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Optimal foreign investment dynamics in the presence of technological spillovers

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  • Dawid, Herbert
  • Greiner, Alfred
  • Zou, Benteng

Abstract

In this paper we present a dynamic model of a firm which is deciding whether to outsource parts of its production to a less developed economy where wages and the level of technology are lower. Outsourcing reduces production costs but is associated with spillovers to foreign potential competitors. Spillovers over time increase productivity of firms in the foreign country and make them stronger competitors on the common market. The paper analyzes the inter-temporally optimal behavior of the firm and shows that two outcomes are possible in the long-run. One outcome is that there is one steady state where the firm invests a positive amount in the foreign country and the other outcome is a continuum of steady states with no investment. The paper then derives conditions such that it is optimal for the firm to invest in the foreign country and characterizes different types of optimal dynamic investment patterns. In addition, using numerical dynamic optimization methods, the effect of the speed of technology adoption and of the wage differential on total labor income in the home country is studied taking into account the transition dynamics.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 3 (March)
Pages: 296-313

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:3:p:296-313

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Foreign direct investment Dynamic optimization Technological spill-overs Oligopoly;

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Citations

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Cited by:
  1. Rattsø, Jørn & Stokke, Hildegunn E., 2012. "Trade policy in a growth model with technology gap dynamics and simulations for South Africa," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 1042-1056.
  2. Bondarev, Anton A., 2012. "Optimal control over a continuous range of homogeneous and heterogeneous innovations with finite life-cycles," MPRA Paper 40068, University Library of Munich, Germany.
  3. Bondarev, Anton, 2014. "Endogenous specialization of heterogeneous innovative activities of firms under the technological spillovers," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 235-249.
  4. Kashefi, Mohammad Ali, 2011. "The effect of vertical knowledge spillovers via the supply chain on location decision of firms," MPRA Paper 31743, University Library of Munich, Germany, revised 20 May 2011.
  5. Bondarev, Anton A., 2011. "Endogenous specialization of heterogeneous innovative activities of firms under technological spillovers," MPRA Paper 35424, University Library of Munich, Germany, revised 15 Dec 2011.

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