Outward Foreign Direct Investment and Product Quality of Domestic Productions: An Empirical Investigation

Abstract

While conceptual and theoretical studies have claimed that outward foreign direct investment (FDI) is an effective way to improve the quality of domestic production, there has been less systematic investigation into that claim. The statistical analysis of a survey of Taiwan’s outward FDI activity shows that FDI had a positive effect on the quality of only 33.4% of investing firms. We further employ the microeconometric technique to analyze what kinds of globalization behaviors improve the quality of domestic firms’ products. The empirical results show that the strategy of expansionary FDI is more effective than defensive FDI at improving product quality because it allows domestic firms to learn advanced technologies from guest countries. Moreover, the reallocation of export between foreign affiliates and the parent company is an effective way for investing firms to focus on improving domestic product quality.