FDI and Technology Spillovers Under Vertical Product Differentiation
University of New South Wales - School of Economics
Xuan Thanh Nguyen
March 11, 2012
UNSW Australian School of Business Research Paper No. 2012ECON19
When Northern firms undertake FDI in the South, the superior technology they bring to their Southern operations spills over to Southern firms. Technology spillovers accompanied by FDI often enable Southern firms to enhance their product quality. This paper explores a model that incorporates quality-enhancing spillovers in an international duopoly model of vertical product differentiation. We find that the Northern firm, when it chooses to undertake FDI, strategically reduces its product quality to reduce the amount of technology that spills over to the Southern firm. This strategic quality reduction, which is often observed in reality, plays a critical role in welfare consequences and policy implications of quality-enhancing technology spillovers.
Number of Pages in PDF File: 39
Keywords: FDI, international oligopoly, quality-enhancing spillovers, strategic quality reduction, vertical product differentiation, welfare
JEL Classification: F12, F13, F21, L13working papers series
Date posted: March 20, 2012
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