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Relocation and Investment in R&D by Firms

  • Bárcena Ruiz, Juan Carlos
  • Garzón San Felipe, María Begoña

The literature on foreign direct investment has analyzed firms€٠location decisions when they invest in R&D to reduce production costs. Such firms may set up new plants in other developed countries while maintaining their domestic plants. In contrast, here we consider firms that close down their domestic operations and relocate to countries where wage costs are lower. Thus, we assume that firms may reduce their production costs by investing in R&D and also by moving their plants abroad. We show that these two mechanisms are complementary. When a firm relocates it invests more in R&D than when it does not change its location and, therefore, its production cost is lower in the first case. As a result, investment in R&D encourages firms to relocate. When firms do not invest in R&D on relocation, R&D discourages firms to relocate since the investment made by the firms that remain in the country partially offsets the labor cost advantage obtained by the firms that move their plants abroad.

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File URL: http://hdl.handle.net/10810/6234
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Paper provided by Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I in its series IKERLANAK with number 2011-52.

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Date of creation: 2011
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Handle: RePEc:ehu:ikerla:201152
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Order Information: Postal: Dpto. de Fundamentos del Análisis Económico I, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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