Testing the knowledge-capital model of foreign direct investment: New evidence

Kox, Henk L.M. (2022): Testing the knowledge-capital model of foreign direct investment: New evidence.

Abstract

The knowledge-capital (KC) model of FDI explains the international distribution of FDI, assuming that firms own proprietary knowledge assets that can at low costs also be exploited in foreign subsidiaries. The model's implication is that countries with much outward FDI should have a relative abundance of proprietary knowledge assets, which has up to now not been adequately tested, partly due to a lack of data. This paper extends the KC model by a module that formalises the encapsulation of public national knowledge assets into proprietary firm-level assets. It provides a way to test the basic tenet of the KC model. We exploit a new dataset (80 indicators, 209 countries, period 2000-2020) to identify the impact and statistical significance of national knowledge assets for explaining outward FDI. Our test confirms the validity of the KC model for explaining patterns of outward FDI. Several robustness tests confirm the stability of our findings.

• Item Type: MPRA Paper
• Language: English
• Keywords: foreign direct investment; knowledge-capital model; empirical testing; 2000-2020; 209 countries
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business

References

Aitken, B., A. Harrison and R. Lipsey (1996), Wages and foreign ownership: A comparative study of Mexico, Venezuela, and the United States, Journal of International Economics, 40, 345-371.

Agrawal, A., and R. Henderson (2002), Putting patents in context: Exploring knowledge transfer from MIT, Management Science, 48 (1), 44-60.

Agresti, A. (2010), Analysis of Ordinal Categorical Data (Second ed.), John Wiley & Sons, New York.

Alcacer, J. and M. Gittelman (2006), Patent citations as a measure of knowledge flows: The influence of examiner citations, Review of Economics and Statistics, 88 (4), 774–779.

Ali, A. and L. Hwang (2000), Country-specific factors related to financial reporting and the value relevance of accounting data, Journal of Accounting Research, 38 (1), 1-21.

Anderson, J., M. Larch and Y. Yotov (2019), Trade and investment in the global economy: A multi-country dynamic analysis, European Economic Review, 120 (November), 103311.

Arora, A., S. Belenzon, and L. Sheer (2021), Knowledge spillovers and corporate investment in scientific research, American Economic Review, 111 (3), 1–28.

Arora, A. and A. Gambardella (2005), The globalization of the software industry: perspectives and opportunities for developed and developing countries, Innovation Policy and the Economy, 5, 1-32.

Arundel, A., N. Es-Sadki, F. Barjak, P. Perrett, O. Samuel, and S. Lilischkis (2013), Knowledge transfer study 2010–2012—Final Report, European Commission, Brussels.

Atkin, D., M. Chen, and A. Popov (2022), The returns to face-to-face interactions: Knowledge spillovers in Silicon Valley, NBER WP #30147 , NBER, Cambridge MA.

Audretsch, D., and P. Stephan (1999), Knowledge spillovers in biotechnology: Sources and incentives, Journal of Evolutionary Economics, 9 (1), 97–107.

Audretsch, D., and P. Stephan (1996), Company scientist locational links: The case of biotechnology, American Economic Review, 86 (3), 641–652.

Battisti, M., F. Belloc and M. Gatto (2021), Is the productivity premium of internationalized firms technology-driven?, Empirical Economics, 60 (6), 3069-3102.

Beer, S., R. De Mooij, and L. Liu (2020), International corporate tax avoidance: A review of the channels, magnitudes, and blind spots, Journal of Economic Surveys 34, 660–688.

Benhabib, J., J. Perla, and C. Tonetti (2021), Reconciling models of diffusion and innovation: A theory of the productivity distribution and technology frontier, Econometrica, 89 (5), 2261-2301.

Benhabib, J. (2019), A vintage model with endogenous growth and human capital, International Journal of Economic Theory, 15 (1), March , 27-35.

Bernard, A., J. Jensen, and P. Schott (2013), Importers, exporters, and multinationals, in: T. Dunne, J. Jensen and M. Roberts (eds), A portrait of firms in the U.S. that trade goods: Producer Dynamics: New Evidence from Micro Data, Chicago Scholarship Online (DOI: 10.7208/chicago/9780226172576.001.0001).

Bernard, A., J. Jensen, S. Redding, and P. Schott (2007), Firms in international trade, Journal of Economic Perspectives, 21 (3), 105-130.

Blonigen, B., and J. Piger (2014), Determinants of foreign direct investment, Canadian Journal of Economics, 47 (3), 775-812.

Blonigen, B., R. Davies and K. Head (2002), Estimating the knowledge-capital model of the multinational enterprise: Comment, NBER WP #8929, NBER, Cambridge MA.

Boyle, J. (2003a), Enclosing the genome: What the squabbles over genetic patents could teach us, in: F. Scott Kief, ed., Perspectives and properties of the human genome project, Elsevier Academic, 97-118.

Boyle, J. (2003b), The second enclosure movement and the construction of the public domain, Law & Contemporary Problems , 66, 33-74.

