foreign direct investment research topics

Foreign direct investment and development: Insights from literature and ideas for research

Christine zhenwei qiang, roberto echandi, jana krajcovicova.

For many decades, academia and policy making has debated about the role of Foreign Direct Investment (FDI) in development. Such question has been very difficult to elucidate, not only because the discussion has being colored by many ideological dogmas, but also because the very fundamental characteristics of cross border investment have evolved over time. Indeed, over the last five decades, the paradigm of FDI has changed significantly. Traditionally FDI has been visualized as a flow of capital, flowing from “North” to “South” by big multinational enterprises (MNEs) from industrial countries investing in developing countries, traditionally aiming to exploit natural resources in the latter or to substitute trade as a means to serve domestic consumption markets. Such paradigm has changed significantly.   Today, FDI is not only about capital, but also --and more important-- about technology and know-how, it no longer flows from “North” to “South”, but also from  “South” to “South” and from “South” to “North”. Further, FDI is no longer a substitute of trade, but quite the opposite. Today FDI has become part of the process of international production, by which investors locate in one country to produce a good or a service that is part of a broader global value chain (GVC). Investors then, have become traders and vice-versa. Moreover, FDI is now not only carried out by only big MNEs, but also from relatively smaller firms from developing countries that are investing in countries beyond their home countries. Last but not least, cross-border investment is no longer only about portfolio investment and FDI. International patterns of production are leading to new forms of cross-border investment, in which foreign investors share their intangible assets such as know-how or brands in conjunction with local capital or tangible assets of domestic investors. This is the case of non-equity modes of investment (NEMs) –such as franchises, outsourcing, management contracts, contract farming or manufacturing.

Challenges in an evolving context: how to maximize the benefits of cross-border investment? Some countries attract large quantities of foreign investment and never move up the value chain.  In order to maximize the development impacts of foreign investment, a suitable investment policy framework is needed. The difficulty starts when decision-makers try to identify what “investment policy” is, or should be. A huge range of stakeholders, problems, institutions, legal instruments, and administrative tools are captured in that concept. Countries get lost. Even if policy-makers can identify a destination, it can be difficult to know where to start, to know which concrete actions will have the most impact. Investment policy encompasses a huge range of issues, and for a state that hopes to reap the benefits of foreign investment, it can be difficult to know where to start. A common mistake is that countries create investment policies to react to the challenges posed by the type of investment they are already receiving. Instead, a state also needs to identify the opportunities to receive greater benefits from existing investments, and consider what other types of investment the country needs in order to develop. Many developing country governments face difficulties in investment policy formulation, coordination and implementation, thus undermining their competitiveness and compromising the ability to attract and maximize the benefits of investment.   What insights does recent FDI policy analysis offer?   As a first stage in tackling these challenges, a recent working paper, “ Impacts of Investment Policy in the Global Modern Economy: A Review of Literature ” by Roberto Echandi, Jana Krajcovicova and Christine Zhenwei Qiang examined econometric and case-study evidence about how good investment policies can help maximize the potential benefits of foreign direct investment (FDI). That includes insights about transforming domestic productive sectors by increasing participation in global value chains.   Two fundamental observations can be drawn from the literature:   With adequate policies, FDI can provide significant economic and social benefits to host countries. For example, FDI can help create higher-skilled and better-paid jobs, promote the transfer of knowledge, raise productivity, and diversify and upgrade the value‐added component of exports—all of which affect a country’s ability to integrate with global value chains. However, such benefits are not automatic. Designing and implementing appropriate investment policies is required if potential of cross border investment is to be maximized. Different contexts call for different policy mixes. The question is then how can governments count with a framework   Specifying policy interventions responding to the respective country and investment contexts may be required.   There is a need to come up with a framework sophisticated enough to differentiate different types of investment and at the same time be simple enough to be practical for policy making. Although a substantial body of literature on the various impacts of investment policy and FDI exists, findings are derived from either an extremely case‐specific research focus --such as an analysis of FDI experiences in one particular country and sector during a given period-- or an overly broad focus  --as if FDI were a homogenous phenomenon. Very few studies differentiate within types of FDI in their analysis. The resulting gap makes it difficult for policymakers to organize the multiple, complex variables affecting a country’s ability to maximize investment benefits.   Could research become more “digestible” for policymakers?   The paper suggests applying a logical framework that takes into account investor characteristics and motives in a more systematic manner.  In fact, an FDI typology based on the key motivations of investors when choosing locations – whether they are seeking natural resources, serving domestic markets, locate segments of international production processes, or seeking to acquire strategic assets – has already been applied by academics --see for example, a book by John H. Dunning and Sarianna M. Lundan -- and has proven to be effective in guiding strategic policy discussions on national investment agendas led by World Bank Group teams in many countries.   A few studies cited in the working paper already adopt the FDI-motive-based approach, but a systematic application of it would allow to design effective reform packages around distinct investor characteristics. Future research could also continue refining the methodological approach to account for the specifics of sectors and activities undertaken by various actors in the global value chains.   Governments are reforming, and they require knowledge that is both cogent and applicable to their specific contexts. While abundant and useful literature has been produced so far, tailoring research to the challenges of investment policy in practice will increase its relevance for countries seeking to enact reforms.   Do you have ideas on how to better tailor research to distill practical policy lessons? Let us know.

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World Investment Report

The World Investment Report focuses on trends in foreign direct investment (FDI) worldwide, at the regional and country levels and emerging measures to improve its contribution to development.

It also provides analysis on global value chains and the operations of multinational enterprises, with special attention to their development implications.

Overviews of the report are available in all official UN languages.

Analysis of the trends in FDI during the previous year, with especial emphasis on the development implications.

Ranking of the largest transnational corporations in the world.

In-depth analysis of a selected topic related to FDI.

Policy analysis and recommendations.

Statistical annex with data on FDI flows and stocks at the country level.

World Investment Report 2024

Read the Report Online

World Investment Report 2024: Weaker global flows show much work ahead for a more inclusive future

Annex tables.

20 June 2024

Publications

World Investment Report 2023

Country fact sheets, regional fact sheet.

Regional Trends

Foreign direct investment (FDI)

Foreign Direct Investment (FDI) lies at the heart of globalisation and serves as an important conduit for the transfer of capital, goods, services, and information across economies. Measuring FDI helps us better understand how countries are interconnected and integrated into today’s global economy. The OECD provides operational guidelines on how FDI activity should be measured and sets global standards for collecting FDI statistics. The OECD also disseminates comprehensive and comparable FDI data as well as in-depth insights into global FDI trends to support economic analysis and inform policy decisions and enhance investment strategies.

• More on the OECD Benchmark Definition of Foreign Direct Investment
• Access the latest FDI statistics collected by the OECD

Select a language

Key messages, setting international standards for measuring fdi statistics to enhance the quality and comparability of data.

The value of FDI statistics depends on their alignment with international standards. 

Better quality and comparable data across countries provide more meaningful measures of investment by multinational enterprises. The 4th edition of the OECD’s Benchmark Definition of Foreign Direct Investment (FDI), offers comprehensive and detailed guidance for compilers and users on the coverage, collection, and dissemination of FDI statistics. 

International statistical standards are updated every 15-20 years to reflect broad global changes, such as new ways corporates structure themselves, technological shifts, evolving investment needs and production patterns. The OECD, alongside the international statistical community, initiated a new update cycle in 2020 with the goal of revising current manuals on macro-economic statistics. The 5th Edition of the OECD’s Benchmark Definition of FDI is expected in 2025.

Promoting the use of international statistical standards for FDI

The OECD works closely with officials from Central Banks and National Statistics Offices of member states as well as partner economies to promote the implementation of FDI statistical standards. The OECD also carries out FDI statistics reviews of non-member countries to assess how their data and methods are compliant with international guidelines and promotes the exchange of best practices, including through capacity building programmes to boost regional or international dialogues.

Monitoring the latest FDI trends to inform decision-making on investment

Timely, reliable and comparable FDI statistics are essential for assessing developments in FDI activity globally and assisting policymakers in making informed investment policy decisions. The OECD regularly monitors the most recent FDI trends and provides in-depth insights on FDI flows for various OECD and G20 economies in its biannual “FDI in Figures” reports. The OECD also collects and disseminates FDI statistics broken down by partner economy and industry, as well as numerous additional breakdowns, to aid in the analysis of FDI and its impact on home and host economies. 

Foreign Direct Investment in the first quarter of 2024

• Preliminary estimates in Q1 2024 show global FDI flows increased by 78% compared to Q4 2023 , reaching USD 462 billion. However, on a year-on-year basis, global FDI flows remained comparable to the level recorded in Q1 2023.
• Top recipients of FDI inflows worldwide in the first quarter of 2024 were the United States (USD 76 billion), the Netherlands (USD 22 billion), and Brazil (USD 21 billion).
• Top sources of FDI outflows worldwide were the United States (USD 131 billion), the Netherlands (USD 71 billion) and Japan (USD 45 billion).
• OECD FDI inflows reached USD 194 billion in Q1 2024, up from very low levels recorded in Q4 2023. [1] However, they were only 2% up from their level recorded in Q1 2023.
• OECD FDI outflows more than doubled in Q1 2024, to USD 430 billion, compared to levels recorded in Q4 2023. Nonetheless, they had a more moderate year-over-year growth of 14% in contrast to the levels observed in the first quarter of 2023.

[1] By definition, inward and outward FDI worldwide should be equal, but in practice, there are statistical discrepancies between inward and outward FDI. Unless otherwise specified, references to ‘global FDI flows’ refer to the average of these two figures.

OECD FDI inflows dropped to USD 26 billion in Q4 2023, impacted by significant negative levels of FDI equity flows in the Netherlands in 2023, as some multinationals relocated their conduit activities to other countries in the last quarter of the year. See FDI in Figures – April 2024.

Global foreign direct investment flows declined in 2023, for the second consecutive year

Global FDI flows dropped by 7%, continuing a downward trend and failing to reach pre-pandemic levels for the second year in a row. Mergers and Acquisitions also hit a ten-year low. Downswings were recorded for more than two-thirds of OECD economies and other major FDI recipients, such as the People’s Republic of China, who received record-low FDI flows. Despite the drop, the United States was the leading FDI recipient worldwide, followed by Brazil and Canada. 

Published twice a year, “FDI in Figures” provides analysis on key developments and trends in global FDI activity, using the most recent official FDI statistics and projects data on Mergers and Acquisitions and Greenfield investment.

International statistical standards support a better analysis of FDI and its impact

The 4 th edition of the OECD’s Benchmark Definition of Foreign Direct Investment (BD4), released in 2008, makes recommendations for compiling FDI statistics that result in more meaningful measures of FDI. Among those is the separate identification of capital channeled through special purpose entities (SPEs), whose role is to facilitate the internal financing of multinational corporations but that have little or no physical presence in an economy. Excluding such entities from FDI statistics offers a much better picture of the amount of FDI that remains in an economy and is not simply passing through.

BD4 also recommends presenting statistics according to the economy of the ultimate investor in addition to the immediate investor, to identify the economy of the investor who ultimately controls the investment and thus bears the risks and reaps the rewards. 

Disaggregated statistics provide further insights on FDI by partner economy and industry

FDI statistics disaggregated by partner economy and by industry for 2022 are available in the online OECD International Direct Investment Statistics database. The database includes detailed indicators on inward and outward FDI flows, income and positions by main destination or recipient economy, and by industry, accounting for resident special purpose entities. Additional indicators are also made available, such as inward FDI positions by ultimate investing economy and a cross-classification of FDI by region and by industry. 

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Related policy issues

• Capital flows and investment standards The OECD helps countries reap the benefits of international capital flows – the movement of money and investments across borders - while ensuring resilience to volatility. The OECD Codes of Liberalisation are the sole binding multilateral agreement among countries dedicated to openness, transparency and cooperation of capital flow policies. In addition to overseeing the Codes, the OECD seeks to contribute to a better understanding of evolving trends and policy design issues in an increasingly complex global financial system. Learn more
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• Investment and national security Foreign investment is associated with benefits for home and host economies which is why countries around the world have gradually opened up. Investment from other countries supports growth and development, creates jobs and enhances welfare. However, certain investments can have national security implications. Changes in the geoeconomic and geopolitical environment, and technological change require appropriate instruments and policies to manage this risk, while not unduly constraining beneficial investment. Learn more
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• Sustainable and resilient infrastructure Sustainable and resilient infrastructure is designed and built to withstand and recover from disasters and disruptions, such as extreme weather events or socioeconomic challenges. It is built to contribute to long-term sustainability goals while incorporating measures to enhance resilience to shocks and stresses. As infrastructure assets are being planned and developed, maintained and upgraded, it is critical that these objectives are taken into account. Ensuring financing is available and costs towards these considerations are made, will ensure that infrastructure assets are being adapted to the economic and social environment in which they operate. Learn more
• Sustainable investment Sustainable investment supports the expansion of an economy’s productive capacity while promoting decarbonisation and preserving our planet’s natural assets, driving job creation and skills development, and ensuring equal opportunities for all. Whether undertaken by foreign or domestic firms, it is key to raising living standards and achieving a better and more sustainable future for all. The OECD supports governments to create the right conditions for investment to flow into the most sustainable and productive uses, both within the OECD and across diverse regions including Africa, Asia, Eurasia, Latin America, and the Middle East. Learn more
• The future of investment treaties Over 2 500 investment treaties are in force today and shape the terms and treatment of certain foreign investments. Most treaties are decades-old and were designed under different conditions, with different concerns in mind, and without experience of how these treaties would be used and interpreted. Many governments are interested in updating their older treaties to adjust them to better account for the climate-crisis, to clarify their content and obligations, and to ensure greater predictability of outcomes for governments and investors. Governments from 99 jurisdictions use the OECD to advance these considerations. Learn more

Articles on Foreign direct investment

Displaying 1 - 20 of 42 articles.

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African countries lost control to foreign mining companies – the 3 steps that allowed this to happen

Ben Radley , University of Bath

Projects funded by the World Bank Group’s private sector arm fuel violent conflict – it’s time to reform the system

Brian Ganson , Stellenbosch University ; Anne Spencer Jamison , Copenhagen Business School , and Witold Jerzy Henisz , University of Pennsylvania

Agoa trade deal talks: South Africa will need to carefully manage relations with the US and China

Arno J. van Niekerk , University of the Free State

India could soon be the world’s third biggest economy – NZ needs to build the trade relationship urgently

Rahul Sen , Auckland University of Technology

Hosting the World Cup: what Qatar can learn from South Africa about nation branding

Brendon Knott , Cape Peninsula University of Technology

Nigeria’s 2023 budget is a plan of despair and won’t change the tempo of the economy

Stephen Onyeiwu , Allegheny College

Foreign investment into Nigeria has fallen sharply: rights and freedoms may be one reason

David Fadiran , University of Cape Town

Fed keeps focus on US economy as the world tilts toward a recession that it may be contributing to

D. Brian Blank , Mississippi State University

Is the world retracting from globalisation, setting it up for a fifth wave?

