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Endogenous R&D and foreign direct investment in international oligopolies

 

Maria-Luisa Petit

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Francesca Sanna-Randaccio

 

 

International Journal of Industrial Organization

2000

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   Multinational firms not only control world trade and FDI but also play a major role in the development and diffusion of technology. This paper examines the impact of the firms¡¦ mode of foreign expansion on the incentive to innovate as well as the effects of R&D activities and technological spillovers on the firm¡¦s international strategy. In addition, the welfare implications also be discussed.

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This paper considers a two country imperfect competition model where the firms face three different type of decisions: how to expand abroad, how much to spend on R&D and how much to sell in each market.

(1) The impact of market structure on the incentive to innovation.

¡´          A positive relationship between multinational expansion and R&D investment.

¡´          The level of R&D is higher if the firms are MNEs rather than exporter.

(2) The effect of R&D activities and technological spillovers on the MNE¡¦s entry mode.

¡´          Investment in research increases the likelihood of multinational.

¡´          A high value of spillover parameter tends to discourage multinational expansion.

(3) The welfare implications of different market configurations

l   Consumer welfare is higher in both countries when the firms are MNEs instead of exports.

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