Journal of International Development

J. Int. Dev. 30, 1439–1454 (2018)

Published online 4 May 2018 in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/jid.3368

EFFECTS OF OUTWARD FOREIGN DIRECT

INVESTMENT ON DOMESTIC
INVESTMENT: THE CASES OF BRAZIL AND
CHINA
IGOR GONDIM1* , MARIO HENRIQUE OGASAVARA1,2 and GILMAR MASIERO3
1
Escola Superior de Propaganda e Marketing, Sao Paulo, Brazil
2
Graduate Program in International Management, Sao Paulo, Brazil
3
FEA/USP, Universidade de Sao Paulo, Sao Paulo, Brazil

Abstract: Policymakers face a dilemma over their investment-promotion strategies for becoming
more competitive in international markets. Encouraging firms to invest abroad could reduce domestic
economic activity. We investigate this issue by analysing the long- and short-run relationships
between outward foreign direct investment and domestic investment for Brazil and China. We use
a time series approach, namely autoregressive distributed lag for the period between 1975 and
2013. Our findings indicate a crowding-in effect of outward foreign direct investment on domestic
investment for both countries. Copyright © 2018 John Wiley & Sons, Ltd.

Keywords: outward foreign direct investment; domestic investment; crowding-out effect;

crowding-in effect

1 INTRODUCTION

Traditionally, the leading investors responsible for foreign direct investment (FDI) have
been multinational enterprises (MNEs) from developed countries. Consequently, the
outward FDI (OFDI) literature has advanced with a focus on countries such as the
United States, Sweden, Germany, and Japan, presumably because MNEs from these
countries invest much abroad (Kim, 2000; Dasgupta, 2014). Furthermore, until very
recently, OFDI from developing countries was restricted to very few firms and had almost
negligible importance to home countries (Caseiro & Masiero, 2014). However, this

*Correspondence to: Dr Igor Gondim, Escola Superior de Propaganda e Marketing, R. Dr Álvaro Alvim, 123, Sao
Paulo 04018-010, Brazil.
E-mail: igor.gondim@espm.br

Copyright © 2018 John Wiley & Sons, Ltd.

1440 I. Gondim et al.

scenario has changed. Both domestic policy choices in developing countries and global
economic conditions helped shape these changes in the investment landscape (Perea &
Stephenson, 2017). An increasing OFDI share now comes from MNEs based in
developing countries (Cuervo-Cazurra, 2008; Luo & Zhang, 2016; Paul & Benito,
2018). Developing and transition countries increased their share of global OFDI from
0.3 to 39.2 per cent between 1970 and 2014 (United Nations, 2015).
One major controversial issue on the internationalisation of MNEs is whether OFDI
crowds in or crowds out domestic investment (DI) in home countries (Stevens & Lipsey,
1992; Feldstein, 1995). One of the main arguments in this debate is that OFDI replaces
domestic activities and consequently DI, especially when firms shift some proportion of
their production abroad (Ameer, Xu, & Alotaish, 2017). Some existing empirical studies
focusing on aggregate cross-country data conclude that OFDI reduces DI in an
approximately one-to-one ratio (Feldstein, 1995; Desai, Foley, & Hines Jr, 2005; Ameer
et al., 2017). In contrast, Herzer and Schrooten (2008) found that OFDI has positive
long-run effects on DI for the United States and negative long-run effect on DI for
Germany. Desai et al. (2005) argue that firms combine home production with foreign
production to generate a final output with lower costs than would be possible with
production in just one country. Nonetheless, such an expansion strategy can be
controversial for developing countries because the decision to invest scarce resources
abroad inevitably reduces the likelihood of concurrent investments at home (Stevens &
Lipsey, 1992). It is worth pointing out that research based on developed countries might
not be relevant for developing countries because developing countries are under imperfect
financial market conditions and are capital-scarce in OFDI (Alsadiq, 2013; Dasgupta,
2014). Moreover, the advantages and internationalisation of MNEs in developing countries
differ from those in developed country ones (Dunning, 2000).
While many theories explain the possible influence of OFDI on DI, the results are still
inconclusive (Alsadiq, 2013; You & Solomon, 2015). Thus, it is worth shedding some
light on this matter to bring out evidence of the effects of OFDI on DI because this
understanding might be a vital step towards internationalisation and national development.
In particular, the recent rise of MNEs in Latin America, India and Asian countries creates
opportunities to carry out comparative studies that explore the countries’ strategic motives
(Paul & Benito, 2018). Hence, we investigate Brazil and China because these countries
have been among the developing countries to start distinct internationalisation programmes
and adopt uniquely political strategies. Further, these two countries are relatively important
in their regions in terms of their economic and demographic sizes.
We developed the study and discussions by using an autoregressive-distributed lag
(ARDL) (Pesaran, Shin, & Smith, 2001) approach to test the presence of cointegration in
the data series. We also estimate the long- and short-run coefficients of these variables. The
results of the study indicate a significant and positive association between OFDI and DI. It also
indicates that a crowding-in effect is stronger for Chinese investments than Brazilian ones.

