Reverse technological spillovers from outward FDI on home countries' total factor productivity: Does the mode of investment matter?

We examine the effect of outward foreign direct investment (OFDI) on total factor productivity (TFP) of home (source of FDI) countries in a global sample of 85 economies, distinguishing between outward greenfield FDI (OGFDI) and outward cross-border merger and acquisition (M&A) purchases. The goal of the study is to test for reverse technological spillovers to the FDI source country. The hypothesis is that OGFDI and M&As have different capabilities of carrying out reverse technological spillovers, which would affect the TFP of home countries differently. We apply a two-step system generalized method of moments (GMM) to deal with possible endogeneity and find the following results. First, total OFDI has no effect on the home country's TFP. Second, disentangling OFDI by mode of investment reveals both positive and negative reverse spillovers from FDI to TFP. While OGFDI produces negative reverse spillovers on the TFP of an MNE's home country due to displacement of production and reduced competition at home, M&A purchases produce positive reverse spillovers on the TFP of an MNE's home country due to their potential to acquire high-value knowledge assets. Third, home countries' human capital development positively moderates the impact of OGFDI and M&A purchases on TFP, while trade openness positively moderates only the M&A impact on TFP. Our findings imply that policies that seek to promote OFDI can be beneficial once countries have reached a certain degree of human capital development and participation in international trade.