Elsabe Loots , University of Pretoria

Risky business: What protests and blockades could do to Canada’s global reputation

Julian Campisi , University of Toronto

How the Bui Dam set up China’s future engagement strategy with Ghana

Kwame Adovor Tsikudo , University of Illinois at Urbana-Champaign

COVID-19 has shone a light on how globalization can tackle inequality

Sylvanus Kwaku Afesorgbor , University of Guelph ; Binyam Afewerk Demena , International Institute of Social Studies , and Peter A.G. van Bergeijk , International Institute of Social Studies

Areas in Africa with more Chinese-backed projects were more likely to experience protests

Bruno Martorano , United Nations University ; Francesco Iacoella , United Nations University ; Laura Metzger , Harvard Kennedy School , and Marco Sanfilippo , Università di Torino

As China’s trade war with Australia shows, New Zealand must be careful to balance its own economic priorities

Hongzhi Gao , Te Herenga Waka — Victoria University of Wellington ; Ivy Guo , Te Herenga Waka — Victoria University of Wellington , and Monica Ren , Macquarie University

Zimbabwe wants to raise money through a sovereign bond. Why this is  ill-advised

Misheck Mutize , University of Cape Town

How coronavirus is changing the rules on foreign investment in essential areas

Anastasia Ufimtseva , Simon Fraser University ; Daniel Shapiro , Simon Fraser University , and Jing Li , Simon Fraser University

China’s investments in Africa: a fresh lens offers more balanced insights

Simon Manda, PhD , University of Zambia

African countries aren’t getting as much as they should from foreign direct investment

Muazu Ibrahim , University for Development Studies

How states rocked by conflict could harness funds from their diasporas

Victor Odundo Owuor, University of Colorado Boulder

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Article Contents

I introduction, 2 good advice neglected, 3 methods and absences, 4 paths forward, 5 conclusion.

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Research Handbook on Foreign Direct Investment

• Article contents
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David Schneiderman, Research Handbook on Foreign Direct Investment, European Journal of International Law , Volume 31, Issue 4, November 2020, Pages 1576–1583, https://doi.org/10.1093/ejil/chaa099

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Even as research handbooks have been proliferating in English-speaking academic circles, only a handful have addressed the subject of international investment law. This new volume, for this reason, is a welcome addition to burgeoning investment law scholarship. Handbooks are intended to provide a survey of the literature and guide future research in any given field. The editors similarly describe their task as not only achieving these ends but suggesting ‘new ways forward . . . raising fundamental conceptual questions as well as addressing practical problems and challenges by engaging different schools of thought and preconceptions’ (at xiii). They have recruited ‘28 leading scholars and junior scholars from six continents’ (at 3) to complete this task. The volume is structured to deliver chapters on a number of themes, including foreign direct investment (FDI) ‘foundations’, investment agreements, country and regional studies and a section on ‘challenges and contentious issues’. Aside from the chapters on political economy, services and investment contracts, the bulk of the volume does not move much beyond the traditional confines of the legal regime for the protection of foreign investment. But there is still much here for readers to chew on.

A volume this large, and with these outsized ambitions, undoubtedly was an enormous editorial task. Inevitably, there will be an unevenness in tone, style and quality of contributions. There also arise interesting tensions, even contradictions, between the contributors. A pithy review such as this cannot aim be comprehensive. Only brief glimpses drawn from selected chapters can be provided, highlighting some interesting questions that arise amongst them. In the discussion that follows, I propose contrasting some of the book’s stronger chapters with some of its more problematic assessments of the field.

The volume begins with a valuable interdisciplinary contribution by Danzman that addresses the relationship between signing investment agreements (principally bilateral investment treaties, BITs) and attracting new FDI. Danzman surveys the extant literature and offers this qualified, but for many reassuring, conclusion: ‘enough studies . . . have found a relationship that it would be unwise to entirely discount any relationship’ (at 26). Several pages later, however, the assessment shifts. The record is now described as generating ‘weak and highly conditional evidence that these treaties meaningfully contribute to investment flows’ (at 31). Danzman affirms this impression by concluding that, because ‘the empirical record provides much weaker evidence of BITs’ purported benefits . . . political economists have generally become increasingly concerned that the potential benefits of maintaining BIT obligations are not worth the associated sovereignty trade-offs’ ( ibid .). It is curious that Danzman characterizes civil society opposition to BITs as ‘strident’ (at 29) when even political economists are expressing doubts about the benefits of signing BITs.

It would have been expected that this helpful review of the empirical evidence would have influenced, or at least shaped, claims made elsewhere in the volume. The verdict of ‘weak and highly conditional evidence’ (at 31) in support of a correlation between signing BITs and FDI, regrettably, appears not to have made much of an impression. One contributor, for instance, describes developing states’ rebellious attitude toward foreign investment protection as ‘tantamount to fiscal suicide’ (at 73) as they, otherwise, ‘stand to benefit significantly from the foreign investment regime’ (at 75). This author calls upon these states to, instead, ‘improve their positions by adopting strategies that would enhance their participation in the regime and the level of FDI they currently attract’ (at 75). It is urged, in another contribution, that EU states not too quickly denounce intra-EU BITs, as this ‘could pose threats to inward investment in the EU as foreign investors could be less willing to invest in EU Member States, not knowing the status of their legal rights’ (at 445). The correlation is assumed to exist without any empirical evidence offered in support, and despite evidence to the contrary provided at the outset of this volume.

Schill and Gülay’s mapping exercise follows, surveying the variety of research methods and approaches adopted in the literature. Domestic law and international law readings of FDI are contrasted with public law, private law and public international law frames. A typology of research questions is sketched: descriptive, normative (or reformist) and theoretical are those into which investment law scholars typically will fall. A hard line is drawn between legal and non-legal methods of research. Interviews, Schill and Gülay claim, employ non-legal methods (at 51). My impression after conducting open-ended interviews as elements of both small and large interdisciplinary studies was just the opposite – these could be likened to the common law process of discovery or examination-in-chief. While they distinguish theoretical approaches from descriptive and normative accounts, as if theory does not inform descriptive and normative scholarship, it is refreshing to see an acknowledgment that scholarship ‘is intertwined with politics and ideological underpinnings’ and that these will influence the choice of research questions taken up by scholars. ‘None of this is problematic’, Schill and Gülay write, ‘so long as legal researchers are forthright about their underlying assumptions and do not claim to be value neutral’ (at 70). This call for forthrightness – together with more reflexivity about the place of scholars in the production of investment law – coming early on in the volume, looks like an invitation to the other authors to be more honest about influences and approaches. The invitation too often gets ignored.

Instead, many of the chapters purport to be neutral and descriptive, adopting methods associated with formal legal rationality. 1 Chapters on ‘Reform Trends’ and ‘Standards of Investor Protection’, for instance, briefly canvass issues with little in the way of an evaluation of their merits. In a chapter on African investment law, an unwieldy amount of detail is presented to readers. This chapter would have benefited from the use of tables, such as those included in the chapter on Australia and New Zealand. Other chapters on Central and Eastern Europe and Latin America are helpful and informative. On occasion, some good questions are asked: for instance, if Australia has agreed to omit investor-state dispute settlement (ISDS) with New Zealand in its side agreement to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), is it defensible to include ISDS in agreements with Canada and Japan (at 433)? If questions are raised, and sometimes answered, at other times difficult questions are elided entirely. One is prompted to ask, in reading the chapter on Asia, why is Japan opposed to the EU’s investment court? Why does China get so little attention? If ‘nothing stands in the way, in theory, of tribunals taking account of human rights arguments’ (at 645), as is argued in a technically sound chapter on human rights, what extra-legal factors explain their reluctance to do so? Other chapters fail to provide sufficient guidance to the existing literature. In a discussion of consent and applicable law, missing in action is Zachary Douglas’s volume that, among other things, helpfully addresses these questions. 2 In a useful chapter on services, no mention is made of Jane Kelsey’s critical contribution to the field. 3 In the chapter on investment contracts, Jean Ho’s terrific book on this subject is neglected. 4 Readers surely would have benefited from being directed to this scholarship.

Contributions with a more normative bent raise other questions. In an assessment of Third World Approaches to International Law (TWAIL), meant to address ‘Foreign Investment Law and Developing Countries’, Hyppolite urges these states to reject advice issuing out of this loose scholarly collective. 5 Developing countries are encouraged, instead, to deepen their engagement with the regime rather than ‘seek to upend’ it (at 76). They should, in short, aspire to be ‘constructive’ by seeking improvements (at 77, 119). It is not clear with whom developing countries might negotiate such improvements: experience has shown that most capital-exporting states are reluctant rule takers. 6 Nor are the expected benefits of seeking ‘improvements’ as unequivocal as Hyppolite suggests. Johnson’s chapter on sustainable development, which follows next, offers quite a different assessment, backed up by abundant research, suggesting that FDI may not yield these assumed economic improvements. These studies indicate that FDI may have cumulative negative effects on natural and human environments (at 128). Protecting investors in countries with poor human rights and environmental records, Johnson concludes, rewards political leadership without the prospect of enhancing the ‘rule of law’ within these states (at 146).

Sándor’s instructive chapter on Central and Eastern Europe is one of the few to address the power imbalance that structures the regime. The purported ‘grand bargain’ – trading sovereignty for economic development – seems ‘less justified and more one-sided’, Sándor writes (at 469). Despite the proliferation of BITs in the 1990s, rather than economic improvement, the region instead experienced economic decline (at 469). Yet any mention of power is absent in the chapter on North America, where the United States has dominated the region in important respects. Instead, each of the states party to the North American Free Trade Agreement (NAFTA) are portrayed as having entered into trade and investment arrangements on something like a level playing field. Yet, as Magraw admits in passing, it was the United States that demanded the inclusion of NAFTA’s investment chapter, consistent with its BIT practice at the time (at 536). Little else is said on the subject. Just as US investment law and policy determined outcomes then, the other state parties have been directed by the Trump administration to severely limit ISDS in NAFTA 2.0 now. 7

By aiming to secure goals associated with sustainable development (SDGs), it is claimed that a ‘better balance’ between investor rights and social and environmental protection can be achieved (at 565, 570). Yet Schacherer and Hoffman are doubtful that ready-to-hand solutions will provide a better balance. They express scepticism about limiting BIT protections to investments that contribute to host state economic development due to the difficulty of interpreting such a limitation (at 572). Limiting the benefits of BITs to investors having a ‘substantial business activity’ in their home state also may not ‘prevent treaty shopping’ due to, again, the lack of clarity around the term ‘substantial’ (at 573). 8 The addition of annexes on indirect expropriation, incorporating the US Supreme Court multi-factor analysis in Penn Central , 9 allows for ‘better balancing’, they say (at 577). Turning from reform to the regime’s implications for sustainable development, the authors gingerly dance around the implications of the spate of disputes launched against Spain for altering its renewable energy policy. These cases ‘highlight how delicate it can become for states to balance their policies with investor’s interests and to adopt new policy and regulation approaches in order to promote energy transition’ (at 583, emphasis in original). Describing as ‘delicate’ the 40 investment claims initiated against Spain and other states for initiating policy changes in renewable energy massively understates their implications. 10 If much of the chapter reads as a defence of the status quo, the authors, to their credit, take a stand against performance requirements (not a common feature in BITs) as these ‘may’ be contrary to sustainable development goals (at 578). Even then, they maintain that ‘further research is still needed as to how to align’ investor protections with SDGs (at 595). ‘Which standards can be avoided and which are absolutely indispensable’, they ask? This prudence is hard to comprehend after 20-plus years of investment treaty and arbitration experience. Moreover, no such caution was on display when the regime was under construction and aggressively promoted by capital exporting states and their allies. Why the hesitation?

This restraint is amplified in the chapter devoted to protection of the environment. The question asked by Robert-Cuendet is whether ISDS is ‘suitable’ for resolving environmental disputes even though the right balance between ‘economic rationality and public policy . . . has not yet been found’ (at 599). Determining suitability is resolved, in part, by characterizing a number of historic disputes as being not about the environment but about rent seeking. The Ethyl claim, regarding a ban on the use of the gasoline additive MMT and settled by the Government of Canada with the payment of a sum of damages, is described as concerning a ‘purely protectionist measure’ (at 609). 11 It is true that Canadian auto manufacturers were lobbying to have the additive banned because it gummed up on-board technology but there were, in addition, legitimate worries about harms to the human and natural environment. There was so much documented concern that the use of the additive was banned by numerous developed economies. 12 These facts entirely escape Robert-Cuendet’s analysis. Nor is any mention made of the precautionary principle, which calls for restraint in the opposite direction and upon which the Government of Canada relied in the Ethyl dispute. To similar effect, the author claims that the ‘real reason’ why Mexico chose to shut down Metalcad’s hazardous waste operation was because the ‘local population was hostile to the plant’ (at 609). 13 Yet the author never asks why the local population was hostile. Was it because peasants were duped into protecting Metalclad’s principal competitor, as the investor alleged? Or was it because the local populace was mobilized to oppose reopening of the site because it had previously leaked dangerous waste into local water supplies? If so (and the research reveals this to be the case), then the ‘real reason’ for local opposition was genuine public health concerns. 14 Yet Robert-Cuendet issues the verdict that in these disputes states invoked the environment as an ‘alibi’ (at 618). This author, like many others in this field, prefers to rely on simplified and self-justifying characterizations promoted by the regime’s norm entrepreneurs (investment lawyers, arbitrators and scholars). 15 Robert-Cuendet, as do many others, appears reluctant to dig beneath the surface of things. Even if Robert-Cuendet expresses worries about the limits that investment law places on state environmental policy, 16 she concludes that ISDS is ‘not unsuitable’ for resolving environmental disputes (at 615). It is hard to reconcile this diagnosis (muddled by the double negative) with Robert-Cuendet’s conclusion that the ‘very demanding character of investment standards, with their vagueness, can jeopardize the enactment of environmental policies’. Matters are made no clearer by calling for a ‘total reinvention’ of investment law (at 618). The author of this chapter appears to want to have it both ways – she wants to both issue verdicts supportive of the regime but also flag investment law’s threats to legitimate measures that protect the environment.

Why this wobbly stance vis-à-vis investment law’s ‘demanding’ disciplines? Is the record, by now, not yet clear? Are the priorities of the regime’s norm entrepreneurs not already self-evident? Why not issue more decisive verdicts about this experience? Hand in glove with this penchant to defend the regime is the need to disparage those who take a more oppositional stance. Many authors implicitly issue verdicts regarding the merits of those critiques. There is only the ‘current perception’ that ISDS is for the ‘most part negative’ (at 580). States have responded to ‘“flaws” of the traditional system of investment arbitration’ (at 587) – the scare quotes reducing this to mere allegation. In a footnote accompanying this sentence, it is claimed that ‘these concerns include the (perceived) need for systemic reform’ (at 587 n.172). Does the author mean to say that these concerns are only perceptions and, therefore, not real? What could otherwise be meant? Critiques of the regime, it is said, are ‘not at all well founded’ (at 614). Nothing more is said on the matter. The dispute settlement machinery is described as ‘mechanisms that appear, from the outside, to be exorbitant privileges’ (at 616). Presumably, those inside the machine have a better, more objective, perspective? It is curious that critical accounts get derided yet there is much evidence at hand to evaluate them. As Schill and Gülay insist, there should be more forthrightness from authors about their preferences. And they should not issue simplistic verdicts without further effort on their part.