2 LITERATURE BACKGROUND

2.1 FDI Framework

In the neoclassical growth model, FDI promotes economic growth by increasing the
volume of investment and its efficiency (X. Li & Liu, 2005). In this vein, FDI raises

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economic growth by generating technological diffusion from developed countries to

developing ones (Borensztein, De Gregorio, & Lee, 1998). FDI is significant for at least
two reasons. First, it is a mechanism by which firms can maintain their production control
abroad, find new opportunities, maximise their values and exploit existing firm-specific
advantages (Kuemmerle, 1999). Second, FDI can help to cover the country’s current
account and fiscal deficits and supplement inadequate domestic resources to finance both
ownership change and capital formation (Krkoska, 2002). In developing countries, it has
also reduced absolute poverty and raised incomes (Nunnenkamp, 2004).
From an international business perspective, MNEs internationalise by an apparent
competitive advantage that allows them to secure enough return to cover the additional
costs and risks associated with operating abroad (Buckley & Ghauri, 1999). The
ownership, location and internalisation (OLI) framework advantages proposed by Dunning
(1988) describe the elements and conditions for MNEs going abroad. Dunning (2000)
added four motive categories for FDI: (i) resource-seeking: motivated by accessing natural
resources and low-cost labour; (ii) market-seeking: motivated by accessing international
markets; (iii) efficiency-seeking: aims to reduce production costs; and (iv) strategic-
seeking: motivated by acquiring strategic assets such as brands, human capital or
distribution networks.
The OLI framework, to some extent, explains why MNEs from developing economies
internationalise, but it is still a comparatively static observation, comparing one point in
time with another (Mathews, 2006). It gives the impression that there is no interconnection
between its various constituent parts (Dunning & Lundan, 2008). It also ignores the
improvement of MNEs in the process of internationalisation (Si, Liefner, & Wang,
2013). The linkage, leverage and learning framework (Mathews, 2006) is an alternative
to the OLI paradigm. It explores firm-specific advantages from developing countries.
Hence, MNEs from developed and developing countries have been expanding their
activities abroad following these frameworks. In some cases, as Si et al. (2013) summarise,
they must combine these frameworks to take advantage of being ‘latecomers’. For
instance, the authors find that the OLI model is quite useful for understanding FDI from
China to developing countries, whereas the linkage, leverage and learning model is more
powerful for explaining FDI to developed countries. Institutional theory is widely used
in research on OFDI from developing countries (Dacin, Goodstein, & Scott, 2002; Paul
& Benito, 2018). It seeks to capture fundamental aspects of the country of origin and the
target country of investments, which are details not usually emphasised by other theories
(Peng, Wang, & Jiang, 2008). In summary, these theories are the cornerstone of knowledge
in the internationalisation process of MNEs.

