Can a home country benefit from FDI? A theoretical analysis

Abstract

The effects of outward FDI on home country’s growth remain an open question. The growth of outward FDI has renewed this attention. By allowing for endogenous decisions of firms on both whether to conduct FDI and whether to flow capital returns back to the home country, we have found several interesting results. First, as long as the probability of conducting FDI is positive, a higher proportion of entrepreneurs may harm economic growth of the home country in short-run and long-run. The ambiguous effects of transaction costs and MRS between domestic and foreign consumption on the home country’s economic growth result from the role of financial intermediaries. If the effect via inflow probability dominates, conducting FDI in a host country with a more liberalized capital account, or with a higher capital return rate may promote the home country’s economic growth rate. This is consistent with the findings in the outward FDI in European Union since 1970s.