Does Foreign Direct Investment Matter for the Economic Performance of Businesses? Evidence from the Warsaw Stock Exchange
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AUTORZY: Bogusława Dobrowolska LICZBA STRON: 160 ROK WYDANIA: 2024 ISBN: 978-83-965902-3-7 DOI: 10.26485/978-83-965902-3-7
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OPIS:
Since Poland’s accession to the European Union, Polish companies have increasingly started to internationalise their activities, as evidenced both by an increase in their exports and an increase in their capital involvement in the form of outward foreign direct investment (OFDI). Some Polish companies have begun transforming into multinational corporations, looking for favourable locations for their operations. Even recent events, such as the COVID-19 pandemic, the war in Ukraine, the related geopolitical turmoil, and the energy crisis, have left the flow of OFDI from Poland unabated. Indeed, the above challenges have forced entrepreneurs to manage risks in international markets more effectively. Still, the National Bank of Poland (NBP) data shows that Polish entrepreneurs are coping well. From 2018 to 2020, OFDI from Poland averaged around PLN 4 billion per year, PLN 12 billion in 2021, and PLN 28 billion in 2022. Thus, as already mentioned, OFDI from Poland is growing steadily. However, it should be emphasised that compared to other EU countries, the potential of our economy is still not very high.
The above raises several questions about the benefits of capital involvement to the company in third markets. Could international expansion offer a competitive advantage that enables the company to compete effectively in the domestic and foreign markets? Does it reduce vulnerability to changes in the institutional and economic environment in the domestic market? Can OFDI positively affect the efficiency and productivity of a firm with capital involvement abroad? While the macroeconomic effects of FDI are well recognised, there is a view in the academic literature that researchers have paid much less attention to the microeconomic effects of OFDIs, which for the parent company can be both positive (e.g., acquisition of knowledge conditioning growth, benefits from increased scale of operations, access to cheaper resources) and negative (e.g., additional management costs, economic and political risks, increased staffing needs). Due to the number of potential determinants and the possibility of further detailing them, the conclusions drawn by empirical researchers are often ambiguous and even contradictory, which justifies further attempts to clarify the relationships in this respect.
A specific cognitive gap that inspired us was the questionable evaluation of active internationalisation in emerging economies, including those in Central Europe. This is because the growth of FDI there often contradicts the logic one uses when analysing investment from developed countries. For this reason, some researchers believe that to interpret FDI made by companies from emerging economies they would need to create a specific theory of international business; others argue that the current theoretical framework is sufficient for this purpose, and still, others believe that an in-depth understanding of this expansion should provide material to enrich and extend existing theories of internationalisation.
Moreover, there is a scarcity of studies showing how enterprises’ economic performance changes due to their FDI. The economic effects of FDI on firms and the home country economy also cannot be generalised, as they depend on many factors. Depending on whether the objective is to find new markets, reduce manufacturing costs or improve efficiency, FDIs can have different effects. A successful or unsuccessful investment abroad primarily determines the investor’s fate. However, it can also affect the market position of its domestic collaborators, competitors and even the position of the local community through, for example, the loss of jobs that have been “transferred” abroad. Hence, we need to explore other factors that not only determine the economic performance of a subsidiary but also their consequences for the entire multinational enterprise, its growth opportunities, and, thus, for the rest of the economy. The scarcity of such research inspired us to write this book, as the issue of OFDI, exciting and vital as it seems to us, is rapidly gaining importance in Poland and more widely in Central and Eastern European countries. At the same time, the effects of FDI on foreign investors still need to be fully recognised. With this in mind, we have attempted to examine the issue of OFDI precisely from the perspective of an enterprise and its economic performance.
The monograph is the result of research undertaken as part of the project “Effects of Polish direct investment on parent companies”, funded by the Excellence Initiative-Research University grant (No. 11/IDUB/ DOS/2021), carried out over the period 2021–2023 at the Department of International Trade, Faculty of Economics and Sociology, University of Łódź (Poland). The main objective was to identify the effects of foreign direct investment on Polish companies in terms of their essential business performance. Hence, the aim of the study is allowed to pose the following research questions: 1. What is the scale and structure of Polish direct investment? 2. What is the economic performance of companies with FDI? 3. Do companies with FDI differ from companies without FDI in terms of economic performance? 4. What are the effects of FDI on parent companies?
