Southern Innovation and Foreign Direct Investment
MPRA Paper from University Library of Munich, Germany
Many empirical studies have yielded mixed results about the impact of foreign direct investment (FDI) on domestic innovation in developing countries. This paper investigates the effect of FDI-promoting policy on innovation in the South in a general equilibrium model that incorporates both the knowledge spillover effect and the market stealing effect via FDI. Specifically, we conduct the analyses of both the short-run effect and the long-run effect. While FDI-promoting policy temporarily discourages Southern innovation in transitional dynamics through the market stealing effect, the accumulation of Southern knowledge via FDI helps domestic firms begin innovation again in the long-run. In the long-run, FDI-promoting policy may generate an inverted-U effect on innovation depending on whether the knowledge spillover is strong. This paper also examines the effect of FDI-restriction policy on Southern innovation, and the model shows that FDI protectionism has only a shortterm effect and may decrease the innovation rate in the long-run.
Keywords: Southern Innovation; Foreign Direct Investment; Market Stealing Effect; Transitional Dynamics (search for similar items in EconPapers)
JEL-codes: F21 O11 O31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cse, nep-ino and nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:57054
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