Technology Sourcing and Strategic Foreign Direct Investment

• Published in: Review of international economics Vol. 14; no. 4; pp. 600 - 614
• Main Authors: Bjorvatn, Kjetil, Eckel, Carsten
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01.09.2006; Wiley Blackwell
• Series: Review of International Economics
• Subjects: Business economics; Business investment; Business strategies; Economic models; Foreign direct investment; Foreign investment; International economics; Studies; Technology transfer
• ISSN: 0965-7576; 1467-9396
• DOI: 10.1111/j.1467-9396.2006.00599.x

Empirical evidence suggests that technological spillovers are limited by distance. The present paper investigates the implications of this observation for the investment decisions of a technologically leading and lagging firm, located in different countries. Technological spillovers may induce “technology sourcing” foreign direct investment by the less advanced firm, as it seeks to upgrade its technology. Our main result, however, is that there may be strong incentives for the leading firm to undertake strategic investment abroad in order to prevent technology sourcing by the lagging firm. We analyze how trade costs, the technology gap between firms, technological spillovers, and the ability of a firm to transfer technology between plants affect the two firms’ entry decisions.