The editors are not to be blamed for these defects. They did, however, choose to recruit authors, the majority of whom do not hold a university teaching position. Of the 29 contributors, almost one third (nine) are self-described (a number of them full-time university instructors) as participating in some aspect of the arbitration industry. Amongst all of the chapters in this very large volume, I can identify only a handful that express scepticism about the merits of the regime. This is not to say that those involved in arbitration should be disqualified from contributing to such a handbook – far from it. It is only to acknowledge that they are likely to issue verdicts that favour, if not the status quo, reform efforts that do not upset too much expectations for professional enrichment. It makes sense, after all, that many of those writing in the field of investment arbitration seek recognition and reward from those practising within it. Should they wish to be invited to conferences convened in glamorous locales, contribute to festschrifts in honour of this or that investment law notable and, ultimately, serve as counsel or arbitrator, how can they be expected to behave otherwise? Whatever their motivation, those who are professionally engaged with the regime are inclined to be more supportive of it and less inclined to think there are significant problems that need remedying. There are fewer 17 (but, nonetheless, gratifying) rewards for those who choose to remove themselves from the intimate embrace of practice. In a field as politically fraught as this one, this is an unfortunate state of scholarly affairs, especially as there is little likelihood of things changing any time soon. It will remain, for the most part, dominated by the regime’s defenders – its norm entrepreneurs – rather than more independently minded scholars who have no stake, other than an intellectual one, in the regime’s future.

This is what renders the Handbook , in sum, less than what the editors purport to offer in their Introduction. Despite differences in seniority and diversity of locales from which the authors are drawn, the overall tone of the volume ranges between hesitant embrace and enthusiastic hug. The upshot is that the collection does not raise many ‘fundamental conceptual questions’ or challenge too many ‘preconceptions’. There remains some ground for enthusiasm, however, as there are many valuable individual contributions, rendering the parts of this tome greater than the whole of it.

Max Weber’s term in his Economy and Society: An Outline of Interpretive Sociology , ed. Gunther Roth and Claus Wittich (University of California Press, 1978), at 974. Weber associates ‘legal rationality’ with facilitating capitalist relations of production by providing unambiguous, continuous and efficient administration of justice. It could be said, however, that investment law lacks some of the features Weber assigns to formal legal rationality given its unpredictable and contradictory outcomes.

Z. Douglas, The International Law of Investment Claims (2009).

J. Kelsey, Serving Whose Interests? The Political Economy of Trade in Services Agreements (2008).

J. Ho, State Responsibility for Breaches of Investment Contracts (2018).

See Eslava, ‘TWAIL Coordinates’, Critical Legal Thinking (2 April 2019), available at http://criticallegalthinking.com/2019/04/02/twail-coordinates/ .

I have addressed this bargaining asymmetry, as between the United States and South Africa, in Schneiderman, ‘Equality Promotion, Black Economic Empowerment, and Investment Rule Flexibilities’, 24 South African Journal on Human Rights (2009) 246.

Referring to the Agreement between the United States of America, the United Mexican States, and Canada (13 December 2019), c. 14, available et at https://bit.ly/3fKJlwM .

The inclusion of criteria may help to improve this situation, they admit.

Penn Central Transportation Co. v. New York City, 438 US 104 124 (1977).

See Freya Baetens, ‘Renewable Energy Incentives: Reconciling Investment, EU State Aid and Climate Change Law’, EJIL: Talk! (18 December 2019), available at https://bit.ly/2VcmZuD .

Ethyl Corporation v Canada, Decision on Jurisdiction, Ad Hoc Tribunal (UNCITRAL) 7 ICSID Rep 12 (24 June 1998).

The Ethyl dispute together with the scientific evidence in support of the ban are discussed in detail in D. Schneiderman, Constitutionalizing Economic Globalization: Investment Rules and Democracy’s Promise (2008), at 130–133.

Metalclad Corp v. Mexico (Award), Ad hoc—ICSID Additional Facility Rules, ICSID Case No ARB(AF)/97/1 (25 August 2000).

The Metalclad dispute and local opposition to the investment are discussed in detail in Schneiderman, supra note 12, at 82–86.

On my characterization of investment law’s norm entrepreneurs, see Schneiderman, ‘The Paranoid Style of Investment Lawyers and Arbitrators: Investment Law Norm Entrepreneurs and their Critics’, in C. L. Lin (ed.), Alternative Visions of the International Law on Foreign Investment: Essays in Honour of Muthucumaraswamy Sornarajah (2016) 131, at 149–152.

For this purpose, the negative example of Clayton and Bilcon of Delaware Inc. v. Government of Canada – Award , 17 March 2015, PCA Case No. 2009-04, is used to good effect.

As Brecht so aptly observed, to ‘displease the possessors is to become one of the dispossessed’, in Brecht, ’Writing the Truth: Five Difficulties’, in B. Brecht, Galileo (Eric Bentley, ed.) (New York: Grove Press, 1966) pp. 133–150 at 134.

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Five decades of research on foreign direct investment by MNEs: An overview and research agenda

Justin paul.

a Graduate School of Business Administration, University of Puerto Rico, San Juan, PR 00925, USA

María M. Feliciano-Cestero

b Graduate School of Business Administration, University of Puerto Rico, San Juan, PR 00925, USA

Associated Data

Despite the significance attached to foreign direct investment (FDI) by Multinational enterprises (MNEs), there are is no comprehensive review of the FDI literature. Moreover, those that have been published, focus on subsets of FDI. This review systematically examines the empirical as well as theoretical research on FDI through an analysis of 500 articles published during the last five decades. Theoretical models, methods, context, and contributions to scholarship were reviewed. We strive to highlight the key theories, paradigms, and articles and provide directions for future research. We conclude that FDI has evolved as the most significant area of international business.

1. Introduction

Foreign direct investment (FDI) by multinational enterprises (MNEs) represents one of the most researched phenomena in international business ( Blonigen, 2005 , Werner, 2002 , Paul and Singh, 2017 ). However, most reviews of the FDI literature do typically focus on a specific subset of FDI only (e.g., Buckley and Casson, 2009 , Chan et al., 2006 , Meyer, 2003 , Blonigen, 2005 , Fetscherin et al., 2010 , Klier et al., 2017 , Paul and Benito, 2018 ). For instance, Meyer (2004) surveyed the research on FDI spillovers in the context of emerging market economies. Chan et al. (2006) examined the interdependencies between FDI and MNE foreign-market-entry strategies. Blonigen (2005) reviewed past research on host-country-specific determinants of FDI. Buckley and Casson (2009) analyzed the progress of FDI research and internalization theory. Fetscherin, Voss, and Gugler (2010) conducted an interdisciplinary literature review on FDI in China.

Prior research shows the linkage between different variables such as corporate governance factors, entry and establishment modes, subsidiary performance and location choices ( Dikova, 2009 , Dikova and Sahib, 2013 , Lien et al., 2005 , Filatotchev et al., 2007 , Ambos et al., 2006 , Dikova and Van Witteloostuijn, 2007 , Ambos et al., 2011 , Hertenstein et al., 2017 ). In this context, our goal is to come out with the most comprehensive review of the MNE-FDI literature. We focused on FDI that occurs when MNEs invest in assets in foreign countries and establish some form of a subsidiary to execute market-seeking, strategic asset-seeking and/or efficiency-seeking activities ( Dunning, 1993 , Dunning, 1998 ). With coverage of all topics under FDI, our review highlights specific gaps in the extant literature and offer directions for future research.

Over the past four decades, MNE-FDI research has evolved from the analysis of investment flows to finer-grained investigations. This review includes topics ranging from the macro-level studies dealing with Outward FDI (OFDI) and Inward FDI (IFDI) to micro-level antecedents (motives for undertaking FDI), characteristics (mode of entry and growth strategies), and performance outcome of foreign subsidiaries of MNEs and international joint ventures (IJVs). It is worth to mention that FDI has been a popular and widely researched subject among both business and economics scholars.

The remainder of this review is structured as follows: In the next section, the methodological approach is described. The findings of the analysis are reported in section three. Similarly, we discuss some of the key contributions to the FDI literature focusing on theories and variables. Dominant theories applied were identified -including the eclectic OLI (Ownership, Location, Internalization) paradigm and internalization theory, amongst others- and provide a path to contrast the more established theories with those more recently introduced such as Conservative, Predictable and Pacemaker (CPP) model. Further, we provide a citation analysis of the most impactful articles and authors in the last five decades of research. Next, we identify the most widely used variables in FDI research such as IFDI and OFDI, locations and determinants, economic growth, FDI spillover effects, entry modes, MNE strategy, etc. Afterward, we report dominant research methodologies including statistical approaches. Finally, we provide suggestions for future research regarding theories, content, and methodology. The value of this review lies in its breadth and the exhaustiveness of the literature identified. It complements the focused sub-analysis of the past and therefore represents a valuable base reference tool for future MNE-FDI research.

2. Methodology

Systematic literature review articles could be of different types, namely – structured review focusing on widely used methods, theories and constructs ( Rosado-Serrano et al., 2018 , Canabal and White, 2008 , Paul and Singh, 2017 , Kahiya, 2018 , Hao et al., 2019 ); Framework based ( Paul & Benito, 2018 ), hybrid (Narrative with a framework) for setting future research agenda ( Paul and Singh, 2017 , Kumar, 2019 ), theory-based review ( Gilal et al., 2019 , Paul, 2019 ), meta-analysis ( Knoll & Matthes, 2017 ), bibliometric review ( Randhawa et al, 2016 ), Review aiming for model/framework development ( Paul and Mas, 2019 , Paul, 2019 ).

We deployed the process of a structured systematic literature review followed in widely cited review articles ( Keupp and Gassmann, 2009 , Canabal and White, 2008 , Rosado-Serrano et al., 2018 ). Our starting point was a content analysis of prior reviews of the FDI literature on different sub-themes (i.e., Meyer, 2003 , Blonigen, 2005 , Buckley and Casson, 2009 , Chan et al., 2006 , Fetscherin et al., 2010 , Dikova and Brouthers, 2016 , Paul and Singh, 2017 ). Next, we performed a keyword search across selected online databases, including Business Source Premier, JSTOR, ScienceDirect, ProQuest, and Google Scholar for the articles on FDI published during the last five decades. Keywords included Foreign Direct Investment, FDI, Inward FDI, Outward FDI, Multinational Enterprise, MNE, and Foreign Subsidiary. In the first phase, we incorporated empirical papers that used at least one statistical technique based on primary or secondary data. However, based on feedback from experts, we then also included selected high-impact theoretical articles (based on citation counts- minimum 500 citations) to identify key contributions to theory.

Furthermore, we checked journal websites independently to ensure that we had captured all published articles — a process that yielded over 600 articles. In the first round, we only include those studies that mentioned the terms “FDI” or “foreign direct investment” in the title, abstract, or keywords list. However, we included some other articles, looking at the relevant universe of articles subjectively, with a holistic approach (following Keupp and Gassmann, 2009 , Grant-Smith and McDonald, 2017 ), by analysing the insights and FDI-related content such as greenfield investment, acquisition, and subsidiary. Next, we reduced the total number of articles by excluding those that were not published in journals included in the Social Sciences Citation Index (SSCI) completing our final sample with 500 articles. Additionally, we established a research agenda for the future, related to content (antecedents, characteristics, and outcomes of FDI) and methodology. Finally, we follow and expand on Keupp and Gassmann (2009) review method and create a structured catalog ( Appendix 1 ) of all reviewed FDI articles categorized by research topics, FDI characteristics, theories, and variables. Fig. 1 illustrates the organizing framework of this review.

Organizing framework.

3. Findings and discussion

Overall, we found that MNE-FDI research has not only been steady but that it has accelerated in-depth and breadth over the decades with a noticeable surge in publications in the last 15 years. It is observed that there is room for conceptual renewal within the field.

Altogether, 52 articles included in our sample were published between 1980 and 1999, 145 were published between 2000 and 2006, and 303 were published between 2007 and 2020. We suggest that one of the reasons for the surge in FDI research is the evolving nature of MNE internationalization characteristics, improvements in data availability from online sources after 1999, and advances in empirical techniques that lead to finer-grained analyses. The time period was divided with a break in 1999 because several agencies made the online data available for researchers by the late 1990s. This classification of time period helps us to understand the impact of such availability of data on the number of publications. In the following section, we will provide an overview of the key theoretical lenses that dominate MNE-FDI research. The goal is to identify seminal works, new theoretical developments, and interesting research ideas.

3.1. Review of theories

It was found that the most prevalent theoretical lenses applied in MNE-FDI research have been: (1) Internalization theory, (2) The eclectic OLI paradigm, (3) Product life-cycle (PLC) theory, (4) Institutional Theory, and (5) Resource Based View. Besides, theoretical models or frameworks such as (i) the Linkage, Leverage, Learning (LLL) model, (ii) the Springboard Perspective, and (iii) the CAGE Distance Framework, which were developed during the last decade, have been also used in FDI research. Those recent models deal particularly in the context of the rise of emerging market MNEs (EMNEs) and OFDI from developing countries. We discuss the scope of these theories/models critically in this section by classifying them as “widely-used theories/models” and “new theories/models”. Theories, models, and frameworks developed during the last two decades are included under the title “new theories/models”.

3.1.1. Widely used theories/models/paradigms

3.1.1.1. internalization theory.

Hymer (1976) contributed significantly to the development of this theory. Rugman (1980) provided an integrative framework for the existence of the MNE by integrating internationalization and internalization logic. Internalization ( Buckley and Casson, 1976 , Buckley and Casson, 2009 ) explains the motivation for firms to engage in FDI by exploring home-country (country of origin) internal firm-specific advantages (resources and/or capabilities) instead of relying on local factor endowments in individual foreign product markets ( Verbeke & Kano, 2016 ). Hennart, 1986 , Hertenstein et al., 2017 developed the internalization model further by extending it along with vertical and horizontal integration of MNE-FDI activities. This has spurred recent studies to draw on internalization theory to explain FDI in the context of regionalization and global value chain disaggregation ( Rugman and Verbeke, 2003 , Pak and Park, 2004 , Rugman, 2010 , Verbeke and Kano, 2016 ).

3.1.1.2. OLI paradigm

Dunning’s OLI paradigm (e.g., 1988, 2000) has been the most widely used lens in MNE-FDI research. This paradigm explains the way firms leverage resources - namely ownership advantages (O), location advantages (L), and internalization advantages (I) to compete in foreign locations ( Dunning, 2001 ). The use of the OLI paradigm remains in effect in contemporary FDI research. Over 30 studies in our sample were framed either along all three OLI dimensions or were focused on one of the dimensions in finer-grained approaches. For instance, Delevic and Heim (2017) stated that home market deficiencies are compensated by the host country's location advantages, and Cook, Pandit, Loof, and Johansson (2012) , using a geographical clustering approach for global cities, built on the L-advantages notion and found that more experienced MNEs and those with stronger home-country resource positions are more likely to engage in OFDI. One reason for the prevalence of the OLI paradigm might be that it forms a grounded starting point for developing other theories/frameworks that explain the evolving MNE-FDI phenomenon. Also, the OLI paradigm even if not represent a theory but allows linking international business phenomena with other theories – such as including transaction cost economics and the resource-based view - and also with other fields like economic geography. Despite the relevance of the OLI paradigm and its refinements, Dunning (2006) admitted that the unique context of OFDI from EMNEs could require a revision of some of its premises. Barkema, Chen, George, Luo, and Tsui (2015) pointed towards the difficulty of testing Western theories with Eastern constructs by discussing the properties of equivalence, salience, and infusion, and provided directions for creating new theories and paradigms. In addition, the OLI paradigm might not be suitable for explaining FDI patterns of new-generation firms (e.g., Cannon and Summers, 2014 , Ross, 2016 ) such as Google, Uber, Airbnb, and Bitcoin, which are asset-light and often virtual in their internationalization approach.