2.2 FDI and DI Interaction

A significant empirical issue arises regarding the interaction between OFDI and DI. If a
one-dollar increase in OFDI leads to more than a one-dollar increase in DI, then a
crowding-in effect occurs. If a one-dollar increase in OFDI leads to a reduction in DI, then
a crowding-out effect occurs (Agosin & Machado, 2005). Knoerich (2012) conceptually
argues that OFDI supports economic development relating this benefit to reverse spillovers
(De Propris & Driffield, 2005). Reverse spillover refers to the process by which one
country learns from the host country when operating abroad, such as knowledge,
technology skills and efficiency that might be transmitted from subsidiaries operating in

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developed countries to headquarters in developing countries. Exposure to competition in

developed countries pushes developing country firms to adjust and enhance their
performance to maintain their competitiveness, perhaps by upgrading their products and
processes and ameliorating their methods of management and organisation (Knoerich,
2012).
Hence, OFDI from developing countries may contribute to MNEs’ competitiveness, but
it is also subject to risks inherent in projects undertaken abroad. First, developing countries
face the disadvantage of being foreign in a host country. Second, there are additional
problems related to cultural, social and institutional differences. Third, they face higher
levels of managerial complexity on account of being in multiple locations. Finally, there
are specific risks related to operations abroad, such as exchange-rate fluctuations and
political uncertainties (UNCTAD, 2006, p. 170).
It is important to note that OFDI affects not only the MNEs’ performance but also the
domestic economy as a whole (Blomström & Kokko, 1998). When MNEs are asset-
seeking, there is no negative impact on the local economy in the firm’s country of origin

Table 1. Recent studies on outward foreign direct investment (OFDI) from developing countries’
perspectives
Study Major findings

Paul and Benito Literature review on OFDI from developing countries between 1993 and 2017
(2018)
Ameer et al. (2017) They analyse the association between OFDI and DI from China. Results applying a
multivariate model show that there is a definite long-run unidirectional causal
relationship running from OFDI to DI. In the short run, DI and OFDI do not show
Granger causality.
You and Solomon They analyse the influence of Chinese OFDI on DI, finding a positive effect and that it
(2015) depends on the level of government support in the particular industries.
Caseiro and Masiero They analyse how the Brazilian and Chinese OFDI policies can contribute to the
(2014) economic development of their home countries, finding a positive effect to the domestic
economy.
Alsadiq (2013) The author analyses 121 developing countries over the period 1990 to 2010, finding that
OFDI negatively affects DI.
Goh and Wong They found an adverse influence of OFDI and DI during the period 1999 to 2010 for
(2012) Malaysia.
Herzer (2011) The author examines the long-run relationship between OFDI and total factor
productivity for a sample of 33 developing countries (1980-2005), finding a positive
association.
Cui and Jiang (2010) They examine ownership decisions of Chinese OFDI. The findings suggest that Chinese
OFDI ownership decisions are influenced by the assets type, global strategy, their
technology motives and seeking of brand assets, the government restrictions and
cultural barriers they face in the host country, and the home government’s financial
support and approval restriction.
Cuervo-Cazurra The author describes multinational enterprises’ strategies from Latin America in their
(2008) selection of the country which to establish FDI. The analysis reveals multilatinas’ need
for sophisticated advantages for establishing FDI. They are induced by institutional
reforms. Multilatinas follow four alternative strategies for selecting countries in which
to first establish FDI.
Buckley et al. (2007) They associated Chinese OFDI with high levels of political risk, cultural proximity, host
market size and geographic proximity and host natural-resource endowments.

Source: The authors’ elaboration.

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because the firm is looking for resources unavailable in its market (Hejazi & Pauly, 2003).
In line with this, resource-seeking FDI may not adversely impact the domestic economy
because MNEs are interested in accessing and exploiting natural resources beyond their
borders (UNCTAD, 2006, p. 172). OFDI enables firms to not only enter new markets
but also gain access to foreign technology, and as a result, the entire domestic economy
benefits owing to the increased efficiency of the investing firms and the associated
spillovers to the local firms at home (Herzer, 2011).
One issue concerning FDI from developing countries relates to the possible substitution
of domestic production with international production. OFDI could constrain DI and fixed-
capital formation, replace exports from the home economy and reduce employment
(UNCTAD, 2006, pp. 180–182). Empirical evidence on OFDI and restructuring in
developing countries is limited and relates mainly to newly industrialised economies in
East and South-East Asia (UNCTAD, 2006, p. 178). Further, the expansion of FDI from
developing countries is a recent phenomenon; few studies have systematically assessed
the impact of developing countries on their home economies (UNCTAD, 2006, p. 169).
Hence, contemporaneous research tries to understand the crowding-in and crowding-out
effects of OFDI on DI mainly from developing countries because this understanding can
help their economic development and fill the literature gap. Table 1 shows recent studies
on OFDI from developing countries’ perspectives.

