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Technological Capability as a Determinant of FDI Inflows: Evidence from Developing Asia & India

  • Amitendu Palit

    ()

    (Indian Council for Research on International Economic Relations)

  • Shounkie Nawani

    ()

    (Indian Council for Research on International Economic Relations)

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    This paper contributes to the empirical literature on determinants of FDI by addressing the question: Why do some developing countries from Asia continue to receive more FDI, while others from the region have fallen behind? It finds R&D-based innovative capacities, and the ability to apply such capacities through modern IT-based techniques, as the two key determinants explaining FDI inflows to developing Asian economies. These traits are found significant for inward FDI in India too with more technology intensive sectors receiving greater FDI. The findings of the paper suggest that in the absence of strong technological foundations and well-developed communications infrastructure, liberal policies alone are not enough for drawing FDI, once initial advantages, like cheap labour, fizzle out. For developing countries like India, strong thrust on R&D and innovative skills is needed for attracting FDI in technology-intensive exports. Therefore, policy actions would have to go further than a broad-based opening up of sectors to FDI, and increasing the limit of such investment in these sectors, for sustained inflows of FDI.

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    File URL: http://www.icrier.org/pdf/Working_Paper_193.pdf
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    Paper provided by Indian Council for Research on International Economic Relations, New Delhi, India in its series Indian Council for Research on International Economic Relations, New Delhi Working Papers with number 193.

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    Length: 37 Pages
    Date of creation: Apr 2007
    Date of revision:
    Handle: RePEc:ind:icrier:193
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    1. John H Dunning, 1988. "The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions," Journal of International Business Studies, Palgrave Macmillan, vol. 19(1), pages 1-31, March.
    2. Acs, Zoltan J & Audretsch, David B, 1988. "Innovation in Large and Small Firms: An Empirical Analysis," American Economic Review, American Economic Association, vol. 78(4), pages 678-90, September.
    3. Bende-Nabende, A. & Ford, J.L. & Sen, S. & Slater, J., 2000. "FDI Locational Determinants and the Linkage Between FDI and Other Macro-Economic Factors: Long-run Dynamics in Pacific Asia," Discussion Papers 00-11, Department of Economics, University of Birmingham.
    4. Ronald Jones, 1970. "The Role of Technology in the Theory of International Trade," NBER Chapters, in: The Technology Factor in International Trade, pages 73-94 National Bureau of Economic Research, Inc.
    5. Robert E. Lipsey, 1999. "The Location and Characteristics of U.S. Affiliates in Asia," NBER Working Papers 6876, National Bureau of Economic Research, Inc.
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