Foreign direct investment and development and the role of research and development

Dwumfour, Richard Adjei and Pan, Lei and Harris, Mark N. (2025): Foreign direct investment and development and the role of research and development.

Abstract

Using a sample of 130 countries over the period 2004-2019, we revisit the development impact of foreign direct investment (FDI), but novelly examine the role of research and development (R&D) within this framework. To allow us to make causality statement, we use bilateral investment treaties (BITs) as an innovative instrument for FDI in the development equations. We find that, compared to FDI, expenditure on R&D has a more pronounced impact on development outcomes - through increasing growth and human development while reducing poverty and inequality. We also find that countries that spend more on R&D are less dependent on FDI for development. This suggests that R&D and FDI are substitutes in the development process with the results showing varying FDI and R&D thresholds at which the substitution takes place. We however, find a diminishing effect of FDI on development. Further to this, we find that R&D complements FDI only when FDI reaches a threshold level, and then begins to hurt development - at this stage there is sufficient R&D expenditure which possibly suggest sufficient adaptive capacity.

• Item Type: MPRA Paper
• Language: English
• Keywords: FDI; R&D; Economic growth; Poverty; Income inequality
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty > I30 - General; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O30 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

Agénor, P. (1998). Stabilization Policies, Poverty, and the Labor Market. mimeo, IMF and World Bank, Washington, DC.

Aitken, B.J. and Harrison, A. E. (1999). Do domestic firms benefit from direct foreign invest- ment? Evidence from Venezuela. American Economic Review, 89(3), 605–618.

Albanesi, S. (2007). Inflation and inequality. Journal of Monetary Economics, 54(4), 1088- 1114.

Alfaro, L., Chanda, A., Kalemli-Ozcan, S. and Sayek, S. (2010). Does foreign direct invest- ment promote growth? Exploring the role of financial markets on linkages. Journal of Development Economics, 91(2), 242–256.

Alfaro, L., Chanda, A., Kalemli-Ozcan, S. and Sayek, S. (2004). FDI and economic growth: The role of local financial markets. Journal of International Economics, 64(1), 89–112.

Altonji, J.G., Elder, T.E. and Taber, C.R. (2005). An evaluation of instrumental variable strate- gies for estimating the effects of catholic schooling. Journal of Human Resources, 40(4), 791-821.

Alvarez, I. and Molero, J. (2005). Technology and the generation of international knowl- edge spillovers: An application to Spanish manufacturing firms. Research Policy, 34(9), 1440-1452.

Anton Muscatelli, V. and Tirelli, P. (2001). Unemployment and growth: some empirical evi- dence from structural time series models. Applied economics, 33(8), 1083-1088.

Appleton, S., Song, L. and Xia, Q. (2010). Growing out of poverty: Trends and patterns of urban poverty in China 1988–2002. World Development, 38(5), 665-678.

Atkinson, A.B. and Stiglitz, J.E. (1969). A new view of technological change. Economic Jour- nal, 79, 573–578.

Asongu, S.A., Le Roux, S. and Biekpe, N. (2018). Enhancing ICT for environmental sustain- ability in Sub-Saharan Africa. Technological Forecasting and Social Change, 127, 209- 216.

Asongu, S.A. and Le Roux, S. (2017). Enhancing ICT for inclusive human development in Sub-Saharan Africa. Technological Forecasting and Social Change, 118, 44-54.

Angrist J.D. and Pischke, J.S. (2009). Mostly Harmless Econometrics. Princeton University Press, USA.

Basu, S. and Weil, D.N. (1998). Appropriate technology and growth. Quarterly Journal of Economics, 113, 1025–1054.

Beck, T., Demirguc-Kunt, A. and Levine, R. (2004). Finance, inequality, and poverty: Cross- country evidence. NBER Working Paper Series, Working Paper 10979, National Bureau of Economic Research.

Beers, V. (2004). Multinationals and the knowledge economy in small countries. Economic Bulletin, 41(6), 205–208.