3.1.1.3. Product lifecycle (PLC) theory

PLC theory represents the focal theoretical lens in several FDI studies, though it has not received the same level of attention as the OLI paradigm in recent years. Vernon (1966) developed the theory based on FDI from U.S.-based MNEs in Western Europe after World War II — specifically, those in the manufacturing sector. Vernon identified four stages of production which he believed formed a continuous cycle: innovation, growth, maturity, and decline. As per this theory, firms undertake exports before thinking about production abroad in the form of FDI. The PLC theory suggests that capital-intensive and technologically sophisticated innovations are typically developed for the domestic market and progress through various stages in which production shifts to other (mainly) developed countries and, finally, to developing countries; such as Contractor, Dangol, Nuruzzaman, and Raghunath (2019, p.2) that indicate that “multinational companies are willing to take the risk by investing in a country with a lower institutional quality at one stage of the investment’s life-cycle in exchange for a more developed institutions, or easier regulations, at another stage of the life cycle”. The scope of PLC theory is not limited to FDI research. It is being applied in other fields as well, such as marketing, where PLC theory was particularly popular in the 1980s and 1990s ( Calvet, 1981 , Boddewyn, 1983 , Kim and Lyn, 1987 , Treviño and Daniels, 1995 ).

3.1.1.4. Institutional theory

Other theories used in FDI research include the institutional theory and the dynamic capabilities theory. According to institutional theory, organizational structures and behavior are to a large extent determined and legitimated by the surrounding environment (e.g., Eisenhardt, 1988 , Child, 1997 ). Several studies have applied institutional theory while focusing on the choice of appropriate organizational forms such as IJVs versus wholly-owned subsidiaries for foreign market entry (e.g. Li and Meyer, 2009 , Roy and Oliver, 2009 , Peng, 2003 , Yiu and Makino, 2002 , Lu et al., 2018 ). Meyer (2004) highlighted the relevance of institutional theory when considering and deciding on the suitability of different market-entry modes for EMNEs from emerging countries. Some researchers ( Cui and Jiang, 2012 , Deng, 2013 , Delevic and Heim, 2017 ) have used institutional theory to explain that EMNEs are subject to institutional constraints such as state interference.

3.1.1.5. Resource-based view (RBV)

RBV has been used in FDI research mainly in the context of OFDI from developing countries. RBV is an approach used to explain how firms achieve competitive advantage while going international. RBV gained popularity in the 1980s and 1990s, after the major works published by Wernerfelt, 1984 , Barney, 1991 . Ghoshal (1987) was one of the pioneers in applying RBV to international business. The proponents of the RBV argue that firms should look internally to find the sources of competitive advantage instead of searching for it in the external competitive environment. In this approach, resources are classified as either tangible or intangible. One of the key factors is that intangible resources (such as intellectual property rights and brand equity) are the main sources of sustainable competitive advantage ( Wernerfelt, 1984 , Barney, 1991 ). Some researchers have applied RBV in the context of OFDI from EMNEs ( Cui and Jiang, 2009 , Cook et al., 2012 , Lin, 2016 , Gaur et al., 2018 ).

3.1.2. Recent models/frameworks

In this sub-section, we briefly discussed the recently developed models/frameworks used/ could be used in future research in the context of MNE-FDI Research.

3.1.2.1. Linkage, leverage, learning (LLL) model

In recent years, the LLL model and the Springboard Framework (discussed below) have gained immense popularity because of their utility in explaining the specific determinants, motivations, and processes of outward OFDI from EMNEs. With the LLL framework, Meier, 1984 , Meyer, 2003 extended the OLI framework to EMNEs with strategic asset-seeking FDI. The LLL framework explains the way EMNEs from peripheral countries in the Asia-Pacific region established themselves successfully in more developed countries. Mathews (2002) suggested that FDI, in pursuit of new capabilities, requires a different perspective than FDI meant to exploit existing capabilities. EMNEs can develop capabilities to the maximum, such that they can globalize ( Hobdari, Gammeltoft, Li, & Meyer, 2017 ) and, also, EMNEs engaged in OFDI from emerging countries, often, enter late to already developed markets and thus principally exhibit catch-up strategies. EMNEs frequently exhibit accelerated or even leapfrogging internationalization patterns. Most researchers have used the LLL model in the context of the internationalization of Asian firms - particularly Chinese firms. For instance, Ge and Ding (2009) applied the LLL model to demonstrate how Chinese firms, such as Galanz Group, developed unique competitive strategies that helped them succeed in foreign markets. On the other hand, Narula (2006) argued that the tenets of the LLL model are interesting, but it proposed modifications, in comparison to the OLI paradigm, seem less than convincing.

3.1.2.2. Springboard perspective/theory

Luo and Tung (2007) Springboard Perspective explains why and how EMNEs will systematically and recursively use international expansion as a springboard to acquire critical resources for competition in their home markets with foreign MNEs from developed markets. This is a very useful tool for researchers, particularly those who examine different aspects of OFDI from EMNEs - which still lacks widespread attention. The authors have developed a general theory of springboard MNEs based on amalgamation, ambidexterity, and adaptation advantages that differentiate springboard EMNEs from more established MNEs from developed countries ( Luo & Tung, 2018 ).

3.1.2.3. CAGE distance framework

Ghemawat, 2001 , Ghemawat, 2003 CAGE (Cultural, Administrative, Geographic, Economic) Distance Framework, while being applicable to both developed and emerging country contexts, seems especially useful to understanding the internationalization processes of EMNEs. It is surprising that the CAGE framework is widely recognized but not yet widely applied. One reason for this could be that the original article did not offer easy-to-use measures. However, some researchers have used the CAGE framework in their studies to analyze distance factors and MNEs’ FDI ( Goodall and Roberts, 2003 , Juasrikul et al., 2018 , Mudambi, 2008 , Malhotra et al., 2009 , Rugman & Verbeke, 2004 ). The CAGE distance calculator has introduced a decade ago ( Ghemawat, 2007; Rugman & Verbeke, 2004 ), and we expect more researchers to use this measure in the future.

3.1.2.4. CPP model

Paul and Sanchez-Morcillo (2019) introduced the Conservative, Predictable and Pacemaker (CPP) model, for analysing the internationalization of firms. This model could be used as a classic theoretical lens in research dealing with FDI. Researchers can undertake studies exploring the destination and pattern of FDI classifying the markets as Predictables and Pacemakers. Global competitiveness measurement is also possible using the ratio mentioned in the CPP Model propositions. Industry-wise FDI flows can also be analysed using the CPP model in either single-country context or using cross-country data.

3.2. Citation analysis

To identify the most influential articles on FDI, we conducted a citation analysis. We registered the total number of citations ( C total ) and computed the average weighted citation scores C total ¯ = C total # o f y e a r s a f t e r a r t i c l e p u b l i c a t i o n . The most cited articles identified were Borensztein, Gregorio, and Lee (1998) , with 8279 citations, Dunning (1988) , with 6057 citations, Dunning (1980), with 4263 citations, and Smarzynska Javorcik (2004) , with 3923 citations (See Table 1 ). The most cited articles were published in the Journal of International Economics , Journal of International Business Studies , and American Economic Review ; thus, these articles were not strictly confined to business journals. Empirical articles with more than 2000 citations (as of January 30, 2020) include Feenstra and Hanson, 1997 , Balasubramanyam et al., 1996 , Markusen and Venables, 1999 , Dunning, 2000 , Helpman, 2006 , Cheng and Kwan, 2000 .

Most cited articles & authors on FDI (as of January 30, 2020).

We also examined the citations of the conceptual articles on FDI, of which two recent ones have received the bulk of citations. Mathews (2006) “Dragon multinationals: New players in 21st-century globalization” have been cited over 2000 times and Luo and Tung (2007) “International expansion of emerging market enterprises: A springboard perspective” has generated over 2500 citations, as on January 30, 2020. While it was found that most of the extant empirical FDI research has relied conceptually on the work of Dunning, 1981 , Dunning, 2000 & 2006 ), Mathews (2006) , and Luo and Tung (2007) works have gained attention in the recent years. This could be partly because of the rising research interest in EMNEs.

Unsurprisingly, review articles have generated a relatively higher weighted annual average citation scores. For example, Blonigen (2005) gained 1777 citations with a high average weighted citation score of 118 per year. This could, possibly, be because of two reasons: (i) Review articles are frequently used as foundation papers by doctoral students and early career researchers in economics as well as international business areas, and (ii) traditional FDI theories are rooted in economic theories and international economics is regarded as the mother discipline of international business.

3.3. Context

A key reason for increased interest in EMNE-FDI research might be that while developed-country MNE-FDI outflows have dominated the global share of FDI activities until recently, the share of FDI from EMNEs has increased sharply over the past 15 years ( Luo and Tung, 2007 , Demirbag et al., 2009 , Paul and Benito, 2018 ). EMNE-OFDI now accounts for more than one-third of the global FDI outflows ( UNCTAD, 2015 ). “EMNE-FDI to other developing countries grew by two-thirds from $1.7 trillion in 2009 to $2.9 trillion in 2013” ( UNCTAD, 2015, p. 8 ).

Despite its long tradition, FDI research that investigates the relationships between FDI and FDI-receiving-country determinants remains buoyant (e.g., Horst, 1976 , Bergsten et al., 1978 , Ruigrok et al., 2007 , Rutherford et al., 2018 , Dunning, 2000 , Mudambi and Mudambi, 2002 , Anwar and Nguyen, 2011 ). Enderwick (2005) found that the benefits derived from MNE activities for FDI-receiving countries depend on quality rather than quantity. Higher-quality FDI includes investments focused on technology or research and development (R&D) that can lead to, for example, knowledge spillovers to other firms in FDI-receiving locations. Alfaro et al., 2004 , Durham, 2004 found that the realization of these benefits is dependent on the absorptive capacity of local firms in FDI-receiving countries. While the general understanding of host-country determinants (e.g., regulatory, political, economic, and cultural institutions) that stimulate FDI has progressed considerably, findings concerning the effects of FDI on receiving countries remain mixed. FDI host-country effects range from positive to insignificant, to negative - depending on the conceptual lens or the contextual setting deployed in a specific research project (e.g. Alvarez and Marin, 2013 , Asiedu et al., 2009 ).

With the large scale emergence of EMNEs, research has gathered momentum in this area. For example, Kedia, Gaffney, and Clampit (2012) posited that an EMNE strategic orientation predicts its propensity to engage in knowledge-seeking FDI and that the type of knowledge sought predicts location choice and entry mode. In recent years, OFDI characteristics related to MNE home countries have attracted increasing attention amongst scholars ( Sauvant, 2005 , Kedia et al., 2012 ). Here, research on EMNEs is experiencing a particularly strong surge (e.g. Filatotchev et al., 2007 , Bhaumik and Driffield, 2011 , Cui and Jiang, 2009 , Cui and Jiang, 2012 ). Several focused journal issues and summary papers have now begun to discuss the characteristics of EMNE internationalization processes - shedding more light on the subject (e.g., Kearney, 2012 , Gray et al., 2014 , Cuervo-Cazurra et al., 2014 ).

The ratio of developing countries in global OFDI to both developed as well as other developing countries has increased considerably since 2000 ( UNCTAD, 2015 ). Outward investments by EMNEs based in developing Asia increased every year during the last 10 years. This growth was widespread, encompassing all the major Asian economies, which made developing Asia the world’s largest outward investor region. EMNEs have undertaken international expansion through greenfield investments as well as cross-border acquisitions.

However, it is worth noting that MNEs from the United States (US) have remained dominant in generating FDI outflows on a home-country basis ( UNCTAD, 2015 ), which is also reflected in the number of research studies that draw on U.S. -based MNE-FDI data. Furthermore, the US, China, and Japan have been most often studied in the context of outward MNE FDI ( see Table 2 ). The reasons for this might lie in (a) the magnitude of outward MNE FDI from these three countries and/or (b) the fact that data from these countries are more easily obtainable and that they thus provide better opportunities for quantitative analyses. Only a handful of studies have so far examined outward MNE-FDI from other countries such as India, Turkey, etc. (e.g., Bhaumik and Driffield, 2011 , Narayanan and Bhat, 2011 , Demirbag et al., 2009 ).

Primary home and host countries/regions studied in FDI research.

China and the US are the most researched FDI-receiving countries, with the former recording the highest FDI inflows for 2013 as well as 2014. Also, the US is the most commonly host-country, followed by all developing countries as a group, such as the United Kingdom, Germany, and the Central & Eastern European countries. Table 2 rank-orders the most frequently researched home and host countries in FDI studies.

3.4. Constructs and variables

In this section, we identify the widely investigated constructs and variables, including, IFDI, OFDI, gross domestic product (GDP)/economic growth, exports and FDI, uncertainty and risk, FDI, entry and establishment modes, spillovers, technology, productivity, and firm performance, MNE strategy, and taxes. Table 3 categorizes the most frequently used dependent and independent variables.

Main variables studied in FDI research.

3.4.1. Inward FDI (IFDI)

The most commonly used construct in FDI studies is IFDI, with over 100 appearances. IFDI research has been mainly concerned with various host-country determinants that are associated with attracting firms to specific locations (e.g., Balasubramanyam et al., 1996 , Balasubramanyam et al., 1999 , Borensztein et al., 1998 , Alguacil et al., 2002 , Chakraborty and Basu, 2002 , Liu et al., 2002 , Buckley et al., 2006 , Baharumshah and Thanoon, 2006 , Delevic and Heim, 2017 ). The most frequently investigated determinants include market size, government policies (including entry barriers, cost of production, and wage rate), infrastructure, etc. (e.g., Kobrin, 1976 , Rolfe et al., 1993 , Loree and Guisinger, 1995 , Luo and Tan, 1997 , Reiljan, 2003 , Ramamurti and Doh, 2004 , Blonigen, 2005 , Galan and Gonzalez-Benito, 2006 , Blonigen and Piger, 2014 ). Ramamurti and Doh (2004) found that the 1990s witnessed a boom in FDI flow in developing countries (particularly in infrastructure sectors) that were characterized by weak institutions and political instability. Meyer and Nguyen (2005) offered a theoretical framework to analyze how institutions in an emerging economy influence MNEs’ entry strategy decisions on where and how to set up operations. They found that sub-national institutional variables influence significantly location and entry mode. Similarly, Feils and Rahman (2011) revealed that after regional integration exists an increase in IFDI into neighboring countries. On the other hand, Jin, García, and Salomon (2018) observed that IFDI affects more innovative firms than straggling ones. Table 4 lists some of the notable recent papers on IFDI, their principal conceptual arguments and findings, and empirical approaches.

Inward FDI.

3.4.2. Outward FDI (OFDI)

The second most used construct in FDI research is OFDI, with over 50 appearances. Studies concerned with OFDI seek to explain FDI motives, FDI determinants, and characteristics of MNEs regarding their particular home countries (e.g., Stevens and Lipsey, 1992 , Desai et al., 2005 ). Some researchers in the recent past have investigated how to encourage or even participate in corporate OFDI to facilitate the internationalization of private as well as state-owned firms from emerging countries ( Kearney, 2012 , Gray et al., 2014 , Cuervo-Cazurra et al., 2014 ). Although the emerging market MNE internationalization phenomenon is not new, its rapid increase in scale only started in the early 2000s ( Ramamurti and Singh, 2009 , Luo et al., 2010 ). A key part of this development is arguably due to the rise of Chinese (see, for example, Buckley et al., 2006 , on the determinants of OFDI from China) and Indian MNEs ( Rienda, Claver, & Quer, 2013 ) - have become major sources of OFDI. In emerging countries, the pattern of OFDI is shaped by local firms’ idiosyncratic contexts such as business groups (a dominant organizational form in emerging countries) and the resources that those firms developed to fit the contexts ( Tan and Meyer, 2010 , Lin, 2016 ). Chari (2013) found a positive relationship between business group affiliation and OFDI overall, in the case of firms from developing countries using Indian data as well as between business group affiliation and OFDI into advanced countries. Ali, Shan, Wang, and Amin (2018) results showed that positive or negative changes in outward FDI trigger meaningfully economic growth in China, demonstrating asymmetry between OFDI and economic growth relationship. Table 5 lists recent papers on OFDI.

