vantage. His models imply that the inflow of foreign direct investment causes the increase in host

country exports if the investment targets sectors in which the country of origin has a comparative

disadvantage and the host country has a comparative advantage. In the opposite case, there would be

a substitutive relationship between the variables and a decrease in the host country (Kojima,1973,

1975, 1982). Ozawa (1979) further explicated the host-country implications of Kojima's models. This

group of models is referenced as a theoretical framework in a number of empirical studies analysed in

the remainder of this paper (Li, Su, Tao, & Lobont,2019; Lin, 1995; Sun,1998; Tekin,2012).

During the 1980s, classical trade theory faced a revolution after economies of scale, product differ-

entiation and imperfect competition were taken into account by the new theoretical models (Helpman

& Krugman,1987; Krugman,1980). These models comprise a stream of literature commonly referred

to as the new trade theory. The new trade theory models exploring the relationship between foreign

direct investment and international trade can be classified into three main categories: models of hor-

izontal, vertical and complex foreign direct investment. All groups of models can be used to describe

the impact of foreign direct investment on both host and home country exports (Moosa,2002; Yokota

& Tomohara,2009).