Bruno, M. and Easterly, W. (1998). Inflation crises and long-run growth. Journal of Monetary Economics, 41(1), 3-26.

Chen, D.H.C. and Dahlman, C.J. (2006). The knowledge economy, the KAM methodology and World Bank operations (English). Washington, D.C. : World Bank Group.

Chuang, Y. and Lin, C. (1999). Foreign direct investment, R&D and spillover efficiency: Evidence from Taiwan’s manufacturing firms. Journal of Development Studies, 35(4), 117–137.

Chowdhury, A. and Mavrotas, G. (2006). FDI and growth: What causes what? World Econ- omy, 29(1), 9–19.

Cragg, J.G. and Donald, S.G. (1993). Testing identifiability and specification in instrumental variable models. Econometric Theory, 9(2), 222-240.

Demirgüç-Kunt, A. and Levine, R. (Eds.). (2004). Financial Structure and Economic Growth: A Cross-country Comparison of Banks, Markets, and Development. MIT press.

Do, Q.A., Le, Q.H., Nguyen, T.D., Vu, V.A., Tran, L.H. and Nguyen, C.T.T. (2021). Spatial im- pact of foreign direct investment on poverty reduction in Vietnam. Journal of Risk and Financial Management, 14(7), 292.

Dollar, D. and Kraay, A. (2002). Growth is good for the poor. Journal of Economic Growth, 7, 195–225.

Doumbia, D. (2019). The quest for pro-poor and inclusive growth: The role of governance. Applied Economics, 51(16), 1762-1783.

Dwumfour, R.A., Agbloyor, E.K. and Abor, J.Y. (2017). Correlates of poverty in Africa: Ex- ploring the roles of remittances, financial development, and natural resources. International Journal of Social Economics, 14(12), 2033-2051.

Dwumfour, R.A. (2020). Poverty in Sub-Saharan Africa: The role of business regulations, policies and institutions. Social Indicators Research, 149(3), 861-890.

Fan, C.S. and Hu, Y. (2007). Foreign direct investment and indigenous technological efforts: Evidence from China. Economics Letters, 96(2), 253–258.

Fischer, S. (1993). The role of macroeconomic factors in growth. Journal of Monetary Economics, 32(3), 485-512.

Fu, X., Pietrobelli, C. and Soete, L. (2011). The role of foreign technology and indigenous innovation in the emerging economies: technological change and catching-up. World Development, 39(7), 1204-1212.

Globerman, S. and Shapiro, D. (2002). Global foreign direct investment flows: The role of governance infrastructure. World Development, 30, 1899–1919.

Galor, O. and Zeira, J. (1993). Income distribution and macroeconomics. Review of Economic Studies, 60(1), 35-52.

Gohou, G. and Soumaré, I. (2012). Does foreign direct investment reduce poverty in Africa and are there regional differences? World Development, 40(1), 75-95.

Gyimah-Brempong, K., Paddison, O. and Mitiku, W. (2006). Higher education and eco- nomic growth in Africa. Journal of Development Studies, 42(3), 509-529.

Haber, S.H., Armando R. and Noel, M. (2003). The Politics of Property Rights: Political Insta- bility, Credible Commitments, and Economic Growth in Mexico, Cambridge University Press.

Hotchkiss, J.L., Moore, R.E. and Rios-Avila, F. (2020). Cost of policy choices: A microsimulation analysis of the impact on family welfare of unemployment and price changes. Journal of Macroeconomics, 63, 103167.

Hu, A.G., Jefferson, G.H. and Jinchang, Q. (2005). R&D and technology transfer: Firm-level evidence from Chinese industry. Review of Economics and Statistics, 87(4), 780-786.

Jalilian, H. and Kirkpatrick, C. (2002). Financial development and poverty reduction in de- veloping countries. International Journal of Finance & Economics, 7(2), 97-108.

