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Domestic R&D, Foreign Direct Investment and Welfare

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  • Yibai Yang

Abstract

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.

Suggested Citation

  • Yibai Yang, 2015. "Domestic R&D, Foreign Direct Investment and Welfare," Review of Development Economics, Wiley Blackwell, vol. 19(4), pages 908-924, November.
    • Handle: RePEc:bla:rdevec:v:19:y:2015:i:4:p:908-924
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    File URL: http://hdl.handle.net/10.1111/rode.12188
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    Cited by:

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    2. Rong, Shu & Liu, Kai & Huang, Si & Zhang, Qi, 2020. "FDI, labor market flexibility and employment in China," China Economic Review, Elsevier, vol. 61(C).

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