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Optimal Foreign Investment Dynamics in the Presence of Technological Spillovers

Author

Listed:
  • Herbert Dawid
  • Alfred Greiner
  • Benteng Zou

    () (CREA, University of Luxembourg)

Abstract

In this paper we present a dynamic model of a firm which decides whether to outsource parts of its production to a less developed economy where wages and the level of technology are lower. Outsourcing reduces production costs but is associated with spillovers to foreign potential competitors. Spillovers over time increase productivity of firms in the foreign country and make them stronger competitors on the common market. The paper analyzes the inter-temporally optimal behavior of the firm and shows that two outcomes are possible in the long-run. There is one steady state where the firm invests a positive amount in the foreign country and there is a continuum of steady states with no investment. The paper then derives conditions such that it is optimal for the firm to invest in the foreign country and different types of optimal dynamic investment patterns are characterized. In addition, using numerical dynamic optimization methods, the effect of the speed of technology adoption and of the wage differential on total labor income in the home country, is studied taking into account the transition dynamics.

Suggested Citation

  • Herbert Dawid & Alfred Greiner & Benteng Zou, 2008. "Optimal Foreign Investment Dynamics in the Presence of Technological Spillovers," CREA Discussion Paper Series 08-07, Center for Research in Economic Analysis, University of Luxembourg.
  • Handle: RePEc:luc:wpaper:08-07
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bondarev, Anton, 2014. "Endogenous specialization of heterogeneous innovative activities of firms under the technological spillovers," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 235-249.
    2. Jørn Rattsø & Hildegunn E. Stokke, 2013. "Trade, Skill Biased Technical Change and Wage Inequality in South Africa," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 419-431, August.
    3. Bondarev, Anton & Greiner, Alfred, 2017. "Catching-up and falling behind: Effects of learning in an R&D differential game with spillovers," Working papers 2017/02, Faculty of Business and Economics - University of Basel.
    4. Fuentes, Raúl & Mishra, Tapas & Scavia, Javier & Parhi, Mamata, 2014. "On optimal long-term relationship between TFP, institutions, and income inequality under embodied technical progress," Structural Change and Economic Dynamics, Elsevier, vol. 31(C), pages 89-100.
    5. Bondarev, Anton A., 2012. "Optimal control over a continuous range of homogeneous and heterogeneous innovations with finite life-cycles," MPRA Paper 40068, University Library of Munich, Germany.
    6. Kashefi, Mohammad Ali, 2011. "The effect of vertical knowledge spillovers via the supply chain on location decision of firms," MPRA Paper 31743, University Library of Munich, Germany, revised 20 May 2011.
    7. Raouf Boucekkine & Xianhai Huang, 2016. "Globalization: Financial, Trade and Institutional Aspects with Applications to China," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 324-329, August.
    8. Anton Bondarev, 2016. "Intensity of R&D competition and the generation of innovations in heterogeneous setting," Journal of Evolutionary Economics, Springer, vol. 26(3), pages 621-653, July.
    9. Rattsø, Jørn & Stokke, Hildegunn E., 2012. "Trade policy in a growth model with technology gap dynamics and simulations for South Africa," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 1042-1056.
    10. Hebert Dawid & Benteng Zou, 2014. "Foreign direct investment in duopoly: When is it optimal to invest abroad?," CREA Discussion Paper Series 14-23, Center for Research in Economic Analysis, University of Luxembourg.
    11. Herbert Dawid & Benteng Zou, 2017. "Foreign Direct Investment with Endogenous Technology Choice," Pacific Economic Review, Wiley Blackwell, vol. 22(1), pages 3-22, February.
    12. Bondarev, Anton, 2018. "Robust policy schemes for R&D games with asymmetric information," Working papers 2018/01, Faculty of Business and Economics - University of Basel.
    13. Bondarev, Anton & Krysiak, Frank C., 2017. "Temporary and permanent technology lock-ins in the quality-differentiated Bertrand competition," Working papers 2017/09, Faculty of Business and Economics - University of Basel.
    14. Bondarev, Anton & Greiner, Alfred, 2017. "Technology lock-in with horizontal and vertical innovations through limited R&D spending," Working papers 2017/04, Faculty of Business and Economics - University of Basel.
    15. Anton Bondarev & Frank C. Krysiak, 2017. "Robust policy schemes for R&D games with asymmetric information," Working papers 2017/14, Faculty of Business and Economics - University of Basel.

    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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