Technology Sourcing and Strategic Foreign Direct Investment

Kjetil Bjorvatn and Carsten Eckel ()

Review of International Economics, 2006, vol. 14, issue 4, pages 600-614

Abstract: Empirical evidence suggests that technological spillovers are limited by distance. The present paper investigates the implications of this observation for the investment decisions of a technologically leading and lagging firm, located in different countries. Technological spillovers may induce "technology sourcing" foreign direct investment by the less advanced firm, as it seeks to upgrade its technology. Our main result, however, is that there may be strong incentives for the leading firm to undertake strategic investment abroad in order to prevent technology sourcing by the lagging firm. We analyze how trade costs, the technology gap between firms, technological spillovers, and the ability of a firm to transfer technology between plants affect the two firms' entry decisions. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.

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