Testing the Knowledge-Capital Model of Foreign Direct Investment : New Evidence

The knowledge capital (KC) model explains the international distribution of foreign direct investment (FDI). It assumes that firms own knowledge assets that may also be exploited via foreign subsidiaries. Do countries with much outward FDI indeed have a relative abundance of proprietary knowledge assets? This has not yet been adequately tested due to a lack of data on knowledge assets. Our paper proposes a new testing procedure. It extends the KC model by a module that formalises the encapsulation of publicly created knowledge into firm-owned knowledge assets. We use a large new dataset for public and private knowledge creation in 200 countries, covering the period 2000-2020. National knowledge assets do indeed explain patterns of outward FDI, and the role of public knowledge assets of the firm's origin countries is of paramount importance. Robustness tests show the stability of these findings. National KC assets also have an impact on inward FDI, but much weaker than their impact on outward FDI. Our results support the original KC model and extends its explanatory power