Capital outflow and R&D investment in the parent firm

Abstract

Outward foreign direct investment (OFDI) from emerging countries to relatively low-wage countries has raised important questions about its impact on domestic technological development because of the small gap in terms of a technological lead. This paper develops hypotheses linking the impact of OFDI on R&D-investment growth in the parent firm to the underlying motivation for investment and firm size. These hypotheses are tested using available data from Taiwanese information and electronics firms for 1993–2008. The findings are that the R&D growth is not only relevant to conventional factors, such as the knowledge stock, demand factors and institutions, but is also importantly explained by the firm's long-term investment in the home country and abroad, and the industry's OFDI and IFDI. This paper also shows that home R&D growth is negatively relevant to the wage gap between the home and the host country, and changes in OFDI policies can significantly affect the R&D growth. The implications are that multinationals have important reasons for investing abroad. An open economy can maintain a technological lead only by improvements in its domestic R&D environment and by encouraging R&D entrepreneurship and social responsibility to promote long-term and R&D investments locally.