2.2.1 Chinese OFDI

Since the late 1970s, the Chinese government has gradually set up legal, regulatory and
financial frameworks to promote OFDI for Chinese firms, either directly by administrative
control or indirectly by economic policy measures (Buckley et al., 2007). Most Chinese
OFDI comes from state-owned and state-controlled firms (Zhu, Zhu, & Zhou, 2010). This
raises the question of whether China’s OFDI (or at least a good part of it) might be made
for purposes other than commercial ones and, more specifically, may be detrimental to the
national security of host countries (Sauvant & Nolan, 2015). However, there has been an
increase in the number of private firms going abroad (Hanemann & Rosen, 2012). In fact,
this reflects the Chinese promotion policy towards OFDI, notably its ‘go global’ policy
implemented after completing its industrialisation process (Caseiro & Masiero, 2014). In
short, the ‘go global’ policy encourages Chinese enterprises to go abroad via export tax
rebates, foreign exchange assistance and other forms of direct financial support (Buckley
et al., 2007). The policy has three primary objectives. The first one is to ensure access to
natural resources. The second is to contribute to the industrialisation and technological
upgrade of the Chinese economy. The third is to increase the competitiveness of Chinese
enterprises by promoting their brands abroad and building a global network of sales,
supply and production (Z. Li, 2009; Luo, Xue, & Han, 2010).
Since this policy, China has significantly increased its presence abroad suggesting that
the aforementioned institutional reforms produce advantages in generating more vigorous
OFDI activities (Luo et al., 2010; Sun, Peng, Ren, & Yan, 2012). The Chinese government
cautiously sought to encourage OFDI as a means of integrating the country into the global
economy. It has been doing so by improving access to domestically scarce raw materials
(Zhang, 2003) and energy sources (Urdinez, Masiero, & Ogasavara, 2014) and in order
to secure the acquisition of strategic assets in semiconductor and other advanced industries
(Avendano, Melguizo & Miner, 2017). In fact, Chinese MNEs aimed at technological
catch-up through overseas investment (Sigurdson, 2005).

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Despite the impulse of Chinese policy towards OFDI, the Chinese government has also
played a negative role (Cui & Jiang, 2010). Davies (2013) points out that official OFDI
figures must be taken with caution because OFDI is used to inject funds into individual
purpose entities that then return the money to China as inward FDI to take advantage of
fiscal incentives, so the official total may be an overestimate. Most of Chinese OFDI goes
to countries such as Hong Kong, the Cayman Islands and the British Virgin Islands (Lau &
Bruton, 2008). In other words, some Chinese MNEs invest in these ‘tax havens’ to
transform themselves into ‘foreign domiciled’ companies, whereupon they can invest in
China as foreign investors to take advantage of tax and other concessions back home
(Peng, 2012). Therefore, the negative role of the Chinese government could be cited
regarding its discrimination against certain domestic firms, especially those that are not
state-owned (Ahlstrom, Chen, & Yeh, 2010).
Finally, a network of approximately of 130 bilateral investment treaties (BITs), as well
as some other international investment agreements (IIAs), protects China’s outward
investors. While these treaties were originally concluded with inward FDI in mind, they
have evolved considerably over time to reflect the rise of OFDI (Sauvant & Nolan, 2015).