Outward FDI.

In this context, it is worth noting that Paul and Benito (2018) developed a framework (Antecedents, Decision characteristics and Outcome – ADO) to explain and analyze the OFDI by MNEs from emerging countries including China. Considering the increased volume of OFDI from emerging countries, they argue that studying antecedents (A) is prudent because such works would give a clear idea about key motives of companies for undertaking international expansion from emerging countries while understanding Decision (D) characteristics provides a strategic platform to examine the dimensions such as entry and establishment modes, location, size and volume and timing of OFDI. Studies on Outcomes (O) usually seek to discuss variables such as performance after innovation, technology and knowledge transfers including reverse transfers and goes beyond financial results to encompass strategic outcomes such as survival or success of the firms involved in FDI.

3.4.3. GDP and FDI

Host-country GDP has been used most often in FDI research, both as an independent and a dependent variable. However, research investigating the relationship between GDP and MNE-FDI is characterized by somewhat diverging findings. For example, Angresano, Bo, and Muhan (2002) found that real GDP has a considerable positive effect and that GDP growth has a minor positive effect on FDI inflows. Hsiao and Shen (2003) identified a reciprocal relationship between FDI and GDP growth. However, by drawing on data from 28 developing countries, they found that FDI has neither consistent long-term nor short-term effects on GDP growth. Findlay (1978) investigated the role of FDI as a carrier of foreign technology, claiming that it could increase economic growth. Using simultaneous equation methods, Ruxanda and Muraru (2010) obtained evidence of a circular self-reinforcing relationship between FDI and economic growth, meaning that incoming FDI stimulates economic growth and that, in turn, a growing level of GDP attracts new FDI. Anwar and Nguyen (2010) found similar results. Table 6 lists recent papers that investigate the relationships between GDP, economic growth, and FDI.

GDP, economic growth, and FDI.

3.4.4. Exports and FDI

Exports were used as a variable in 30 FDI studies that have investigated the effects of international trade and FDI. This research stream often takes an evolutionary perspective on the MNE and host-country development. Economic theorists have focused on the complementary versus substitute relationship of exports and FDI (e.g., Bhasin and Paul, 2016 , Marin, 1992 , Meier, 1984 ), culminating in the export-led growth thesis. Conversely, some recent studies have analyzed the relationship between FDI and exports further by taking a unified approach which postulates the simultaneous determination of the two MNE activities in developed countries ( Markusen & Maskus, 2002 ). Alternatively, Aurangzeb and Stengos (2014, p. 141) performed an empirical study and concluded: “that countries with higher levels of FDI inflows have higher factor-productivity in the exports sector”. Table 7 lists recent papers that integrate and/or contrast research on exports and FDI.

Exports and FDI.

3.4.5. Uncertainty and risk

Uncertainty and risk have been used as focal constructs in 43 FDI studies. Cushman (1985) examined how uncertainty acted as a determinant of FDI location. There is evidence that the high risks associated with some FDI destinations ( Gatignon and Anderson, 1988 , Miller, 1992 ) discourage FDI. Ly, Esperança, and Davcik (2018) examined the effect of information on FDI, taking into account the country of origin's effect on the FDI’s pattern, multinational companies' attitudes toward risk and institutional factors. Schotter and Beamish (2013) suggested that besides traditional location choice criteria — including geographic distance, psychic and cultural distances, and market attractiveness — MNEs should consider managerial preferences. They found that managers influence FDI decisions based on travel inconveniences experienced with FDI locations and called this phenomenon the “Hassle Factor.” Hajzler (2014) explored the effects of different types of FDI incentives on magnitude and output performance and found that incentives are effective.

3.4.6. Entry modes

We found 24 studies in our sample focusing on FDI equity-based entry modes such as wholly-owned subsidiaries and equity joint ventures using firm-level data from MNEs ( see Table 15 in Appendix ). Most of these studies focused on entry modes, entry barriers, and mode switching. Brouthers and Brouthers (2003) found that the investment-intensive nature of manufacturing, environmental uncertainties, and risk propensity influence manufacturers’ entry-mode choices, while behavioral uncertainties, trust propensity, and asset specificity influence service providers’ entry-mode choices. Meyer, Ding, Li, and Zhang (2014) analyzed equity stake decisions, that drive MNEs to choose between two establishment mode routes: greenfield or acquisition. Delios and Beamish (2001) examined the influences that a firm’s intangible assets and its experience have on foreign subsidiary survival and profitability using a sample of 3080 subsidiaries of 641 Japanese firms. They show that survival and profitability have different antecedents. Host country experience has a direct effect on survival but a contingent relationship with profitability; this relationship is moderated by the entry mode. Luo (2001) found that entry-mode selection in an emerging economy is influenced by situational contingencies at four levels: nation, industry, firm, and project. He suggested that the joint venture’s mode is preferred in China when perceived governmental intervention is high or host-country experience is low. Chung, Xiao, Lee, and Kang (2016) showed that institutional pressures exerted by the home-country government have a significant effect on the OFDI mode decisions of Chinese firms. Those Chinese MNEs facing greater institutional pressures from their own government are more inclined to choose joint ventures over wholly-owned foreign subsidiaries when investing abroad.

3.4.7. FDI, spillover effects, performance, and strategy

The spillover effects of FDI, on technology transfer, firm-level productivity, and performance of subsidiaries, was seen in over 60 studies examined. (Ex, Ambos et al., 2006 , Ambos and Birkinshaw, 2010 ; see Table 17, Appendix 1 ). Subsidiary performance improves with (i) the integration of a parent firm's technological and marketing knowledge resources, (ii) high technological (market) relatedness between a parent firm and subsidiaries for transfer of parent technological (market) knowledge, and (iii) the co-presence of high technological and market relatedness ( Fang, Wade, Delios, & Beamish, 2013 ). Furthermore, Piperopoulos, Wu, and Wang (2018) suggest that spillovers can boost learning and enhance innovation in emerging market enterprises subsidiaries. On the other hand, Luo (2005) explains why competition occurs and in what areas foreign sub-units of a geographically dispersed MNE co-operate and compete. This augments a typology that classifies sub-units along with the various levels of simultaneous cooperation and competition (aggressive demander, silent implementer, ardent contributor, and network captain).

Jeon, Park, and Ghauri (2013) tested whether horizontal and vertical FDI spillover effects are different among various industries in China and found that foreign investments in the same industry are more likely to engender negative influences on local firms. China’s outward foreign direct investment promotes “the development of the home country through various channels of spillovers as well as the backward linkage of MNEs with parent companies” ( Ali et al., 2018, pp. 710–711). Lee and Rugman (2012) examined two types of firm-specific advantages (FSAs) — innovation capabilities measured by R&D intensity and marketing capabilities measured by selling, general, and administrative intensity. The results showed that both FSAs affect MNE performance in a non-linear, U-shaped fashion and that the investing MNE’s home region moderates the curvilinear relationship between the two constructs into an inverted U-shaped one. Sánchez-Sellero, Rosell-Martínez, and García-Vázquez (2013) investigated the determinants of absorptive capacity from FDI spillovers and found that firm behavior, capabilities, and structure drive absorptive capacity such as R&D activities and expenditures, R&D results, internal organization of innovation, external relationships of innovation, human-capital quality, family management, business complexity, and market concentration. Their results complement previous evidence of absorptive capacity, particularly with different approaches to innovation activities as mediators of the capability.

The results of the empirical tests linking the relationship between internationalization and MNE performance vary significantly and reflect the diversity of research (for example, Chen and Tan, 2012 , Ruigrok et al., 2007 , Prange and Verdier, 2011 ). It is worth noting that Bausch and Krist (2007) address the question of if and how internationalization relates to firm performance by integrating findings from 36 studies using meta-analysis. They found empirical support for a significant positive relationship at the aggregate level. Similarly, Chen and Tan (2012) examined the relationship between internationalization and firm performance using the data of 887 publicly listed Chinese firms (and the geographic region to which they internationalize) by classifying the regions as Greater China, Asia and outside Asia. While they found a positive and significant relationship between internationalization (within Greater China) and performance, their results varied between internationalization outside Asia and within Asia.

It was found that 8 studies in our sample investigated taxation in the context of FDI ( see Table 16, Appendix 1 ). Hajkova, Nicoletti, Vartia, and Yoo (2006) explored the impact of taxation on FDI while controlling several, policy and non-policy, factors. They found that taxation and the business environment are the main drivers of FDI in OECD (Organization for Economic Co-operation and Development) countries. De Mooij and Ederveen (2003) found that most studies were reporting a negative relationship between taxation and FDI, but that there was a wide range of estimates of the tax elasticity of FDI. Also, Mutti and Grubert (2004) investigated empirical asymmetries associated with the effects of taxation on foreign operations by U.S. MNEs; and Shirodkar and Konara (2017, p. 117) confirmed that “the tax rate in the host country can have a negative effect on subsidiary profit”.

3.5. Data and methods

In this section, an overview of the methodologies used in existing FDI research, including datasets and statistical approaches is provided.

3.5.1. Data

Over 80 percent of all studies in our sample used publicly available secondary data. This could very well be due to relatively easy access to secondary data through sources such as the UNCTAD or due to the difficulty of collecting primary data. The most commonly used datasets include the Kaigai Shinshutsu Kigyou Souran Kuni-Betsu dataset on Japanese overseas investments, published by Toyo Keizai Inc. ( Toyo Keizai, 2014 ), various United Nations Conference on Trade and Development (UNCTAD) statistics, the International Monetary Fund’s financial statistics, the World Bank database, Compustat data, and various other hand collected statistics from China. The popularity of the Kaigai Shinshutsu Kigyou Souran Kuni-Betsu dataset can be attributed to the richness and granularity of firm-level and subsidiary characteristics. This dataset represents a near population size, longitudinal record of Japanese MNE-FDI ( Schotter & Beamish, 2013 ). More than 120 research papers (not all on FDI) have been published based on various iterations of this dataset alone.

3.5.2. Statistical methods

We found that the most commonly used statistical method in FDI research was ordinary least squares (OLS) regression (127 studies). Other widely used statistical methods included the Granger causality test, co-integration analysis, vector autoregression (VAR), and cross-sectional analysis. Table 8 lists the main statistical empirical methods used in FDI research.

Main statistical methods used in FDI research (1980–2015).

4. Future research agenda

It was found that the extant FDI literature is diverse but on the other hand still relies on a limited number of theoretical lenses. One of the limitations of this review is the possible exclusion of some articles on FDI as it covers so many concepts such as greenfield investment and acquisition. Nevertheless, an attempt has been made to cover maximum articles. Merely 10 percent of the reviewed articles explicitly sought to extend or develop new theories. Going forward, new theory development should be at the core of future FDI research, to recognize the changes and developments in the phenomenon and taking into account potential, path, process, pattern, process and problems associated with the MNEs and FDI. These changes are driven by developments at the country level, inter-country level and, most importantly, MNE level. This seems particularly necessary, considering that prior empirical FDI research suffered to a significant extent from statistical robustness issues of the main variables. In this section, we offer directions on how to complement the dominant theoretical logics following Barkema et al. (2015) example.

4.1. Future directions for theory development

Although FDI researchers have introduced some new frameworks and constructs, it appears that Dunning’s (1980) OLI paradigm still represents the most dominant theoretical starting point for new MNE FDI research. It has been used repeatedly in FDI research in a recycled way. While we do not challenge such an approach, we find that it has limited, to a certain extent, new theory development. Therefore, we call for new and novel theories to use in this area of research. We suggest that with the rise of EMNEs and the emergence of new industries ( Cannon and Summers, 2014 , Ross, 2016 ) and new corporate firms like Google, Uber, and Bitcoin, recently developed theories/models such as CPP (Conservative, Predictable & Pacemaker markets and firms), Model for firm internationalization ( Paul & Sanchez-Morcillo, 2019 ) or 7-P framework ( Paul & Mas, 2019 ), based on Potential, Path, Process, Pace, Pattern, Problems and Performance, can be used as a theoretical lens in future. Although 7-P framework was originally developed for international marketing, its use can be extended in the area of FDI research as almost all the P-variables would serve as platform for future research.

New theories could be developed for analyzing the new forms of FDI. Dunning’s work and Vernon’s PLC theory were developed based on OFDI by MNEs from the developed world and mostly from traditional (and often manufacturing) industries, which creates only limited relevance for the aforementioned emerging phenomena. Further, research on EMNE-OFDI has so far looked at a limited number of determinants and is based on EMNE data from a very limited number of home countries (mainly China). We suggest that for EMNE research, in particular, the LLL ( Mathews, 2006 ), Springboard Perspective ( Luo & Tung, 2007 ) and ADO framework (2018) provide potentially better fitting and organized starting point for research on EMNEs. Similarly, it would be insightful if researchers use frameworks such as (i) Luo (2005) typological framework (aggressive demander, silent implementer, ardent contributor, and network captain) to analyze the simultaneous cooperation and competition between geographically dispersed sub-units of MNEs (ii) Paul and Sachez-Morcillo (2019)’s CPP, model to explore the direction and pattern of FDI. We also argue for developing new theoretical models, methods, measures, and frameworks to analyze, explain and discuss different aspects of FDI to make sure that researchers do not run short of new research agenda and to avoid recycled and repeat type research.

Another interesting outcome from this review is that only a limited number of studies (e.g., Andersson, Forsgren, & Holm, 2002 ) have investigated how entry modes influence the evolution of post-FDI strategy. We suggest that utilizing contingency models from the strategy domain might create an opportunity to more accurately connect country-level and firm-level FDI research with the literature on MNE strategy. Another area of opportunity lies in comparative analyses in the context of FDI from developed countries and developing countries while drawing on existing models, including the CAGE framework ( Ghemawat, 2001 , Ghemawat, 2003 ). Previous theory development has been based on the notion that most MNE-FDI is directed toward predictable markets (markets with similar features in terms of cultural, administrative, geographical, and economic distance). This notion is likely a result of firms avoiding dealing with any liability of foreignness issues, problems arising from cognitive biases, and resource constraints. Today’s level of economic development of emerging markets and the level of developed market-bound investments by EMNEs ( Mathews, 2006 , Luo and Tung, 2007 , Demirbag et al., 2009 ) should provide ample opportunities for such research. It is also worth extending the institutional theory and RBV in such studies. For instance, there are opportunities to develop theories and frameworks and extend the available theories to explain the FDI phenomenon of emerging market firms - in particular, Asian firms. This is true especially considering that Asia has emerged as a strategically important region. There are opportunities to develop separate frameworks to analyze the path, process, pace, pattern, problems, and potential of MNE investment concerning the past, present and future all within the context of strategy. For example, there is scope for developing theories that explain the pace of internationalization regarding entry mode switch from exporting to FDI.

