Analysis of Foreign Ownership, R&D and Spillovers in Developing Countries: Evidence from Turkey

In the past few decades globalization enabled a new playing field for emerging economies. With the falling costs of information and communication technologies, multinational companies (MNCs) from the developed world first took advantage of the low labor costs in the developing economies. However, recognizing the lower cost of skilled manpower in the same countries, MNCs started to take advantage of scientists and engineers as well. Therefore, Foreign Direct Investment (FDI) has been recognized as a major means of knowledge transfer mechanism from the developed to the developing world. It is the purpose of this paper to examine the impact of FDI on the R&D activities of Turkish manufacturing firms. Using firm-level data, this study examines the 2003-2007 period when new legislation favoring FDI inflow had been enacted and when the government started to pursue strategic science and technology policies. Our findings indicate that there is a negative impact of foreign ownership on the R&D intensity of local enterprises. As for the geographical knowledge spillover from foreign firms, we find yet another significant negative effect which may be attributable to the competition effect born by the presence of foreign firms in the market.