Working Paper: CEPR ID: DP5766
Authors: Hans Gersbach; Armin Schmutzler
Abstract: We analyze a two-country model of Foreign Direct Investment (FDI). Two firms, each of which is originally situated in only one of the two countries, first decide whether to build a plant in the foreign country. Then, they decide whether to relocate R&D activities. Finally, they engage in product-market competition. Our main points are: first, FDI liberalization causes a relocation of R&D activities if intrafirm communication is sufficiently well developed, external spillovers are substantial, competition is not too strong and foreign markets are not too small. Second, such a relocation of R&D activities will usually nevertheless increase domestic welfare since it only occurs if intrafirm communication is well developed and therefore knowledge generated and obtained abroad flows back to the domestic country. Third, the potential of R&D offshoring makes FDI itself more likely. Fourth, when countries are asymmetric, the small-country firm is more likely to offshore its R&D activities into the large country than conversely.
Keywords: Foreign Direct Investment; R&D; Research; Relocation; Spillovers
JEL Codes: F23; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FDI liberalization (F23) | R&D relocation (O32) |
| Intrafirm communication (L22) | R&D relocation (O32) |
| External spillovers (F69) | R&D relocation (O32) |
| Weak product-market competition (L13) | R&D relocation (O32) |
| Market size (L25) | R&D location decisions (R32) |
| Technological know-how (O30) | R&D location decisions (R32) |
| R&D offshoring (O36) | FDI likelihood (F23) |
| R&D relocation (O32) | domestic welfare (I38) |
| Intrafirm communication improvements (L22) | R&D offshoring (O36) |