2.2.2 Brazilian OFDI

Brazilian OFDI has also been rising, although less aggressively. OFDI soared in the 1990s
because of a series of neoliberal reforms that reflected a higher openness to trade and
investments (Carvalho, 2009). The Brazilian government has never implemented an
efficient OFDI policy (Panibratov, 2017). The lack of clear public policy towards
internationalisation has resulted in investments made by already large and profitable meat
processing and engineering services firms (Caseiro & Masiero, 2014). Cyrino, Barcellos,
and Tanure (2010) reveal that the most frequently chosen countries for Brazilian MNEs
are from Latin America (46 per cent), North America (17.1 per cent), Europe (20.6 per
cent) and Asia (10.7 per cent). Brazilian MNEs have a historical preference for geographic
and psychic proximity as their main target markets (Barreto & Rocha, 2003). Further,
Brazilian OFDI has been concentrated on services and tax havens. OFDI to tax havens
often flows back to Brazil, mainly in the form of intracompany transfers (Andreff,
2016). The entry modes of Brazilian MNEs are multiple, combining a mix of activities that
occur simultaneously and encompass asset-seeking and efficiency-seeking strategies
(Fleury & Fleury, 2011, p. 299).
The internationalisation process by Brazilian multinationals has advanced in several
stages with differences in sectoral specificities, strategic motivations regarding financing
and ways of implementing the investments (Dias, 1994; Goulart, Arruda, & Brasil,
1994; López, Chudnovsky, Kosacoff, & Garrido, 1999). Iglesias and Veiga (2002)
mention that all these specificities are connected to the country’s macro context and
institutional voids (Ferreira & Ferreira, 2016), such as economic instability and high
inflation, which could enable or discourage OFDI.
Panibratov (2017) explains that OFDI from Brazil is supported by export promotion
agency (APEX), which helps domestic firms to develop their capabilities and accumulate
resources for international expansion and the participation of the Brazilian Development
Bank (BNDES) with new financing programmes. BNDES loans have allowed Brazilian
MNEs to compete with Chinese ones (which are also supported by public funding) for
large infrastructure projects in Latin America and Africa (Sennes & Mendes, 2009; Caseiro
& Masiero, 2014). In 2007, the government launched its ‘Production Development Policy’
for international expansion and consolidation of Brazilian companies that possessed

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 OFDI from Brazil and China 1445

competitive leadership. The chosen sector was aeronautics, oil and gas, petrochemicals,
mining, steel, paper and pulp and meat, but this activity ceased in 2011 (Caseiro &
Masiero, 2014; Panibratov, 2017). Also, IIAs have seen increased use in the world
economy, thus promoting investment abroad by MNEs and protecting both domestic and
foreign investors (Gondim et al., 2017). In 2016, about 4.715 BITs and 2.806 other IIAs
were in force worldwide (UNCTAD, 2016). Regardless of the importance of such
agreements to promote international expansion, Brazil had 0 BITs and 13 IIAs in force,
which is a weak indicator of OFDI promotion policies because it guarantees isonomic
taxes.
Table 2 shows a comparison between the Brazilian and Chinese OFDI features that were
discussed above.

3 HYPOTHESIS DEVELOPMENT

If MNEs are market-seeking and OFDI replaces a country’s exports or shifts domestic
production abroad, it is likely to reduce DI. On the contrary, if MNEs are asset-seeking,
there is no negative impact on the local economy in the firm’s country of origin because
the firm is looking for resources unavailable in its market (Hejazi & Pauly, 2003).
Resource-seeking MNEs are mainly interested in acquiring particular types of resources
not available in their home or at a cheaper cost, so in this case, OFDI would have a positive
effect on DI. Strategic-asset-seeking helps MNEs to build up their ownership advantages at
home and abroad (You & Solomon, 2015). The idea is that MNEs can acquire and
complement ownership advantages rather than exploiting the existing assets.
Dunning and Lundan (2008) pointed out that OFDI could affect DI positively, neutrally
or negatively. In fact, empirical research has provided mixed results (Alsadiq, 2013; You
& Solomon, 2015; Ameer et al., 2017). Nevertheless, the Chinese government seems to be
more efficient in integrating OFDI policies with the primary objectives of its overall
industrial policy than its Brazilian counterpart (Caseiro & Masiero, 2014).
Many factors make up the idea of a comparative analysis with Brazil and China from
academic, managerial and policy-orientated points of view. Both countries are developing
markets and have large domestic markets. They also face diverse and somewhat opposing

Table 2. Summary of outward foreign direct investment (OFDI) features

Features Brazil China

Strategic-seeking ● ●
Market-seeking ◑ ◑
Resource-seeking ○ ●
Efficiency-seeking ◑ ◑
OFDI Global strategy ◑ ●
OFDI in developed countries ◑ ◑
OFDI in developing countries ● ●
State interference in OFDI ◑ ●
Continued OFDI policies ○ ●
Tax haven ● ●
International agreements ○ ●

Source: The authors’ elaboration ● strong; ◑ medium; ○ weak.

