Foreign Direct Investment and the Nature of R&D

We examine whether an increase in foreign direct investment (FDI) flows necessarily increases international technology transfer (ITT). The answer to this question depends on whether FDI is the sole channel of ITT or whether other channels of ITT such as imitation are present for the host country. A faster flow of FDI to the South increases the rates of innovation, imitation and ITT when FDI is the sole channel of ITT. Yet FDI merely substitutes for imitation targeting Northern firms when FDI and imitation both serve as alternative channels of ITT. A faster flow of FDI to the South would then essentially fail to affect the rates of innovation, imitation and ITT. We conclude that FDI generates mostly dynamic benefits though faster innovation when it is the sole channel of ITT but generates mostly static benefits through lower prices when FDI merely displaces imitation in ITT