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Domestic R&D , Foreign Direct Investment and Welfare
Author(s) -
Yang Yibai
Publication year - 2015
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12188
Subject(s) - foreign direct investment , welfare , incentive , economics , investment (military) , marginal cost , international economics , monetary economics , labour economics , microeconomics , market economy , macroeconomics , politics , political science , law
This paper provides a new rationale to examine the two‐way relationship between domestic research and development ( R&D ) and foreign direct investment ( FDI ), as well as their impacts on domestic welfare. Our analysis is based on the strategic interaction in cost‐reducing investment decisions between domestic firms and a foreign firm, which is different from the common factors that are discussed in the literature such as spillovers and technology sourcing. Our results are as follows. We show that domestic R&D investment may either increase or decrease the foreign firm's FDI incentives. Further, depending on the marginal cost of domestic firms, domestic R&D incentives can always increase regardless of the effects of domestic R&D investment on the foreign firm's FDI decision. Finally, we find that domestic welfare improves under domestic cost reduction if the slope of the marginal cost of domestic R&D investment is sufficiently small.