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political and productive contexts on their domestic fronts (Caseiro & Masiero, 2014). They
are responsible for the two most significant stocks of OFDI among developing countries,
having successfully internationalised several public and private companies within the past
decade (Verma et al., 2011; Nölke, 2014). Both countries face weak financial markets.
Capital markets in developing countries are not efficient and might have capital controls.
This may also crowd out DI because it is cheaper for firms to secure debt for the creation
of foreign assets rather than DI (Girma, Patnaik, & Shah, 2010; Dasgupta, 2014).
In light of these earlier arguments and discussions, we test the following hypothesis for
the Brazilian and Chinese cases:
H1 Increases in OFDI will increase domestic investment.

4 METHODOLOGY

4.1 Data Description

This study uses the most extended available annual data collected from the World Bank,
ranging from 1975 to 2013 for Brazil and from 1985 to 2013 for China. The independent
variable is OFDI, which is a sort of cross-border investment associated with a resident in
one country having control or a significant degree of influence on the management of an
enterprise that is resident in another country (World Bank, 2018).
The dependent variable is DI. Previous studies use gross fixed capital formation (GFCF)
as a proxy for DI (Feldstein, 1995; Agosin & Machado, 2005; Herzer & Schrooten, 2008;
Alsadiq, 2013; You & Solomon, 2015). GFCF allows measuring to what degree the
allocation of resources to projects abroad leads to a fall or rise in DI. It is perhaps the most
common benchmark of the impact of OFDI on DI (UNCTAD, 2006, p. 180). In addition,
GFCF is one of the main components of final expenditures to calculating gross domestic
product (GDP) (United Nations, 1964), whereas FDI relates to financing, that is, the
purchase of shares in foreign companies where the buyer has a lasting interest (10 per cent
or more of voting stock). FDI can be used to finance fixed-capital formation. However, it
can also be used to cover a deficit in the company or to pay off a loan. Thus, one cannot say
FDI is always included in GFCF (World Bank, 2018).

4.2 Model Specification

We used EViews 9.0 for the estimation procedures. We applied an econometric technique
called ARDL bounds testing by Pesaran et al. (2001) as a comprehensive approach to
model specification and integration testing (Philips, 2016). ARDL has several advantages
over the traditional co-integration techniques. First, the method uses a single equation,
which reduces the number of parameters to be estimated. Second, the ARDL approach is
more statistically significant for small sample sizes (Ghatak & Siddiki, 2001). Third, this
method does not require that regressors are integrated in the same order. This means that
it could be either I(0) or I(1). In short, according to Philips (2016), the protocol to apply
ARDL encompasses four steps: (i) ensuring that the dependent variable is I(1); (ii)
checking whether the order of the independent variable is not explosive or higher than
I(1); (iii) estimating the ARDL model in error correction form and ensuring there is no

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 OFDI from Brazil and China 1447

autocorrelation; and (iv) performing the bounds test for cointegration. Following Desai
et al. (2005) and Herzer and Schrooten (2008), we can write the DI equation as follows:
   
DI OFDI
¼ a1 þ a2 t þ a3 þ εt (1)
Y t Y t

where (DI/Y)t denotes GFCF as a share of GDP, a are the coefficients, t is a linear trend,
(OFDI/Y)t denotes the OFDI from the home economy to the rest of the world as a
percentage of the GDP, and εt is the white-noise term. We also estimate the error correction
of the ARDL model, as follows:
       
DI DI OFDI DI
Δ ¼ b1 þ b2 t þ b3 þ b4 þ ∑ki¼1 ηi Δ
Y t Y t1 Y Y t1
k
  t1
OFDI
þ ∑ γi Δ þ εt (2)
i¼0 Y t1

where b, η and γ are coefficients; t is the deterministic trend; Δ is the difference operator;
and εt the white noise term. In order to determine whether the model needs a trend (t), we
estimate Equation (2) with and without a trend for both countries.