4.2. Future directions on FDI antecedents, characteristics, and outcomes

FDI research has advanced our knowledge of the antecedents, characteristics, and outcomes of entry modes. However, the extant research base is diverse and somewhat fragmented. In this section, we highlight opportunities for future research.

Many studies focus on FDI antecedents, including firm-level investment motives and a broad range of home-country and host-country determinants. However, although the number of existing studies gives the impression of being large, the existing literature appears fragmented and often the focus on certain antecedents seems somewhat arbitrary. This provides an opportunity for future research to integrate FDI antecedent research methodologically and conceptually. For the methodological research, we suggest that primary data be collected from the senior managers of MNEs to understand and explain the path, process, and pace of FDI they have undertaken. This includes analysis of motives and determinants of International Joint Ventures (IJV): foreign subsidiaries of MNEs.

Research on FDI characteristics (location, entry modes, etc.) is relevant for examining how FDI evolves over time and across different industries and countries. Current FDI research is largely cross-sectional, in nature. We suggest investigating longitudinal FDI patterns using firm-level data for different industries and countries. We believe that characteristics-based studies offer ample potential for future research. In this regard, we feel that it would be interesting to examine the linkage between business groups and the mode of entry into foreign countries. For example, research on the pertinent question — do the firms supported by business groups follow the same pattern and entry mode while going international in the form of FDI? This phenomenon can be examined in the context of both developed as well as developing countries. Further, we believe that a fruitful area of investigation is entry and establishment modes based research ( Dikova & Brouthers, 2016 ) at either the firm level or industry level, particularly for high-value, knowledge-intensive industries. Here, the emerging research on global value chain disaggregation (e.g., Mudambi & Puck, 2016 ) could benefit strongly from such an approach.

FDI research on outcomes has focused most often on firm-level financial performance and economic growth at the country level, but there are gaps in the extant literature. While FDI research on country-level outcomes is abundant in literature, research studies dealing with firm-level outcomes are not as many as the country-level studies. We believe that this provides a promising opportunity for future research. For example, Yang, Martins, and Driffield (2013) found a significant relationship between the breadth of a firm’s FDI and performance. They showed that the return on FDI over time in developing countries represents a U-shaped relationship, indicating that multinationals are likely to face losses in the early stage of their investment in developing countries before positive returns are realized. We suggest that researchers test the FDI–profit relationship hypothesis further with reference to wholly-owned subsidiaries and joint ventures and find evidence from different countries. While a substantial amount of research provides insights into antecedents and characteristics of acquisitions or greenfield FDI, the outcome of such investments at the firm and industry levels is very limited. Similarly, research on the outcomes of technology transfer for FDI intensity should be particularly fruitful.

It was found that the literature on MNE-FDI would benefit from a combined methodological and conceptual renewal. This implies the scope for developing new frameworks, paradigms, and theoretical models to explain different dimensions of MNE-FDI such as key motivates (antecedents), entry /and establishment mode decisions and characteristics or outcomes as suggested by Paul and Benito (2018) . There are immense possibilities to develop typologies for discussing one or more of the dimensions of FDI such as - Potential, Path, Process, Pace (ex, switching entry mode), Problems or/and Performance. Although the methods used in FDI research have grown to be more sophisticated, there are opportunities to develop integrative approaches by studying the antecedents, characteristics, and outcomes of FDI simultaneously. On the other hand, most studies build models in single countries only. It would be very useful if researchers conduct comparative analyses either for a group of countries or for two countries with similar or dissimilar features.

Empirically, there is a need for analyzing the impact of OFDI on performance at home. Here, propensity score matching that is similar to what was done by Hayakawa, Matsuura, Motohashi, and Obashi (2013) could provide interesting results. Such a novel approach would be valuable, as plenty of studies have already been published on FDI using multiple regressions with control variables. Recent advances in structural equation modelling techniques could also be deployed. Another important aspect is that researchers in this area should specify carefully the degree to which their insights are likely to generalize in different settings. One suggestion is to collect primary data from at least three firms/MNEs as there is less number of studies using such data, in comparison to the number of studies using secondary data. Nevertheless, it is important to understand that secondary data may provide useful benchmarks.

Additionally, there are opportunities for conducting research studies that address one or more of the issues and topics outlined below. Researchers may use the following as their research questions in their future studies using data.

• i. What are the motives that drive the FDI of small, medium and large enterprises from emerging economies and what factors are involved in positive outcomes for these firms? Are there similarities in the decision characteristics of FDI, such as entry modes from emerging as well as developing countries? Do regulatory and cultural factors influence the path, process, and pace of FDI?
• ii. How do the micro and macro environments in both the home and host countries influence the MNEs from emerging economies? What are the challenges firms from countries such as China and India will face during the post-COVID-19 era?
• iii. What strategies (organic growth strategy such as greenfield investment versus inorganic growth strategy such as acquisition) are implemented by MNEs while going global? What are the paradigm shifts MNEs will undergo during the post-COVID-19 period, compared to the pre-COVID-19 period (till 2019)?
• iv. What are the problems and challenges faced by firms from emerging countries in Asia while going global? Would they confine to Predictable markets ( Paul & Sanchz-Morcillo, 2019 ) in the post-COVID-19 period?

5. Conclusion

The literature on MNE-FDI is quite substantial, though arguably heterogeneous, in nature. In an attempt to review 50 years of MNE-FDI research, we have provided a near-exhaustive catalog of the extant literature (See Tables 10 onwards given as online supplement ). We systematically reviewed 500+ journal articles, which as a whole can be considered representative of the present body of knowledge on MNE-FDI. The review summarizes past and contemporary FDI research in the context of developed as well as developing countries. Such a large-scale approach is justified, and necessary, as existing reviews have only provided subsets without integrating the overall body of research.

We identified the most commonly used theories, variables, statistical methods employed, home/host countries, and primary outlets for FDI research. We have also listed different approaches and variables used in FDI research to show their impacts on home/host countries. The most insightful and most-cited studies have developed either hypotheses or propositions about only one or two critical dimensions of FDI. These dimensions include antecedents, characteristics, and outcomes of FDI undertaken by MNEs. They also focus on the following aspects of FDI: FDI potential, path, process, pace, problems, and performance. Most authors of these most influential studies deployed advanced approaches to test hypotheses. However, the ever-greater availability of micro-level data should help future research move beyond our current state of knowledge.

Overall, we found that, despite the long history of FDI research, there has been a considerable rise in academic interest and publications since 2000. This validates the notion that globalization has increased not only in momentum but also in its characteristics during the last two decades. Thus, continued pursuit of FDI research could generate meaningful contributions to scholarship, practice, and policy.

From the point of view of scholarship, comparative research should identify new generalizable patterns across firms, industries, or countries: leading to the development of robust new theories. In practice, FDI research can provide better insights for decision-makers. For instance, research using firm-level data and information would help managers to make intelligent decisions on entry modes such as equity joint ventures or subsidiaries, or on formulating their strategic choice between greenfield investments or acquisitions. For policymakers, findings in new research at the country level and industry level may help in identifying the best and most appropriate policies in support of IFDI or OFDI, as well as how to cope with the increasingly difficult management of MNEs that are less home-country centric but truly transnational.

Acknowledgement

Authors are thankful to Professor Andreas Schotter, Ivey Business School, Canada. Alex Beamish, Ivey-Canada helped us in proof reading the manuscript. Comments and help from Jonathan Doh and Gurmeet Singh are also acknowledged.

Biographies

Dr Justin Paul serves as Editor-in-Chief, International Journal of Consumer Studies, (A Grade, Australian Business Deans Council) and a tenured full professor with the Graduate School of Business, University of Puerto Rico, PR, USA. He holds a title Distinguished Scholar, Indian Institute of Management (IIM-K), Kerala, He is known as an author/co-author of text books such as  Business Environment  (4th ed),  International Marketing, Export-Import Management  (2nd edition) by McGraw-Hill & Oxford University Press respectively. Over 100,000 copies of his books have been sold and his articles have been downloaded over 500,000 times. He has served as a full-time faculty member with premier institutions such as the University of Washington, Nagoya University, Japan and Rollins College-Florida. Dr. Paul has served as Senior/Guest/Associate Editor with the  International Business Review ,  Journal of Retailing & Consumer Services, Small Bus Economics, European Management Journal, The Services Industries Journal and Journal of Strategic Marketing, Journal of Promotion Management & International Journal of Emerging Markets.  In addition, he has taught full courses at Aarhus University- Denmark, Grenoble Eco le de Management-France, Universite De Versailles -France, ISM University-Lithuania, Warsaw School of Economics-Poland and has conducted research paper development workshops in countries such as Austria, USA, Croatia, China. He has been an invited speaker at several institutions such as University of Chicago, Fudan & UIBE-China, Barcelona and Madrid and has published over 50 research papers and bestselling case studies with Ivey & Harvard. Dr. Paul introduced Masstige model and Masstige Mean score scale as an alternative measure for brand equity measurement, CPP Model for internationalization of firms and 7-P Framework for Internationalization.

María M. Feliciano-Cestero has more than 15 years of work experience as a Mathematics Professor before joining for Ph.D. in Business Administration.

Appendix A Supplementary data to this article can be found online at https://doi.org/10.1016/j.jbusres.2020.04.017 .

Appendix A. Supplementary material

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Foreign Direct Investment

Over the past decade, foreign direct investment (FDI) around the world has nearly tripled, and with this surge have come dramatic shifts in FDI flows. In Foreign Direct Investment , distinguished economists look at changes in FDI, including historical trends, specific country experiences, developments in the semiconductor industry, and variations in international mergers and acquisitions. Chapters cover such topics as theoretical accounts of FDI patterns, the growth of multinational enterprises, and the FDI experiences of Japan, the United States, and selected developing countries. This volume will interest economists, government officials, and business people concerned with FDI today.

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• Published: 02 August 2022

Foreign direct investment and the innovation performance of local enterprises

• Wen Yue   ORCID: orcid.org/0000-0002-9251-4812 1  

Humanities and Social Sciences Communications volume  9 , Article number:  252 ( 2022 ) Cite this article

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Based on the micro data set of Chinese manufacturing enterprises, this study examines in detail the impact of foreign direct investment on the innovation performance of Chinese local enterprises and its mechanism. Results show that foreign direct investment helps to improve the innovation performance of Chinese local enterprises, and spillover effect and competition effect are important ways for foreign direct investment to affect the innovation performance of local enterprises. In addition, the impact of foreign direct investment on the innovation of local enterprises of different types varies. Foreign direct investment has significantly promoted the innovation of high-productivity, capital-intensive, non-coastal, export, and non-state-owned enterprises. This study enriches the research literature on foreign direct investment and enterprise innovation and provides new micro evidence for understanding the impact of foreign direct investment on the innovation performance of local enterprises.

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Introduction.

Over the past 40 years of reform, specifically after China’s accession to the World Trade Organization (WTO), China has attracted considerable foreign direct investments (FDI) with its rapid economic growth and an increasingly open investment environment. In 2018, China’s actual use of FDI reached 134.97 billion US dollars. China has already become the second-largest country to attract FDI after the United States. The large influx of FDI not only promoted China’s economic growth and export trade at the macro-level (Sun, 2012 ), but also had an important impact on markups (Sembenelli and Siotis, 2008 ), productivity (Keller and Yeaple, 2009 ; Iwasaki and Tokunaga, 2016 ; Zhang, 2017 ; Lin et al., 2020 ), enterprise employment structure (Hsieh and Woo, 2005 ), and other micro-performances of China’s enterprises. As innovation is the driving force and source of national economic growth and economic structural adjustment and optimization, the impact of FDI on the innovation performance of Chinese local enterprises has attracted widespread attention from scholars and policymakers.

From the theoretical level, foreign direct investment will have an impact on the innovation performance of local enterprises through spillover effects and competition effects. First, FDI not only provides capital but also brings advanced technology, equipment, and management experience, which can produce spillover effects, such as demonstration, learning, and staff turnover effects. FDI is helpful in improving the innovation performance of local enterprises. For example, with the entry of foreign-funded enterprises, local enterprises can learn the technology and management experience of foreign-funded enterprises and imitate and increase their investment in research and development (R&D) (Ito et al., 2012 ). With the implementation of the policy of attracting talents into local enterprises, those R&D personnel who have worked in foreign-funded enterprises or have received good skills training will partly flow to local enterprises, which will help in enhancing the innovation performance of local enterprises. Therefore, from this perspective, the positive spillover effect of FDI can have a positive impact on the innovation performance of local enterprises.

Second, the entry of a large amount of foreign capital will seize high-quality resources in the domestic market, which will inevitably intensify the market competition in the industry. The intensification of market competition will have an important impact on enterprise innovation (Amiti and Konings, 2007 ; Goldberg, et al., 2010 ). On the one hand, according to “Escape from the competition effect”, innovation can reduce the cost of enterprises, and the innovation profit obtained by technology leaders is higher than the discounted profit shared with other companies (Hashmi, 2013 ). Enterprises can escape from their competitors through innovation, which means that increased market competition will stimulate local enterprises to innovate. On the other hand, according to the “Schumpeter effect”, innovation is driven by high expected profits, and the intensification of the market competition will reduce innovation profits, which will restrain the innovative R&D of local enterprises. When the degree of market competition is relatively low, the “Escape from competition effect” will play a leading role (Fernandes, 2007 ), and the intensification of competition brought by FDI will promote local enterprises to innovate. When the degree of competition is high, the “Schumpeter effect” begins to dominate (Aghion et al., 2005 ), and the intensification of competition brought by FDI will inhibit the innovation of local enterprises.

The existing relevant empirical literature analyzed how foreign direct investment affects the innovation performance of local enterprises. Several earlier works suggested that FDI or foreign ownership should lead to additional product innovation (Lai, 1998 ; Girma et al., 2009 ). Cheung and Ping ( 2004 ) also suggested that FDI can benefit innovation activities in the host country through spillover channels, such as reverse engineering, skilled labor turnover, demonstration effects, and supplier–customer relationships. Vahter ( 2011 ) examined the impact of FDI on product innovation of domestic enterprises based on the firm-level panel data of Estonian and found that FDI has a significant positive impact on the innovation of enterprises. Based on European cross-country data, Sandu and Ciocanel ( 2014 ) suggested that FDI will positively affect the R&D expenditure of different industries by promoting exports, which is conducive to the innovation of enterprises. Crescenzi et al. ( 2015 ) explored the impact of foreign mergers and acquisitions on the innovation activities of domestic enterprises by using the data of British multinational enterprises. The results show that FDI can significantly improve the innovation performance of domestic enterprises. Olabisi ( 2017 ) found that enterprises that received FDI also tend to engage highly in product innovation. Gorodnichenko et al. ( 2020 ) also found that FDI and trade have strong positive spillover effects on innovation by domestic firms.

By contrast, Chen and Zhang ( 2019 ) found that conditional on the firm’s R&D investment, the FDI has no significant impact on the patenting for inventions. Brambilla et al. ( 2009 ) also found that the increased FDI presence in a given industry leads to imitation, but not necessarily innovation, by domestic firms. García et al. ( 2013 ) utilized the data from Spanish manufacturing enterprises and examined the impact of FDI on the innovation of enterprises. They found that foreign investment tends to inhibit the innovation of local enterprises. Similarly, Buckley et al. ( 2002 ) and Lu et al. ( 2017 ) found a negative spillover effect of FDI.

