Do Foreign Investment and Trade Spur Innovation?
51 Pages Posted: 11 Aug 2015 Last revised: 2 Dec 2019
There are 3 versions of this paper
Does Foreign Entry Spur Innovation?
Does Foreign Entry Spur Innovation?
Date Written: August 2015
Abstract
Using large firm-level and industry-level data sets from eighteen countries, we find that foreign direct investment (FDI) and trade have positive spillover effects on product and technology innovation by domestic firms in emerging markets. The FDI effect is more pronounced for firms from advanced economies. However, while we detect the spillover effects with micro data at the firm-level, when we use linkage variables computed from input-output tables at the industry level we find much weaker, and usually insignificant, effects. These patterns are important for policy, suggesting that spillovers are localized to firms engaged directly with multinationals and in trade, rather than affecting all domestic firms in industries with FDI presence.
Keywords: emerging markets, FDI, foreign competition, horizontal and vertical linkages, innovation, spillovers
JEL Classification: F23, M16, O16, P23
Suggested Citation: Suggested Citation