In the past two decades, there has been an unprecedented rise in outward investment from the Global South. Corresponding with this rise in outward investment are industrial policies, where emerging market governments use financial subsidies to incentivise their firms’ outward investments. Why are developing countries increasingly adopting policies that would shift capital outside of a capital-scarce economy? To explain this puzzle, I argue that outward foreign direct investment (OFDI) confers developmental benefits to developing economies similar to those usually fulfilled by inward FDI flows (IFDI). Developing countries that experience less success harnessing developmental benefits from IFDI are thus more likely to adopt a policy strategy of supporting OFDI.

I test my theory using a mixed methods approach, combining a quantitative analysis from 84 emerging markets, as well as case studies of India and Brazil. This paper employs an original dataset of outward investment policies (ranging from subsidies, development loans, and equity support for mergers & acquisitions) coded from Export-Import banks in 84 emerging markets. Using this data, I test the core argument that global value chain integration is a key determinant of outward-facing investment policies, particularly the use of M&A support and equity finance. Further, I test the causal mechanisms underpinning the shift towards overseas investment finance with case studies from India and Brazil drawing from interviews conducted over thirteen months of fieldwork in both countries. This paper’s presents new empirical evidence demonstrating the conditions under which emerging markets use their outward investment to “leapfrog” traditional development processes.