Foreign investment innovation: a review of selected policies

Abstract

Whereas foreign investment innovation (FII) has become increasingly common, after decades of debate it is still unclear whether it is desirable for the home country or for the company’s host country. This paper reviews articles from three complementary economic and business traditions which investigate this phenomenon and propose policies based on facts: the economics of technological change tradition, the international business (IB) tradition, and the line of research on international technology transfers. Articles in line with these strands of theory complement each other because they approach different aspects of complex events while explaining FII and its effects on host and home countries. Host countries obtain maximum benefits from FII when affiliates import foreign technology, purchase their inputs in the host country and enjoy product and technological autonomy vis-a-vis the parent. Different types of MNEs, affiliates and foreign R&D units have different potentials for transferring technology to host countries and provide different scope for policies. The authors recommend that governments encourage direct vertical linkages between MNEs and domestic suppliers who could reap the benefits from foreign knowledge. However, some important success factors remain exogenous to governments. As for indigenous MNEs, it is a matter of controversy whether governments should always stimulate them to conduct research in foreign locations or, alternatively, incentive them to stay at home. The need for additional evidence is still considerable in many respects.