Braconier, H., P. Norback and D. Urban (2005), Reconciling the evidence on the knowledge capital model, Review of International Economics, 13, 770-786.

Breschi, S., and C. Catalini (2010), Tracing the links between science and technology: An exploratory analysis of scientists’ and inventors’ networks, Research Policy, 39 (1), 14–26.

Calderini, M., C. Franzoni, and A. Vezzulli (2007), If star scientists do not patent: The effect of productivity, basicness and impact on the decision to patent in the academic world, Research Policy, 36 (3), 303–319.

Cantwell. J. (2009), Location and the multinational enterprise, Journal of International Business Studies, 40 (1), 35-41.

Carlsson, B., and A. Fridh (2002), Technology transfer in United States universities, Journal of Evolutionary Economics, 12, 199–232.

Carr, D., J. Markusen, and K. Maskus (2001), Estimating the knowledge-capital model of the multinational enterprise, American Economic Review, 91 (3), 693-708.

Chan, E. and B. Cheung (2022), Readiness of intellectual capital measurement: A review of the property development and investment industry, International Journal of Economics and Management Engineering 16 (3), 82-88.

Chellaraj, G. and A. Mattoo (2009), Can the knowledge-capital model explain sectoral foreign investment? Evidence from Singapore, East-West Center Economics Series WP #101, Honolulu (Hawaii).

Corrado, C., C. Hulten and D. Sichel (2009), Intangible capital and U.S. economic growth, Review of Income and Wealth 55 (3), 661-85.

Damgaard, J., T. Elkjaer, and N. Johannesen (2019), What is real and what is not in the global FDI network? IMF WP #19/274, IMF, Washington DC.

De Vries, K. (2022), TED - Sources & methods - Detailed description (version: April 2022), The Conference Board, New York.

Debenham, J. (2002), Estimating Knowledge Decay, In: M. Musen, B. Neumann, and R. Studer (eds), Intelligent Information Processing. IIP 2002. IFIP - The International Federation for Information Processing, Springer, 93, 189–200.

Dutta, S., F. Gurry, and B. Lanvin (2020). The global innovation index 2020: Who Will Finance Innovation?, Cornell University, INSEAD, and World Intellectual Property Organization (WIPO), Ithaca, Fontainebleau, and Geneva.

Egger, H. and U. Kreickemeier (2013), Why foreign ownership may be good for you, International Economic Review, 54, 693–716.

Escalona Reynoso, R. (2010), Are intellectual property rights evolving towards the enclosure of the ‘intangible commons’?, Dept of Science and Technology Studies, Cornell University, MPRA Paper #42662, München.

Foster, G., R. Kasznik, and B. Sidhu (2012), International equity valuation: The relative importance of country and industry factors vs. company-specific financial reporting information, Accounting and Finance, 52 (3), 767-814.

Fagerberg, J., M. Fosaas, and K. Sapprasert (2012), Innovation: Exploring the knowledge base, Research Policy, 41 (7), 1132-1153.

Freeman, C. (1987), Technology and economic performance: lessons from Japan, Pinter, London.

Gerbin, A., and M. Drnovsek (2016), Determinants and public policy implications of academic-industry knowledge transfer in life sciences: A review and a conceptual framework, The Journal of Technology Transfer, 41, 979–1076.

Girma, S., R. Kneller and M. Pisu (2005), Exports versus FDI: An Empirical Test, Review of World Economics, 141, 193–218.

Görg, H., E. Strobl and F. Walsh (2007), Why do foreign-owned firms pay more? The role of on-the-job training, Review of World Economics, 143 (3), 464-482.

Gwartney, J., R. Lawson, J. Hall, and R. Murphy (2021), Economic freedom of the world: 2021 annual report, Fraser Institute, Vancouver BC.

Hall, R. (2000), e-Capital: The link between the stock market and the labor market in the 1990s, Brookings Papers on Economic Activity, 2000 (2): 73-118.

Helpman, E., M. Melitz, and S. Yeaple (2004), Export versus FDI with heterogenous firms, American Economic Review, 94 (1), 300-316.

Henderson, R., A. Jaffe, and M. Trajtenberg (1998), Universities as a source of commercial technology: A detailed analysis of university patenting, 1965–1988, The Review of Economics and Statistics, 80 (1), 119–127.

Keen, M., L. Liu and H. Pallan (2022), Tax spillovers in cross-border real investment: evidence from a new dataset on multinationals, mimeo presented at NBER conference, January 15, 2022.

Keller, W. (2004), International technology diffusion, Journal of Economic Literature, 42, 752– 782.

Kleinert, J. and F. Toubal (2010), Gravity for FDI, Review of International Economics, 18 (1), 1-13.

Kose, M., E. Prasad, K. Rogoff, and S.-J. Wei (2009), Financial globalization: A reappraisal, IMF Staff Papers, 56, 8–62.

