EFFECTS OF FOREIGN DIRECT INVESTMENTS ON HOME AND HOST ECONOMIES AND ON THE PROFITABILITY OF INVESTING FIRMS

Abstract

Over the last two decades, FDI flows have increased nearly six-fold across the world. These surges in FDI flows have led to extensive research on the topic in economics and business literature. However, the focus of existing research has mostly remained limited to the study of the relationship between total inward FDI flows and the host (FDI receiving) country’s GDP. The current literature also points to the inconclusiveness and the uncertainty of the results of the existing empirical studies on this topic. Recent literature on this topic also indicates that the two distinct forms of FDIs, greenfield investments and cross-border mergers and acquisitions (CB-M&As), can have different effects on the domestic economies. Nevertheless, the effects of the two forms of FDI on the key macroeconomic variables of host economy such as competition, export propensity and productivity have largely remained under-researched. Using a cross-country time series data, this dissertation contributes to the current literature through an integrated study, investigating the effects of both forms of FDI Inflows and Outflows on the host and the home economies and on the profitability of MNCs. The Autoregressive Distributed Lag (ARDL) estimates show the following results: (a) A negative long run relationship between CB-M&As and the welfare (per capita GDP) of the host economies; (b) a positive long run relationship between CB-M&As and the welfare (per capita GNI – Gross National Income) of home economies; (c) positive long run relationships between greenfield investments and welfare of both host and home economies; and (d) a positive long run relationship between CB-M&As and the long run profitability of MNCs. The country specific results show mixed trends but are found to be consistent with that of panel data results. Based on country specific results this study provides an additional explanation for the uncertainty surrounding the effects of FDIs by showing that the two forms of FDI can have varying effects on individual countries. Therefore, for sustainable FDI benefits, in the long run, the host country’s FDI policy should ensure the existence of efficient competition in its economy.