4.3 Robustness Check

The ARDL approach does not require a stationary test, but we need to ensure that none of
the time series is integrated at order 2 or higher. According to Ouattara (2006), if the series
is I(2), the F-statistics provided by Pesaran et al. (2001) are no longer valid, because the
bounds tests assume that the variables are either I(0) or I(1). To check this, we run a unit
root test on the first difference for OFDI and DI. The p-value for each series is zero,
implying that the series is either I(0) or I(1). To verify the stability of the model, we
perform unit root and structural break tests (Perron, 1989), ignoring structural breaks that
might lead to model misspecifications and inconsistent estimation results of model
parameters (Cergibozan & Demir, 2017). A dummy (D94) variable was created in 1994
to account for the Brazilian trade liberalisation and economic stabilisation programmes.

4.4 Estimation

The results from the unit root and stability tests indicate that we can continue the procedure
by investigating the presence of co-integration among the variables. We estimate the
existence of a long-run relationship between OFDI and DI by applying the ARDL bounds
testing approach. To verify whether the model needs a trend, we estimate Equation (2) with
and without a trend term. Thereby, the trend component is added for both models.
Additionally, the optimal lag length number of the variables was determined based on
the Schwarz information criterion.
The ARDL test is based on the joint F-statistic, the asymptotic distribution of which is
non-standard, so we test the long-run relationship between (DI/Y)t and (OFDI/Y)t in
Equation (2) under the null hypothesis H0 : b2 = b3 = b4 = 0 (there is no co-integration
between the variables) against the alternative hypothesis H1 : b2 ≠ b3 ≠ b4 ≠ 0 (there is
co-integration between the variables) by ordinary least square.

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Table 3. Estimated long-run coefficients by autoregressive-distributed lag approach

Country Lags Regressors F-Statistic (Prob.)

Brazil 1 (OFDI/Y)t; t 5.3614 (0.0102)

China 2 (OFDI/Y)t; t 8.8199 (0.0017)

There are two sets of critical values, the upper bound critical values, which assume that
all variables are I(1), and the lower bound critical values, which assume that all variables
are I(0). If the calculated F-statistic lies between the lower and upper bounds, then the test
is inconclusive. However, if the calculated F-statistic is higher than the upper bound, then
the null hypothesis of no long-run effect is rejected, and if it lies below the lower bound,
we cannot reject the null hypothesis.
We use the Wald test to compare the F-statistic to the critical values obtained from
Pesaran et al. (2001). Because the calculated F-statistics in Table 3 are higher than the
upper bound for both countries, we reject the null hypothesis and accept the alternative
hypothesis of co-integration at the 5 per cent significance level.
Furthermore, we perform some diagnostic tests to ensure that the regression is valid. We
test whether the variance of residuals is homoscedastic and that residuals are not
autocorrelated and rather follow a normal distribution. We show the results from Table 4
. On the basis of the results, we conclude that the residuals do not show any signs of
non-normality, autocorrelation or heteroscedasticity, which are the desired results.
We found that (DI/Y)t and (OFDI/Y)t are cointegrated. Thus, the next step is to estimate
the long-run coefficients for the model. The estimated coefficients of the long-run
relationship are presented in Tables 5 and 6.

4.5 Results Analysis

In the case of Brazil (Table 5), dividing the estimated coefficients of 0.777 by the absolute
value of 0.509, we obtain 1.53. This result means that one additional dollar spent on
OFDI leads to an increase of 1.53 additional dollars in DI in Brazil. In other words, a
crowding-in effect exists. Considering the results for China (Table 6), we also obtain a
crowding-in effect of OFDI on DI of 8.23 (7.043/0.856). Comparatively, these results
indicate that China has stronger benefits in the long run (approximately 5.42 times higher
than Brazil).
The error correction coefficient term of (0.44) and (0.80) for Brazil and China
respectively are highly significant at 1 per cent and negative. This indicates a quick
adjustment of 44 per cent (Brazil) and 80 per cent (China) of the previous year’s

Table 4. Results of diagnostic tests

Countries Brazil China

Test F-Statistic Prob. F-Statistic Prob.

