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Foreign Direct Investment and the Incentives to Innovate and Imitate *
Author(s) -
Brambilla Irene,
Hale Galina,
Long Cheryl
Publication year - 2009
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2009.01589.x
Subject(s) - imitation , foreign direct investment , incentive , product (mathematics) , industrial organization , china , business , variety (cybernetics) , product line , economics , panel data , product innovation , commerce , international economics , microeconomics , macroeconomics , computer science , political science , law , psychology , social psychology , geometry , mathematics , artificial intelligence , econometrics , engineering , manufacturing engineering
We propose a new channel of FDI spillovers on domestic firms, which operates through imitation of original products. Domestic heterogeneous firms may not introduce any new products, introduce a new product line (innovate), or develop a variety that is a close substitute to an existing product line (imitate). The presence of foreign firms generates incentives for imitation because they introduce original products that are vertically differentiated from domestic products. Using firm‐level panel data for China, we find that increased FDI presence in a given industry leads to more imitation, but not necessarily more innovation, by domestic firms.