What Determines the Foreign Direct Investment in R&D in Developed vs. Developing Host Countries: A Country-Panel Analysis

Abstract

In this paper, we analyze the determinants of the increasing foreign direct investments on research and development (R&D) as multinationals expand their business functions abroad. We use panel data analysis based on the country-specific variables suggested by the literature. The panel data taken from developed and developing countries are analyzed separately to examine the significant differences in levels of economic development and identify representative variables between the groups. Three different specifications widely used for panel analysis were employed: pooled OLS, fixed effect model, and random effect model. The result reveals that the host countries' systematic R&D activity, the level of existing foreign direct investment, and the concentration of workforce in R&D have positive impacts on the flow of foreign direct investment on R&D. More interesting results also show that while local private R&D is positively related to the degree of foreign R&D in the host developed countries, private R&D in the host developing countries is negatively related to foreign R&D, and public R&D is positively related to foreign R&D. This implies that in developing countries, foreign firms investing in R&D are concerned about the effects of competitive leakage with local companies. This also implies that it is effective for the government in developing countries to support local public R&D because this will induce foreign investment in R&D.