Foreign Direct Investment and International Technology Diffusion

Abstract

Foreign direct investment (FDI) plays an important role in facilitating the process of international technology diffusion. While FDI among industrialized countries primarily occurs via international mergers and acquisitions (M&As), investment headed to developing countries is more likely to be greenfield in nature; that is, it involves the establishment or expansion of new foreign affiliates by multinational firms. M&As have the potential to yield productivity improvements via changes in management and organization structure of target firms, whereas greenfield FDI leads to transfer of novel technical know-how by initiating the production of new products in host countries as well as by introducing improvements in existing production processes. Given the prominent role that multinational firms play in global research and development (R&D), there is much interest in whether and how technologies transferred by them to their foreign subsidiaries later diffuse more broadly in host economies, thereby potentially generating broad-based productivity gains. Empirical evidence shows that whereas spillovers from FDI to competing local firms are elusive, such is not the case for spillovers to local suppliers and other agents involved in vertical relationships with multinationals. Multinationals have substantially increased their investments in research facilities in various parts of the world and in R&D collaboration with local firms in developing countries, most notably China and India. Such international collaboration in R&D spearheaded by multinational firms has the potential to accelerate global productivity growth.