Serial correlation LM 0.3905 0.6804 1.2120 0.3196
Normality test 3.5134 0.1726 0.2522 0.8815
Heteroscedasticity test 0.7187 0.6376 1.8572 0.1286

Copyright © 2018 John Wiley & Sons, Ltd. J. Int. Dev. 30, 1439–1454 (2018)
DOI: 10.1002/jid
 OFDI from Brazil and China 1449

Table 5. Estimated long-run coefficients by autoregressive-distributed lag approach

Brazil

Regressors Coefficient T-Statistic Prob.

C 11.075 2.920 0.007
@Trend 0.076 1.835 0.077
D94 2.117 1.026 0.313
D(DI(1)) 0.080 0.466 0.645
D(OFDI(1)) 0.927 1.379 0.178
D(1) 0.509 3.091 0.004
OFDI(1) 0.777 0.770 0.448
2
R 0.310
DW-Stat 1.942
F-statistic/[Prob] 2.248 [0.066]

Table 6. Estimated long-run coefficients by autoregressive-distributed lag approach

China
Regressors Coefficient T-Statistic Prob.

C 29.417 4.1777 0.000

@Trend 0.080 1.4972 0.174
D(I(1)) 0.362 1.8970 0.072
D(OFDI(1)) 0.805 0.3492 0.730
D(DI(2)) 0.375 2.2062 0.037
D(OFDI(2)) 3.179 1.6318 0.118
I(1) 0.856 4.1999 0.000
OFDI(1) 7.043 3.2225 0.004
2
R 0.579
DW-Stat 2.077
F-statistic/[Prob] 4.128 [0.005]

disequilibrium adjustment to equilibrium in the current year. We also performed a stability

test for the error correction mode to verify that it is stable over time.

5 CONCLUSION

The literature investigating crowding-in and crowding-out effects of OFDI on DI has

shown mixed results. To a certain extent, MNEs’ investments abroad using OFDI could
lead to reductions in domestic activity and capital formation, and consequentially, to a
slowdown in economic growth. In contrast, investments made by MNEs in international
markets could improve their global competitiveness and performance and thus boost
economic growth.
When MNEs enter developed countries, they gain access to new assets, allowing them
to reduce the knowledge gap between developed and developing countries. Such benefits
will depend on their ability to absorb and integrate the acquired knowledge into their
activities.

Copyright © 2018 John Wiley & Sons, Ltd. J. Int. Dev. 30, 1439–1454 (2018)
DOI: 10.1002/jid
1450 I. Gondim et al.

The empirical evidence presented in this study indicates that there are crowding-in
effects for Brazil and China, suggesting that OFDI contributes to enhancing DI. At the
same time, it indicates the importance of establishing new linkages to transmit resources
and knowledge from developed countries to developing countries by reverse spillovers.
The idea is that domestic conditions, such as efficient institutions, high levels of human
capital and a supportive government can have a positive effect on a country’s
development.
These findings are in line with the strand of research that states that OFDI has a positive
impact on the home country and that the benefits are similar to those from developed
countries. Hence, the economic impact of OFDI can be similar to developed countries,
but the differences could be set in OFDI motivations or in OFDI’s development stage.
For instance, MNEs from developed countries may focus more on controlling knowledge
creation (Kuemmerle, 1999), whereas MNEs from developing countries may focus more
on accessing technologies and knowledge abroad (Cantwell & Santangelo, 1999).
In short, OFDI provides a way to access new knowledge and technology for economic
development. This sort of strategy helps MNEs move up the value chain and increase their
competitiveness in international markets. Furthermore, government support to encourage
OFDI can be understood as a development strategy.

5.1 Limitations and Need for Further Research

As is the case with any research, this current research faces several shortcomings. First, in
regard to developing countries’ heterogeneity, given that MNEs from developing countries
are a recent phenomenon and that most developing countries have economic and legal
constraints, we must analyse the findings with caution. Thus, generalisations require
additional research support. Second, data from developing countries can be biased or
incorrect because the data might reflect those governments’ interests. Third, we use
aggregate data, which cannot capture the different levels of industry or government
support to a specific sector. Fourth, the interaction between OFDI and DI takes place
through various channels, such as interactions with institutions, which we did not consider
in this study. A combination of channels would improve the analysis results because the
effect of OFDI on DI is not necessarily straightforward.

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