Determinants and home-country effects of FDI outflows: Evidence from Latin American countries

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August 2015
Paper author(s): 
Ramón Padilla Pérez
Caroline Gomes Nogueira
Financial Economics
Microeconomics - Competition - Productivity

Foreign direct investment (FDI) by Latin American companies has increased sharply since the beginning of the 2000s. While most investment flows correspond to firms from large economies (i.e. Argentina, Brazil, Chile, Mexico and Colombia), small economies have also witnessed the increasing internationalisation of their domestic companies. This study has two main contributions. First, it examines the strategies followed by multinational enterprises (MNEs) from Latin America when they decide to invest in other countries, highlighting differences by sector and issuer-country size. To that end a new database, which comprises quantitative information on the main operations abroad of Latin American enterprises (both greenfield, and mergers and acquisitions) was constructed, based on fDi Markets and Thomson Reuters Datastream. Second, it investigates the home-country effects of outward foreign direct investment (OFDI) by conducting a case study of Costa Rica through a representative sample of firms investing abroad.

The econometric findings show that MNEs from both large and small Latin American economies have market seeking as an important strategy to invest abroad. Yet MNEs from large economies tend to invest in countries which already have strong commercial ties that are well-endowed with natural resources and not necessarily in neighbouring countries, while those from Central America are more likely to invest in countries with lower wages following an efficiency-seeking strategy. As for the case study on the benefits on home countries, the main findings are: a) internationalisation is not only for large and mature firms as medium and small-sized firms are actively investing abroad; b) most firms have pursued a market-seeking strategy; c) the benefits for the firm and the home country are stronger in companies with a clear internationalisation strategy; d) there is a positive relationship between international trade and internationalisation, and e) investing abroad does not mean, in general, that such firms are closing down or reducing their operations at home. 


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