Southern Innovation and Foreign Direct Investment

Suzuki, Keishun (2014): Southern Innovation and Foreign Direct Investment.

Abstract

Many empirical studies have yielded mixed results about the impact of foreign direct investment (FDI) on domestic innovation in developing countries. This paper investigates the effect of FDI-promoting policy on innovation in the South in a general equilibrium model that incorporates both the knowledge spillover effect and the market stealing effect via FDI. Specifically, we conduct the analyses of both the short-run effect and the long-run effect. While FDI-promoting policy temporarily discourages Southern innovation in transitional dynamics through the market stealing effect, the accumulation of Southern knowledge via FDI helps domestic firms begin innovation again in the long-run. In the long-run, FDI-promoting policy may generate an inverted-U effect on innovation depending on whether the knowledge spillover is strong. This paper also examines the effect of FDI-restriction policy on Southern innovation, and the model shows that FDI protectionism has only a shortterm effect and may decrease the innovation rate in the long-run.

• Item Type: MPRA Paper
• Language: English
• Keywords: Southern Innovation, Foreign Direct Investment, Market Stealing Effect, Transitional Dynamics
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

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