The direction of the research conducted to achieve the set objective and to elicit answers to the research questions formulated in this way is dictated by the following main hypothesis: “The OFDI improves the economic performance of a parent company.” To verify it, we used data from 297 Polish companies listed on the Warsaw Stock Exchange in Poland in 2021, of which 93 were engaged in FDIs. We based our research on financial data from the Eikon Refinitiv database covering 2012–2021. The Global Industry Classification Standard classified the analysed companies into the following sectors: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Information Technology, Communication Services, Utilities, and Real Estate. We decided to exclude companies classified in the financial sector from the study because their investments often exceed the traditional framework of FDI concepts described in the literature.
The achievement of the adopted objectives determined the structure of the monograph, which consists of five chapters. The first two provide an overview of the basic concepts, approaches, research streams and results of empirical studies on FDI. Subsequent chapters present the results of empirical self-studies and provide a picture of the practical implications that arise from them. The publication concludes with key findings for OFDI theory and economic practice.
The first chapter presents the theoretical background of foreign direct investment. The discussion starts with the essence of the phenomenon and the difficulties in defining what FDI is. We attempted to present the variety and evolution of approaches to the concept. Then, we discussed the forms and motives of FDI in macro and microeconomic terms and the eclectic theory of international production. We have dedicated the last subsection to issues concerning barriers to internationalisation, focusing on those that significantly affect foreign investors.
The second chapter provides an overview of research on FDI effects on parent companies. We refer to the issues most commonly addressed by researchers, which concern the impact on firm productivity, on its employment, as well as on production and exports. An essential issue in this context is the impact on the transfer of knowledge and technology, considered a critical source of multinational enterprise competitiveness and the primary resource upon which competitive advantage is founded. In the last part of the chapter, the emphasis is on showing a specific mechanism, which we cautiously refer to as the learning by OFDI effect. It shows that firms engaged in OFDI perform better than their not OFDI-engaged competitors. In other words, we identified a learning process that companies with OFDI go through that allows them to benefit from their experience in foreign markets.
In the third chapter, we present the international investment activity of Polish foreign direct investment, starting with the scale and dynamics. Furthermore, we explore the directions of Poland’s OFDI, synthesising the geographical and sectoral breakdown of OFDI from Poland. The chapter concludes by discussing OFDI composition (equity versus debt instruments). The research period covers 2013–2022, which is the most extended period of analysis attainable, as 2013 was the first year for which the National Bank of Poland statistics on OFDI were available in the format conformant to the standards described in the Benchmark Definition of Foreign Direct Investment 4th ed.
In the fourth and fifth chapters, we present the results of our research on foreign direct investment by all Polish companies listed on the Warsaw Stock Exchange in 2021. The selection of the researched group was based on the fact that (1) the most active entities are generally listed on the stock exchange, which should be reflected in the scale and scope of their internationalisation, and (2) the financial statements of listed companies are available more readily than those of other entities, and it is easier to compare the data obtained, as they are structured by nature. As mentioned, our analysis rests on financial data from the Eikon Refinitiv database, which covers 2012–2021. In the first part of Chapter Four, we discuss the research assumptions, the method used, and the limitations adopted. This content is preceded by a review of empirical studies on Polish OFDI conducted in different research centres in Poland. We then present the results of our study, focusing on the analysis of selected financial data and indicators. Chapter Five, in turn, shows a sectoral approach based on the same data and indicators as Chapter Four.
As authors, we are aware of the many limitations and simplifications we have had to adopt for the book the reader has in his hands. This study exhausts only some of the essential issues concerning the complex impact of OFDI on the parent company, as to get a fuller picture, we would need more reliable and complete data on resource flows between the parent and subsidiary companies. Unfortunately, our attempts to obtain additional information based on survey questionnaires addressed directly to the companies were unsuccessful. However, we hope the book’s contents will suggest potential directions for future research to the attentive reader and provide an opportunity to make further discoveries in studying this issue. Moreover, perhaps it will become, as in our case, an inspiration to verify empirically the learning by OFDI effect.
The monograph crowns another phase of research on OFDI, in which Professor Janusz Świerkocki participated. His contribution to our understanding of OFDIs and how they affect the economy is significant. We would also like to thank the reviewers, Prof. Renata Lisowska and Dr. Renata Orłowska, for their kind comments, which made removing the faults in the original text possible. Those that remain are charged to the authors’ account.