Kox, H. and H. Rojas-Romagosa (2020), How trade and investment agreements affect bilateral foreign direct investment: Results from a structural gravity model, The World Economy, 43 (12), 3203–3242.

Kox, H. and H. Rojas-Romagosa (2010), Exports and Productivity Selection Effects for Dutch Firms, De Economist, 158, 295–322.

Kox, H. (2018), Foreign investment access and the services industry: Quantitative policy analysis for the Philippines, Study commissioned by the IFC/World Bank Group, KVL Economic Policy Research, Hertogenbosch.

Kristjánsdóttir, H. (2010), Foreign direct investment: The knowledge-capital model and a small country case, Scottish Journal of Political Economy, 57 (5), 591-614.

Liu, J. and C. Kuan (2016), A new approach for main path analysis: Decay in knowledge diffusion, Journal of the Association for Information Science and Technology, 67 (2), 465–476.

Lu, Y., Z. Tao, and Z. Zhu (2017), Identifying FDI spillovers, Journal of International Economics, 107, 75-90.

Mariel, P., S. Orbe, and C. Rodriguez (2009), The knowledge-capital model of FDI: A time varying coefficients approach, Scottish Journal of Political Economy, 56 (2), 196-212.

Markusen, J. (2002), Multinational firms and the theory of international trade, Cambridge, MA: The MIT Press.

Markusen, J. (2001), Contracts, intellectual property rights, and multinational investment in developing countries, Journal of International Economics, 53 (1), 189-204.

Markusen, J. and K. Maskus (2003), Discriminating among alternative theories of the multinational enterprise, Review of International Economics, 10 (4), 694-707.

Maskus, K. and J. Reichman (2004), The globalization of private knowledge and the privatization of global public goods, Journal of Economic Law, 7 (2), 279-320.

Mataloni Jr, R. (2011), The productivity advantage and global scope of U.S. multinational firms, BEA Working Paper WP2011-02, U.S. Bureau of Economic Analysis.

Mazzucato, M., 2014, The entrepreneurial state: Debunking public vs. private sector myths, Anthem Press, London - New York.

McGrattan, E. (2012), Transition to FDI openness: Reconciling theory and evidence, Research Department Staff Report #454, Federal Reserve Bank of Minneapolis, Minneapolis.

McGrattan, E., and E. Prescott (2010), Technology capital and the US current account, American Economic Review, 100 (4), 1493-1522.

McGrattan, E., and E. Prescott (2009), Openness, technology capital, and development, Journal of Economic Theory, 144 (6), 2454–2476.

Morck, R. and B. Yeung (1991), Why investors value multinationality, The Journal of Business, 64 (2), 165-187. OECD (1997), National innovation systems, OECD, Paris.

Perkmann, M., V. Tartari, M. McKelvey, et al. (2013), Academic engagement and commercialisation: A review of the literature on university-industry relations, Research Policy, 42 (2), 423–442.

Sheer, L. (2022), Sitting on the fence: Integrating the two worlds of scientific discovery and invention within the firm, Research Policy, 51 (7), forthcoming: https://doi.org/10.1016/j.respol.2022.104550

Tanaka, K. (2009), Re-estimating the knowledge-capital model: Evidence from Japanese and U.S. multinational enterprises, Global COE Hi-Stat DP #087, Institute of Economic Research, Hitotsubashi University, Tokyo.

Tanaka A. (2015), Wage premiums for exporters and multinational enterprises: evidence from Japanese linked employer-employee data, Discussion papers #15106, Trade and Industry (RIETI), Tokyo.

Toole, A., and D. Czarnitzki (2010), Commercializing science: Is there a university “brain drain” from academic entrepreneurship?, Management Science, 56 (9), 1599-1614.

Ubaldo, M. di, and I. Siedschlag (2021), Investment in knowledge-based capital and productivity: Firm-level evidence from a small open economy, Review of Income and Wealth, 67 (2), 363-393.

UNCTAD (2022), Corporate income taxes and investment incentives: A global review, Investment Policy Monitor, Special Issue #8, July 2022.

Van Elk, R., B. ter Weel, K. van der Wiel, and B. Wouterse (2019), Estimating the returns to public R&D investments: Evidence from production function models, De Economist, 167 () , 45–87.

UNCTAD (2022), World Investment Report 2022: International tax reforms and sustainable investment, UNCTAD/WIR/2022, United Nations Publications, New York.

Vujanović, N., I. Hashi, M. Hisarciklilar, et al. (2022), FDI spillover effects on innovation activities of knowledge-using and knowledge-creating firms, WP 213, Vienna Institute for International Economic Studies (WIIW), Vienna.

Wacker, K. (2016), (When) should we use foreign direct investment data to measure the activities of multinational corporations? Theory and evidence, Review of International Economics, 24 (5), 980-999.

Wagner, J. (2012), International trade and firm performance: a survey of empirical studies since 2006, Review of World Economics, 148 (2), 235-267.