Foreign direct investment (FDI): Friend or foe of non-innovating firms?

Rajeev K. Goel, Illinois State University and Kiel Institute for the World Economy, Germany
James W. Saunoris, Eastern Michigan University


This paper examines the incentives of firms to bypass the innovation process by not pursuing innovation, focusing specifically on whether FDI enables innovation participation or retards it. This consideration of innovation participation is broader than the impact of FDI on innovation because it captures whether FDI leads to greater concentration in research markets. Using data on more than 50 countries and accounting for possible two-way causality between FDI and non-innovation, our results consistently show that FDI increases the ranks of non-innovators. These spillovers or crowding-out effects of FDI do not seem to have been widely recognized. Another interesting finding is that the main result is sensitive to the size of firms-large firms are less impacted by FDI relative to small and medium firms. Implications for technology policy are discussed.