R&D and foreign direct investment with asymmetries in knowledge transmission

Abstract

The purpose of the chapter is to analyze how firms’ R&D investment decisions are affected by asymmetries in knowledge transmission, taking into account different sources of asymmetry, such as unequal know-how management capabilities and spillovers localization within an international oligopoly. We follow a game theoretic approach and consider a two-country imperfect competition model with two firms – one from each country – producing a homogeneous good. Both the firms’ mode of foreign expansion and R&D level are endogenously determined. We find that a better ability to manage knowledge flows incentivates the firm to invest more in R&D. By introducing geographically bounded spillovers, we also show that one-way foreign direct investment (FDI) stimulates the multinational enterprise (MNE) to raise its own R&D, due to both the elimination of transport cost and a greater ability to source. Furthermore, it emerges that when geographical proximity increases the MNE's capability to source local know-how, FDI is more likely to occur. The originality of this chapter relies on the analysis of the impact of asymmetries within an oligopoly model with endogenous R&D. Differently from other studies, this framework allows us to provide neat analytical results.

Citation

Luisa Petit, M., Sanna-Randaccio, F. and Sestini, R. (2008), "R&D and foreign direct investment with asymmetries in knowledge transmission", Feldman, M.P. and Santangelo, G.D. (Ed.) New Perspectives in International Business Research (Progress in International Business Research, Vol. 3), Emerald Group Publishing Limited, Leeds, pp. 231-261. https://doi.org/10.1016/S1745-8862(08)03011-2