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Exchange Rate Movements, Foreign Direct Investment, and Domestic R&D

Author

Listed:
  • Kun-Ming Chen
  • Chia-Ching Lin
  • Shu-Fei Yang

Abstract

This paper develops a game-theoretical model to investigate heterogeneous firms¡¯ entry mode choice of international expansion. The distinct feature of this paper is that exchange rate, R&D competition, and intra-industry firm heterogeneity are incorporated into the theoretical framework. The possible impact of a firm¡¯s outward foreign direct investment (OFDI) on its R&D spending and other non-OFDI firms¡¯ R&D spending is also examined. Our analytical results indicate that, if host country has lower labor costs, when facing rising domestic labor costs or appreciation of home currency, a firm with lower productivity in production or R&D activity will choose OFDI, whereas the firms with higher productivity will produce at home and export. In addition, our results demonstrate that the impact of OFDI on R&D spending is ambiguous, depending on firm heterogeneity as well as the wage gap between home country and host country.

Suggested Citation

  • Kun-Ming Chen & Chia-Ching Lin & Shu-Fei Yang, 2015. "Exchange Rate Movements, Foreign Direct Investment, and Domestic R&D," Research in World Economy, Research in World Economy, Sciedu Press, vol. 6(1), pages 20-35, March.
    • Handle: RePEc:jfr:rwe111:v:6:y:2015:i:1:p:20-35
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    References listed on IDEAS

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