Kang, H. and Martinez-Vazquez, J. (2022). When does foreign direct investment lead to inclusive growth?. World Economy, 45(8), 2394-2427.

Kathuria, V. (2008). The impact of FDI inflows on R&D investment by medium- and high- tech firms in India in the post-reform period. Transnational Corporations, 17(2), 45–66.

Kathuria, V. and Das, S. (2005). Impact of FDI on R&D strategies of firms in the post-1991 era. IIMB Management Review, 17(2), 17–28.

Kirui, O.K., Okello, J.J., Nyikal, R.A. and Njiraini, G.W. (2013). Impact of mobile phone-based money transfer services in agriculture: evidence from Kenya. Quarterly Journal of International Agriculture, 52(892-2016-65177), 141-162.

Kliner, M., Knight, A., Mamvura, C., Wright, J. and Walley, J. (2013). Using no-cost mo- bile phone reminders to improve attendance for HIV test results: a pilot study in rural Swaziland. Infectious Diseases of Poverty, 2(1), 1-7.

Kumar, N. (1987). Technology imports and local research and development in Indian manufacturing. The Developing Economies, 25(3), 220-233.

Lall, S. and Urata, S. (Eds.) (2003). Competitiveness, FDI and Technological Activity in East Asia. Cheltenham, UK: Edward Elgar.

Li, X. and Liu, X. (2005). Foreign direct investment and economic growth: an increasingly endogenous relationship. World Development, 33(3), 393-407.

Magombeyi, M.T. and Odhiambo, N.M. (2018). Dynamic impact of FDI inflows on poverty reduction: Empirical evidence from South Africa. Sustainable Cities and Society, 39, 519-526.

Martínez, R., Ayala, L. and Ruiz-Huerta, J. (2001). The impact of unemployment on inequal- ity and poverty in OECD countries. Economics of Transition, 9(2), 417-447.

Mishra, V. and Bisht, S.S. (2013). Mobile banking in a developing economy: A customer- centric model for policy formulation. Telecommunications Policy, 37(6-7), 503-514.

Niebel, T. (2018). ICT and economic growth–Comparing developing, emerging and developed countries. World Development, 104, 197-211.

Romer, C.D. and Romer, D.H. (1998). Monetary policy and the well-being of the poor. NBER Working Paper 6793, National Bureau of Economic Research.

Sasidharan, S. and Kathuria, V. (2011). Foreign direct investment and R&D: Substitutes or complements—A case of Indian manufacturing after 1991 reforms. World Development, 39(7), 1226-1239.

Saunders, P. (2002). The direct and indirect effects of unemployment on poverty and in- equality. Australian Journal of Labour Economics, 5(4), 507-529.

Soumaré, I. (2015). Does FDI improve economic development in North African countries? Applied Economics, 47(51), 5510-5533.

Stewart, F. (1983). Macro-policies for appropriate technology: An introductory classification. International Labour Review, 122(3), 279.

Stiglitz, J. (1998). The role of the state in financial markets. Proceedings of the World Bank Annual Conference on Development Economic. World Bank, Washington, DC, 19–52.

Stock, J.H. and Yogo, M. (2005). Testing for weak instruments in linear IV regression. In D.W.K. Andrews, J.H. Stock (Eds.), Identification and Inference for Econometric Mod- els, Essays in Honor of Thomas Rothenberg, Cambridge University Press, New York (2005), 80-108.

Veugelers, R. and van den Houte, P. (1990). Domestic R&D in the presence of multinational enterprises. International Journal of Industrial Organisation, 8(1), 1–15.

Willoughby, K.W. (1990). Technology choice: A critique of the appropriate technology movement (Book). Futurist, 24(4), 45.

World Bank. (2001). Bangladesh: Poverty Assessment Background Paper on Poverty Trends. World Bank, Washington.

World Bank. (2012). ICT for greater development impact. Available at: http://documents.worldbank.org/curated/en/285841468337139224/ICT-for-greater- development-impact-World-Bank-Group-Strategy-for-2012-2015