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Foreign Direct Investment with Endogenous Technology Choice
Author(s) -
Dawid Herbert,
Zou Benteng
Publication year - 2017
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12202
Subject(s) - foreign direct investment , absorptive capacity , spillover effect , economics , stock (firearms) , monetary economics , microeconomics , industrial organization , macroeconomics , mechanical engineering , engineering
In this paper, we analyse the optimal foreign direct investment (FDI) of a firm operating in a duopolistic market. FDI induces technological spillovers to a competitor in the foreign country; the intensity of which depends on the absorptive capacity of the foreign firm and the size of the technological gap. We characterize a technology spillover threshold and show that for an intensity of spillovers below this threshold, there is a unique locally asymptotic stable steady state with a positive capital stock in the developing country. Furthermore, we characterize how optimal foreign investment patterns and the investor's value function depend on the level of technology transferred and characterize the optimal level to be used for the FDI.