Endogenous R&D and foreign direct investment in international oligopolies

Abstract

This paper examines the impact of the firms' mode of foreign expansion on the incentive to innovate as well as the effects of R&D activities and technological spillovers on the firms' international strategy. We consider a two country imperfect competition model where the firms face three different type of decisions: how to expand abroad, how much to spend on R&D and how much to sell in each market. Market structure is endogenously determined as the equilibrium solution of a three stage game. It is shown that the firm that invests more in research is the one which is a MNE while the rival is an exporter. The results indicate that there is a positive relationship between multinational expansion and R&D investment and that, in turn, investment in research increases the likelihood of multinational expansion. The value of the spillover parameter can also be an important determinant of firms' international strategy.