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Southern Innovation and Foreign Direct Investment

Keishun Suzuki

MPRA Paper from University Library of Munich, Germany

Abstract: 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)
Date: 2014-06-10
New Economics Papers: this item is included in nep-cse, nep-ino and nep-int
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