The Dynamic Impact of Internalization Advantage

OSU Working Paper NO. 99-04

29 Pages Posted: 12 Jul 1999

See all articles by Amy Jocelyn Glass

Amy Jocelyn Glass

Texas A&M University - Department of Economics

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics

Date Written: June 15, 1999

Abstract

Internalization advantage determines whether firms use foreign direct investment (FDI) or licensing to serve markets abroad. We determine how innovation affects the incentives for internalization and how internalization in turn affects the incentives for innovation. Bigger innovations are kept within the firm through establishing a local production subsidiary, while smaller innovations are licensed. Additionally, multinational firms choose larger innovations than licensors. Subsidizing multinational production increases the extent of FDI, the aggregate rate of innovation and the average magnitude of innovation. The increase in the average innovation magnitude occurs despite a reduction in the average innovation magnitude chosen by multinational firms due to the shift from licensing to FDI.

JEL Classification: F21, F43, O31, O34

Suggested Citation

Glass, Amy Jocelyn and Saggi, Kamal, The Dynamic Impact of Internalization Advantage (June 15, 1999). OSU Working Paper NO. 99-04, Available at SSRN: https://ssrn.com/abstract=168389 or http://dx.doi.org/10.2139/ssrn.168389

Amy Jocelyn Glass (Contact Author)

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States
979-845-8507 (Phone)
979-847-8757 (Fax)

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States
214-768-3274 (Phone)
214-768-1821 (Fax)

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