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Strategies of Foreign Direct Investment in the Presence Technological Spillovers

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  • Herbert Dawid

    (Department of Business Administration and Economics and Center for Mathematical Economics, Bielefeld University)

  • Benteng Zou

    (CREA, Université du Luxembourg)

Abstract

In this paper we present a differential game model of two firms with different technologies producing the same good and selling in the same world market. The firm equipped with advanced technology is deciding whether to outsource parts of its production to the home country of its competitor, where wages and the level of technology are lower. Outsourcing reduces production costs but is associated with spillovers to the foreign competitor. The degree to which the foreign competitor can absorb these spillovers depends on its absorptive effort. Using numerical methods the properties of a Markov Perfect Equilibrium of this game are characterized and the implications of the variation of different key parameters are examined.

Suggested Citation

  • Herbert Dawid & Benteng Zou, 2013. "Strategies of Foreign Direct Investment in the Presence Technological Spillovers," DEM Discussion Paper Series 13-06, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:13-06
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    References listed on IDEAS

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    1. Doraszelski, Ulrich, 2003. "An R&D Race with Knowledge Accumulation," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 20-42, Spring.
    2. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
    3. Ronald Findlay, 1978. "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(1), pages 1-16.
    4. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329.
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    Cited by:

    1. Colombo, Luca & Dawid, Herbert, 2014. "Strategic location choice under dynamic oligopolistic competition and spillovers," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 288-307.

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