Numerous studies have been conducted on the impact of foreign direct investment on the innovation performance of local enterprises, but no consistent conclusion has been reached. The reason is mainly due to the following aspects. First, different scholars adopted different research methods, samples, and measurement indicators of enterprise innovation ability. Different scholars used different indicators to measure the enterprise innovation ability, such as productivity, R&D investment, and output value of new products, and they mostly used industry-level data to estimate the innovation spillover effect of FDI. Thus, identifying accurately whether the innovation spillover effect of FDI exists is impossible. Taking the total factor productivity (TFP) as an example, which is commonly used as a proxy variable for enterprise innovation in the existing literature, the improvement of TFP is not necessarily related to technological innovation activities. Crépon et al. ( 1998 ) found that the innovation output of enterprise (the number of patents and output value of new products) is weakly related to TFP. Second, the emergence of spillover effect of FDI is conditional. Numerous studies found that the spillover effect of FDI does not occur automatically. Such an effect is because domestic enterprises face the gap between domestic and foreign enterprises and take the initiative to imitate and learn. As the absorber of spillover effects, the heterogeneity of domestic enterprises (e.g., the type of enterprise ownership) will affect the innovation spillover effect of FDI (Khachoo et al., 2018 ). Therefore, the heterogeneity of different types of local enterprises should be fully considered when analyzing the impact of FDI on the innovation performance of local enterprises.

Based on the micro data set of Chinese manufacturing enterprises from 2000 to 2007, this study discusses the impact of FDI on the innovation performance of Chinese local enterprises by using the output value of new products to measure the innovation of enterprises. Compared with existing studies, the main contribution of this study is reflected in the following aspects: First, this study focuses on the innovation of enterprises. This study conducts a detailed investigation on how FDI affects the innovation performance of Chinese local enterprises by using the output value of new products to construct the indicator of measuring the innovation of enterprises. After a series of robustness tests, such as the substitution of key indicators, instrumental variables (IV) estimation, and controlling other policy changes, this study verifies the conclusion that FDI significantly improves the innovation performance of Chinese local enterprises. This study is a beneficial enrichment of the relevant literature. Second, this study empirically tests whether spillover effect and competition effect are important ways for FDI to affect the innovation performance of Chinese local enterprises by constructing the corresponding intermediary effect model. On the one hand, FDI has a positive impact on enterprise innovation by promoting R&D investments of enterprises. On the other hand, as the market competition increases, the positive effect of FDI on the innovation performance of local enterprises gradually weakens. The analysis of the influence mechanism is evidently conducive to deepening the understanding of the relationship between FDI and enterprise innovation. Third, considering that the emergence of foreign direct investment spillover effect is conditional, this study also analyzes the heterogeneous impact of FDI on the innovation performance of different types of local enterprises (different factor intensity types, productivity types, ownership types, regional types, and export and non-export enterprises). This study provides a rich perspective for a comprehensive understanding of the innovation effects of FDI by exploring the differences in the impact of FDI on the innovation performance of different types of local enterprises.

The remainder of this paper is organized as follows: Section “Empirical model and data” outlines the empirical models and presents the data. Section “Results” presents the empirical results. Section “Influence channel and heterogeneous impact analysis” examines the influence mechanism and discusses the heterogeneous impact of FDI on the innovation performance of different types of local enterprises. Section “Conclusion” concludes and discusses the policy implications.

Empirical model and data

Empirical specification.

To analyze the impact of FDI on the innovation performance of Chinese local enterprises, by following Lu et al. ( 2017 ), this study sets the following benchmark regression model:

where the subscripts i , j , k , and t represent the enterprise, industry, province, and year, respectively, and the industry indicated by j is the four-digit code industry in the national economic industry classification of China. The dependent variable Innov ijkt is the innovation performance of the local enterprise i in industry j in region k in year t . Following Girma et al. ( 2009 ) and Olabisi ( 2017 ), this study uses the logarithm of the output value of new products of local enterprises to measure Innov ijkt The core explanatory variable FI jt measures the amount of FDI in industry j in year t . X ijt represents a set of other control variables. γ t denotes year fixed effects, α k denotes province fixed effects, υ i denotes firm fixed effects, μ ijkt denotes random disturbance term.

Following Javorcik ( 2004 ), Lu et al. ( 2017 ), and Lin et al. ( 2020 ), this study constructs the following indicators to measure the foreign direct investment ( FI j t ):

where the subscripts i , j , and t represent the enterprise, industry, and year, respectively. FI_firm ijt represents the proportion of foreign capital to the paid capital of the enterprise i in year t in industry j . Y ijt represents the total output of enterprise i in industry j in year t .

Similarly, following Khachoo et al. ( 2018 ), Chen and Zhang ( 2019 ), and Lin et al. ( 2020 ), this study introduces the following control variables into Eq. ( 1 ): ① Enterprise size ( Size ). This study uses the logarithm of the enterprise sales to measure the enterprise size. ② Factor intensity ( Kl ). This study uses the logarithm of the ratio of capital to labor to measure the factor intensity, where capital is the logarithm of the annual average net value of the firms’ fixed assets deflated by the price index of fixed assets investment, whereas labor is the logarithm of the annual average number of firms’ employees. ③ Average wage ( Wage ), which is measured as the logarithm of the ratio of total wages payable to the number of employees. ④ Enterprise age ( Age ), which is measured as the logarithm of the number of years since the establishment of the enterprise. ⑤ Government subsidies ( Subsidy ), which is measured as the ratio of subsidies that enterprises obtain from the government to enterprise sales. ⑥ Industry concentration ( HHI ), which is measured by the Herfindahl–Hirschman index for each four-digit industry.

The data used in the empirical analysis come from the Annual Survey of Industrial Firms (ASIF) compiled by the National Bureau of Statistics of China. The ASIF data set includes all SOEs and firms of other ownership types with turnover of more than 5 million RMB. The firms included in the data set accounted for approximately 90% of the gross output in the manufacturing industry in China (Brandt et al., 2012 ). The sample period is from 2000 to 2007, which is consistent with the existing related studies, such as Xiang et al. ( 2017 ). To obtain reliable results, this study only selected enterprises in the manufacturing industry as research objects. Similar to the approach of Brandt et al. ( 2012 ) and Yu ( 2015 ), this study processed the original industrial firm data by removing the samples of missing variables, excluding the samples of enterprises with less than eight employees, and deleting some samples of enterprises that violate accounting common sense (e.g., total assets are less than net fixed assets or paid-up capital is less than or equal to zero).

This study mainly discusses the impact of FDI on the innovation performance of local enterprises. Following Ding et al. ( 2013 ), this study defined enterprises with foreign capital accounting for more than 50% of the registered capital of enterprises as foreign-funded enterprises to distinguish between local and foreign-funded enterprises. All foreign-funded enterprises are excluded from the subsequent regression samples. Table 1 shows the descriptive statistics of main variables used in the empirical analysis.

Baseline results

This study estimated Eq. ( 1 ) using the micro data set of Chinese manufacturing enterprises from 2000 to 2007, and Columns (1) to (3) of Table 2 show the corresponding regression results where firm, province, and year fixed effects are included. In Column (1), the study directly regressed the enterprise innovation ( Innov ) on foreign direct investment ( FI ) without any control variables. The result shows that the estimated coefficient of FDI is positive and significant, which indicates that with the increasing of FDI, the innovation performance of local enterprises will increase accordingly. In Column (2), five enterprise-level control variables were added: enterprise size, factor density, average wage, enterprise age, and government subsidy. The regression results are similar to those in Column (1): the coefficient of FDI is significantly positive, indicating that FDI is conducive to improving the innovation performance of Chinese local enterprises. In Column (3), the industry-level control variable Herfindahl–Hirschman index ( HHI ) was further added. The estimated coefficient of FDI remains significantly positive, indicating that FDI will have a significant positive impact on the innovation performance of local enterprises. This finding is consistent with that of Gorodnichenko et al. ( 2020 ). They found that FDI improved the innovation performance of local enterprises in general. Columns (4)–(6) of Table 2 present the results of re-estimating Eq. ( 1 ) by adding industry fixed effects. The estimated coefficients of FDI are still positive and significant, which is similar to the regression results obtained by controlling firm fixed effect before.

Throughout the regression results of Table 2 , although the addition of control variables will change the magnitude of the coefficient of foreign direct investment ( FI ), the symbol and significance of the coefficient have not changed. This finding shows that the impact of FDI on the innovation performance of Chinese local enterprises will not change with the change in control variables. Specifically, looking at the regression results in Column (3), the coefficient of foreign direct investment ( FI ) is 0.5859 and passes the significance test of 1%, which shows that for every one percentage point increase in the proportion of FDI in the industry, the output value of new products of enterprises will increase by 0.59% on average.

Robustness tests

Endogeneity problems.

This study aims to explore the impact of FDI on the innovation performance of local enterprises. The dimension of the dependent variable is the enterprise level, whereas the measurement dimension of FDI is the industry level. Therefore, the possibility of endogenous problems caused by reverse causality is relatively low, which is also the reason why most enterprise micro-level research literature regards foreign direct investment variables as exogenous (Javorcik, 2004 ). Nevertheless, some unobserved factors (e.g., macroeconomic fluctuations) may affect FDI and enterprise innovation. If these unobservable factors are omitted, then they will also cause endogenous problems.

In order to avoid the potential endogenous problem, this study tries to construct the corresponding instrumental variables (IVs), and then use the two-stage least squares method for estimation. Firstly, considering that the Chinese government has continuously relaxed the controlling for FDI through policy opening during the sample period, following Lu and Yu ( 2015 ), this study uses the logarithm of the number of foreign-funded enterprises at the industry level as the instrumental variable for regression. The results are shown in column (1) of Table 3 . Secondly, following Ahsan ( 2013 ), this study further selects the amount of foreign investment in the initial year of the sample period as the instrumental variable to estimate Eq. ( 1 ). The results are shown in column (2) of Table 3 . It can be seen that the estimated coefficients of foreign direct investment are both significantly positive. This shows that the previous benchmark regression results are less likely to be disturbed by endogenous problems.

Alternative variable measures

On the one hand, the dependent variable in the previous analysis is measured by the logarithm of the output value of the enterprise’s new product. For the sake of robustness, in this part, following Ito et al. ( 2012 ) and García et al. ( 2013 ), the logarithm of the total number of enterprise patent applications was employed to re-measure the innovation performance of local enterprises. The patent data of enterprises come from the patent database of all state-owned and above-scale industrial enterprises issued by the China Intellectual Property Office from 1985 to 2013. This study summarized the number of annual patent applications by enterprises Footnote 1 . Similarly, following He et al. ( 2018 ), this study matched the patent data with the ASIF data set. Based on this matched samples, Eq. ( 1 ) was re-estimated using the number of enterprise patent applications to measure the innovation performance. From the regression results in Column (3) of Table 3 , the estimated coefficient of FDI is still significantly positive, which is similar to the previous baseline regression results.

On the other hand, when constructing the measure index of FDI in Eq. ( 2 ), this study used the total output of enterprises as the weight. Some existing related studies also used the enterprise’s sales or value added as the weight to construct the measure index of FDI (Javorcik 2004 ; Lu et al., 2017 ). For the sake of robustness, the enterprise’s sales and value added were also used as the weight to reconstruct the measure index of FDI before re-estimating Eq. ( 1 ). From the regression results of Columns (4) and (5) of Table 3 , whether the measure index of FDI is constructed with the enterprise sales as the weight ( FI_S ), or with the enterprise added value as the weight ( FI_A ), the estimated coefficients of FDI remain significantly positive, which is also similar to the previous baseline regression results.

Excluding the impact of other policy changes

The sample period of this study is from 2000 to 2007. During this period, two important policy changes deserved attention: One is that China officially joined the WTO at the end of 2001 and the process of China’s reform was further accelerated (Xiang et al., 2017 ); the other is that China implemented the reform of the RMB exchange rate system in 2005. Since then, the RMB exchange rate has continued to appreciate. The changes of these two policies may have a relatively large impact on the inflow of foreign capital and likely result in bias in previous estimations. For the sake of robustness, this study re-estimated Eq. ( 1 ) based on the following two reconstructed sub-samples: First, the sample data of enterprises before China joined the WTO were deleted to eliminate the influence of China’s accession to WTO. Column (6) of Table 3 shows the regression results. Second, only the sample data of the enterprises after the exchange rate reform were retained to eliminate the impact of this policy change. Column (7) of Table 3 shows the results. The estimated coefficients of FDI are still significantly positive. Therefore, the previous baseline regression results are less disturbed by the two policies of China’s accession to WTO and RMB exchange rate reform.

Influence channel and heterogeneous impact analysis

Influence channel analysis.

The previous estimation results have shown that FDI significantly improves the innovation performance of Chinese local enterprises. In this part, the channels through which FDI promotes the innovation performance of local enterprises will be further analyzed.

According to the previous analysis, FDI may have a positive effect on the innovation performance of local enterprises through positive spillover effects, such as demonstration and learning effects. To test this, this study selects the R&D investment of enterprises as the intermediary variable and estimates the corresponding intermediary effect model to verify whether FDI has a positive impact on the innovation performance of local enterprises by promoting R&D investment of enterprises. The complete intermediary effect model is set as follows:

where RD denotes the R&D investment of enterprises, which is measured by the logarithm of the R&D investment of the enterprise in the current period. All other subscripts and variables have the same meaning as in Eq. ( 1 ).

Table 4 shows the estimated results of the intermediary effect model. The estimation result of Eq. ( 3 ) is not reported in this part for it is just the previous baseline regression result. Column (1) of Table 4 reports the estimation result of Eq. ( 4 ), in which the dependent variable is the enterprise’s R&D investment. The estimated coefficient of FDI is significantly positive, indicating that FDI has significantly improved the enterprise’s R&D investment, which is consistent with Olabisi ( 2017 ). This result is mainly because foreign-funded enterprises often have advanced production technologies and management experience. After entering the host country market, they will have a demonstration effect on local enterprises in the same industry. Moreover, R&D personnel who have worked in foreign-funded enterprises or have received good skills training may partially flow to local enterprises. The effect of personnel turnover will also enhance the R&D capabilities of local enterprises. Column (2) reports the estimation result of Eq. ( 5 ). The estimated coefficient of the intermediary variable ( RD ) is significantly positive, which means that the increasing enterprise R&D investment will significantly improve the innovation performance of enterprises. This result is consistent with the usual expectations. The regression results of Eqs. (3) and (5) show that the estimated coefficient value and significance level ( t -value) of foreign direct investment ( FI ) have a large decline after adding the intermediary variable ( RD ), which preliminarily shows the existence of the intermediary effect of “enterprise R&D investment”.

For the sake of robustness, following the method of Sobel ( 1987 ), this study further tested whether the product term of the regression coefficient on the path of the intermediary variable is significant. That is, to test H 0 : b 1 d 2  = 0: If the original hypothesis is rejected, then the intermediary effect is significant; Otherwise, the effect is insignificant. The test result shows that the original hypothesis should be rejected, which further verifies the existence of the intermediary effect of “enterprise R&D investment”. These results indicate that promoting the increase of enterprise R&D investment is an important channel for FDI to affect enterprise innovation.

