FDI, R&D and endogenous competitiveness

Abstract

We analyze the influence of endogenous competitiveness on multinational activity. Competitiveness is endogenized by assuming that firms differ on R&D commitment power, i.e.: some firms are leaders in R&D. We show that firms with higher commitment power tend to invest more in R&D and consequently also tend to be more competitive than rivals that lack such capability. As a result, firms with higher commitment power have higher propensity to become multinationals than firms with lower commitment power. In addition, the former use the R&D leader advantage to compel the latter to not enter the market or, in case of entry, to force them to adopt the domestic strategy. Therefore, in addition to the proximity-concentration trade-off, we identify another FDI determinant: strategic technological competitiveness.