PRC Outward Investment in the USA and Europe: A Model of R&D Acquisition

Joseph Pelzman

Review of Development Economics, 2015, vol. 19, issue 1, 1-14

Abstract: In this paper, I present a theoretical framework designed to explain People's Republic of China (PRC) outward foeign direct investment in the USA and Europe, in search of research and development (R&D) acquisition modeled as positive “spillover effects” in a two-country model with firms distinguished by their ability to innovate. The motivation for this paper is the growing PRC merger and acquisition activity in Europe and the USA. The fact that the PRC, despite its many successful internal reforms, cannot induce innovation activity designed to alter its external sector from one that is based on cheap labor to one that is based on innovation-rich products, has forced it to use its extensive reserve holdings to acquire the necessary R&D via merger and acquisition. These acquisitions will allow the PRC to alter their domestic and export product mix and thus avoid the middle-income trap.

Date: 2015
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