According to the previous analysis, FDI may also affect the innovation performance of local enterprises through competition effects. However, this mechanism will have different effects based on the degree of competition in the industry. If the industry competition is fierce, then the “Schumpeter effect” will weaken the positive impact of the “Escape from competition effect” on enterprise innovation. In this situation, the market incentive effect of FDI on enterprise innovation will be relatively weak. On the contrary, if the industry competition is insufficient, then the market incentive effect of foreign investment on enterprise innovation will be relatively strong. Based on this, this study uses the industry HHI to measure the degree of market competition and used the interaction between the industry HHI and FDI to analyze the mechanism of “competition effects of FDI affecting enterprise innovation”. Column (3) of Table 4 shows the results. The estimated coefficient of the interaction term ( FI   ×   HHI ) is significantly positive, which means that if the degree of market competition is low, then FDI can highly promote the innovation performance of local enterprises. This result is mainly because FDI effectively disintegrates the high monopoly of the industry and stimulates market competition. The incentive effect of market competition caused by FDI also has a relatively large impact on enterprise innovation, that is, the “Escape from competition effect” of market competition is absolutely dominant. However, with the increasing market competition, the “Schumpeter effect” has gradually strengthened and will weaken the positive effect of “Escape from competition effect”. The positive effect of FDI on the innovation performance of local companies was gradually weakened. To a certain extent, this finding verifies that the competition effect is also an important way for FDI to affect the innovation performance of local enterprises.

Heterogeneous impact analysis

Different types of productivity.

Substantial differences in the productivity level of different enterprises were observed, which may make them react differently to the fierce external competition caused by FDI. This study estimated the TFP of enterprises following the method of Ackerberg et al. ( 2015 ) to explore whether a significant difference exists in the impact of FDI on the innovation performance of different productivity enterprises. Then, using the median of the TFP of enterprises in the sample as the critical value to divide the sample into two sub-samples, based on which Eq. ( 1 ) was then re-estimated. Columns (1) and (2) of Table 5 show the results. Foreign direct investment does not significantly affect the innovation performance of low-productivity enterprises, but will significantly improve that of high-productivity enterprises. The possible reasons are as follows: On the one hand, in the face of the fierce market competition caused by FDI, only enterprises with high-productivity and close to the cutting-edge technology are able to deal with the threat of competition through R&D and innovation. For enterprises with low-productivity and far away from the cutting-edge technology, the intensification of competition reduces the expected profit of innovation investment, thus reducing the innovation incentive of such enterprises (Aghion et al., 2005 ; Baghdasaryan et al., 2016 ). On the other hand, enterprises with high-productivity tend to have high absorptive capacity and competitiveness, and therefore are relatively highly motivated to imitate and learn foreign advanced technology and knowledge and introduce corresponding technical equipment. They can obtain more spillover effects from foreign direct investment.

Different types of factor intensity

The traditional factor endowment theory emphasizes the important role of production factors in enterprise production activities. Varying factor-intensive enterprises have great differences in factor input, production technology, organization, and so on. Is there a significant difference in the impact of FDI on the innovation performance of local enterprises with different factor intensities? To this end, using the median of the factor density of enterprises in the sample as the critical value, this study divided the sample into two sub-samples: the labor-intensive enterprises with low capital–labor ratio and the capital-intensive enterprises with high capital–labor ratio. Using the two sub-samples, Eq. ( 1 ) was re-estimated. Columns (3) and (4) of Table 5 show the results. FDI does not have a significant impact on the innovation performance of labor-intensive enterprises, but significantly improves that of capital-intensive enterprises. This result is consistent with our expectations. Generally, capital-intensive enterprises will pay more attention to equipment renewal and R&D investment than labor-intensive ones, and obtaining great positive spillover effects from the demonstration and staff turnover effects brought about by FDI is easy. In contrast, labor-intensive enterprises often rely more on labor input and less on innovation and advanced technology. Therefore, FDI mainly improves the innovation performance of capital-intensive enterprises.

Different types of region

The regional economic development in China has differences. Compared with non-coastal areas, coastal ones have a higher degree of economic openness and development, relatively better transportation and infrastructure construction, and more active attraction of FDI. Differences between regions likely lead to varying effects of FDI on the innovation performance of local enterprises in different regions. To this end, this study divided all provinces into coastal and non-coastal areas according to whether they are near the sea or not Footnote 2 . Using the sub-samples composed of enterprises in these two areas, Eq. ( 1 ) was re-estimated. Columns (1) and (2) of Table 6 show the results. Foreign direct investment significantly improves the innovation performance of local enterprises in non-coastal areas but not that of local enterprises in coastal areas. The reason may be that due to the higher economic openness and development level and more complete legal systems, the competition among enterprises in coastal areas is relatively fierce. Foreign direct investment has further intensified the market competition, making the “Schumpeter effect” gradually enhanced and dominant, weakening the positive spillover effect brought by FDI. Hence, the effect of FDI in promoting the innovation performance of local enterprises in coastal areas is insignificant. In the case of insufficient competition in non-coastal areas, the “Escape from competition effect” may still dominate, and that of FDI in promoting the innovation performance of local enterprises in non-coastal areas is relatively evident.

Export and non-export enterprises

Since the reform and opening up, the export trade has made an indelible contribution to the rapid development of China’s economy. Considering that non-export (i.e., pure domestic enterprises) and export enterprises face different product markets, the degree of competition in different markets may impose a significant difference in the impact of FDI on the innovation performance of export and non-export enterprises. To this end, this study divided all sample enterprises into exporting and non-exporting enterprises according to whether they export or not. Using the sub-samples composed of these two types of enterprises, Eq. ( 1 ) was re-estimated. From the regression results of Columns (3) and (4) of Table 6 , foreign direct investment significantly improves the innovation performance of exporting and non-exporting enterprises. However, compared with non-exporting enterprises, FDI has a relatively greater positive effect on export enterprise innovation. The reason may be that as some products of export enterprises are oriented to overseas markets, export enterprises often face more fierce international competition. Thus, export enterprises need to pay attention to the improvement of production efficiency. A strong sense of suffering may allow export enterprises to obtain great positive spillover effects from the demonstration and staff turnover effects brought by FDI.

Different types of ownership

China’s unique institutional settings have made the ownership structure become an important factor affecting the performance of Chinese enterprises (Hu and Liu, 2014 ). Following Ding et al. ( 2013 ), this study divided all enterprises into state-owned enterprises (SOEs) and non-state-owned enterprises (Non-SOEs) according to the proportion of registered capital invested by enterprises, so as to analyze whether differences exist in the impact of FDI on the innovation performance of local enterprises of different ownership types. Using the sub-samples composed of SOEs and Non-SOEs, Eq. ( 1 ) was re-estimated. Columns (5) and (6) of Table 6 show the results. For Non-SOEs, the estimated coefficient of FDI is significantly positive, whereas for SOEs, the estimated coefficient of FDI is also positive, but does not pass the significance test. This finding shows that the effect of FDI in promoting the innovation performance of Chinese local enterprises is more reflected in Non-SOEs than SOEs. The reasons may be that SOEs have a weak awareness of intellectual property rights and lack a strong sense of competition and crisis under the protection of the government. Hence, they do not have sufficient motivation to learn to imitate the cutting-edge knowledge and advanced technology of foreign-funded enterprises. Similarly, their innovative activity may be discouraged due to the increasing competition through foreign direct investment (Aghion et al., 2005 ). On the contrary, non-SOEs have a higher absorptive capacity and willingness to learn. They can adapt to the fierce market competition, survive and develop, and eventually obtain additional spillover effects of FDI.

Over the past 40 years of reform, specifically after China’s accession to the WTO, China has attracted considerable foreign direct investments with its rapid economic growth and an increasingly open investment environment. What impact will considerable foreign direct investments have on the innovation performance of Chinese local enterprises? Based on the micro data of Chinese manufacturing enterprises from 2000 to 2007, this study analyzes the impact of FDI on the innovation performance of Chinese local manufacturing enterprises. After a series of robustness tests, this study found that FDI significantly improves the innovation performance of Chinese local manufacturing enterprises. The analysis of the impact mechanism shows that the spillover effect and competitive effect are important ways for FDI to affect the innovation performance of Chinese local enterprises. On the one hand, FDI has a positive impact on enterprise innovation by promoting the R&D investment of enterprises. On the other hand, the positive effect of FDI on the innovation performance of local enterprises gradually weakens with the increasing market competition.

Further analysis of the different types of enterprises shows the following: First, FDI significantly improves the innovation performance of high-productivity enterprises but does not significantly affect the innovation performance of low-productivity enterprises. Second, FDI does not have a significant impact on the innovation performance of labor-intensive enterprises but can significantly improve the innovation performance of capital-intensive enterprises. Third, FDI can promote the innovation performance of local companies in non-coastal areas but does not significantly affect the innovation performance of local companies in coastal areas. Fourth, FDI promotes the innovation performance of local export enterprises but does not significantly affect the innovation performance of local non-export enterprises. Fifth, FDI does not significantly affect the innovation performance of SOEs, while the effect of FDI in promoting the innovation performance of local Chinese enterprises is reflected in non-SOEs.

The research conclusions of this study also have strong policy implications: First, foreign direct investment significantly improves the innovation performance of local companies. To this end, the government should further introduce and improve relevant policies to attract FDI. The government may protect the legitimate rights and interests of foreign investors through legislation. Similarly, the government may also learn from the management model of “pre-entry national treatment” and “negative list” to minimize and standardize the administrative approval process for the inflow of foreign capital and continuously optimize the business environment and improve the level of facilitation of foreign direct investment. Second, the government should also timely adjust the corresponding policy of attracting FDI. When formulating the policy of attracting FDI, local governments should pay attention to optimizing the innovation environment and adjusting the inflow direction of foreign capital to maximize the spillover effects of FDI. Similarly, the analysis of this study shows that the impact of FDI on the innovation performance of varying factor-intensive enterprises, ownership enterprises, and regional enterprises is different. Therefore, when formulating and adjusting the corresponding policies to attract FDI, the government should attach great importance to the different impact of FDI on different types of enterprises.

It should be noted that the data used in this study came from the ASIF compiled by the National Bureau of Statistics of China. The sample spans from 2000 to 2007. Owing to the limitation of data, this paper cannot use the latest data to study the impact of FDI on the innovation performance of Chinese local enterprises, which has to be said to be a major limitation of this study. Therefore, in future research, using the latest data to analyze how FDI affects the innovation performance of Chinese local enterprises through spillover effects and competitive effects will undoubtedly provide more timely policy implications.

For further information on this database, see Chen and Zhang ( 2019 ).

The coastal area includes 11 provinces: Liaoning, Tianjin, Hebei, Shandong, Shanghai, Jiangsu, Zhejiang, Fujian, Guangdong, Guangxi, and Hainan. The remaining provinces belong to non-coastal areas.

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Yue, W. Foreign direct investment and the innovation performance of local enterprises. Humanit Soc Sci Commun 9 , 252 (2022). https://doi.org/10.1057/s41599-022-01274-6

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Progress in remote sensing and gis-based fdi research based on quantitative and qualitative analysis.

1. Introduction

2. research methods and data, 2.1. research methods, 2.2. data sources and screening, 2.3. data processing, 3. subject categories and publication trends, 3.1. subject evolution, 3.2. trends in the number and cited times of published papers, 4. the intellectual structure, 4.1. quantitative analysis, 4.2. qualitative analysis, 4.2.1. macro-environmental research at national, regional, and city scales, 4.2.2. global industrial development and layout, 4.2.3. research on global value chains, 4.2.4. micro-information geography of tncs, 4.2.5. internationalization and commercialization of geo-information industry, 4.2.6. multiple data and interdisciplinary approaches, 5. discussions and conclusions, data availability statement, acknowledgments, conflicts of interest.

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Li, Z. Progress in Remote Sensing and GIS-Based FDI Research Based on Quantitative and Qualitative Analysis. Land 2024 , 13 , 1313. https://doi.org/10.3390/land13081313

Li Z. Progress in Remote Sensing and GIS-Based FDI Research Based on Quantitative and Qualitative Analysis. Land . 2024; 13(8):1313. https://doi.org/10.3390/land13081313

Li, Zifeng. 2024. "Progress in Remote Sensing and GIS-Based FDI Research Based on Quantitative and Qualitative Analysis" Land 13, no. 8: 1313. https://doi.org/10.3390/land13081313

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‘Foreign investors show little interest in Canadian equities’, notes Scotiabank strategist

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

The title of Scotiabank strategist Hugo Ste-Marie’s most recent report is blunt – Foreign Investors Show Little Interest in Canadian Equities ,

“While the TSX Composite is posting solid gains this year (+10%) and in the past year (+16%), foreign investors show little appetite for Canadian equities. In fact, the latest data from Statistics Canada for the month of June shows that foreign investment in Canadian equity and investment fund shares dropped by C$5.5B ... the negative print in June is not a new phenomenon as foreign investors have been constantly reducing their exposure to CDA equities in the past few years. They sold for C$14B worth of stocks this year and C$27B in the past 12 months, which should not come as a surprise given the massive outperformance of US equities (Mag-7 + AI-theme). Interestingly, the divestment in June was mainly in shares of Canadian banks. With their FQ3 reporting season starting this Thursday, if banks manage to beat expectations and deliver solid results all around, global investors could be tempted to make a comeback and possibly turbo[1]charge TSX returns once again”

RBC Capital Markets analyst Darko Mihelic previews earnings reports in the banking sector which begin in two days with TD,

“We make a few changes to our models and our Q3/24 core EPS estimates modestly increase; we increase our Canada P&C [personal and commercial] loan growth assumptions in line with RBC Elements’ model predictions and adjust our capital markets estimates (higher for NA and lower for CM and TD). We continue to view credit quality as one of the key areas to watch for the Canadian banks as we have seen signs of credit quality deterioration (increasing unemployment, higher NCO ratios at U.S. peers, etc). We expect impaired PCL ratios to increase 3 bps QoQ and 12 bps YoY on average. We adjust our models to reflect a muted level of capital markets revenue growth of 0.8% QoQ in aggregate for the large Canadian banks we cover. Capital continues to be solid in our view as the last remaining banks with discounted DRIPs are turning them off soon (CM is turning it off in Q3/24 and BNS intends to turn it off in Q4/24)”

Mr. Mihelic has an outperform rating only on TD among the major banks, favouring insurance stocks.

BofA Securities analyst Arjun Goyal believes that the rapid fall in the VIX index is (counterintuitively) a signal to hedge against risk,

“Vol markets have rapidly stabilized from 5 Aug’s spike, with the VIX having already retraced almost all the way back to its pre-August YTD average level. In fact, the speed of this retracement has been historic, with the VIX dropping from its peak to below its long-term median in just 7 days (fastest in history). With vol back to relatively low levels, equities having resumed their rally, and numerous downside risks ranging from macro to political to seasonal, hedging the downside remains prudent in our view”

BMO Canadian rates and macro strategist Benjamin Reitzes charts the lack of growth in mortgage originations,

“With the housing market continuing to languish through spring under the pressure of high interest rates and high prices, mortgage activity has remained similarly under wraps. Mortgage balances grew by 3% annualized in Q2, the second slowest quarterly pace since 2000. Last week’s July home sales figures showed a small decline, suggesting that Canadians are maintaining a cautious view on housing even as interest rates are starting to come down (mortgage rates are off the highs, though BoC rate cuts didn’t start until June). While the modest growth in mortgage borrowing reflects softness in housing, the bright side is that it also points to a further dip in household debt-to-income ratios. The latter will be welcome news, as elevated leverage drives household financial vulnerability”

Diversion: “The Terrifying Rise of Ransomware Gangs” – Macleans

Market Factors: Three stretched trends that are poised to reverse. Plus, the surprising stock winners so far in 2024

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