Amy Jocelyn Glass

International technology transfer and the technology gap

Abstract We build a quality ladders product cycle model that explores how the quality of technology transferred through foreign direct investment (FDI) is linked to innovation and imitation when the absorptive capacity of LDCs is limited. Successful imitation of low quality levels makes FDI involving high quality levels possible through reduction of the technology gap. A subsidy to imitation or a tax on low quality FDI production encourages imitation relative to innovation, thus releasing the constraint faced by foreign firms seeking to produce in the South. These forces that stimulate high-quality FDI raise Southern welfare through lower prices, faster innovation and higher wages.

Multinational Firms and Technology Transfer

The authors construct an oligopoly model in which a multinational firm has a technology superior to those of local firms in the host country. Workers employed by the multinational acquire knowledge of the superior technology and can spread their knowledge to local firms by switching employers. The multinational chooses to pay a wage premium to prevent local firms from hiring away its workers if the local firms are sufficiently disadvantaged or if there are enough local firms. Diffusion of the superior technology benefits local firms at the expense of workers, whose wages suffer. The host government might have an incentive to attract foreign direct investment even when technology transfer will not result, because of the wage premium local employees of the multinational firm earn. Also, foreign direct investment with technology transfer may reduce the total economic rent the host country earns.

Intellectual property rights and foreign direct investment

Abstract This paper develops a product cycle model with endogenous innovation, imitation, and foreign direct investment (FDI). We use this model to determine how stronger intellectual property rights (IPR) protection in the South affects innovation, imitation and FDI. We find that stronger IPR protection keeps multinationals safer from imitation, but no more so than Northern firms. Instead, the increased difficulty of imitation generates resource wasting and imitation disincentive effects that reduce both FDI and innovation. The greater resources absorbed in imitation crowd out FDI. Reduced FDI then transmits resource scarcity in the South back to the North and consequently contracts innovation.

Innovation and Wage Effects of International Outsourcing

We study the role of increased outsourcing of production to a low wage country on relative wages across countries and innovation incentives. In particular, we examine the following causal forces behind an increase in the extent of international outsourcing: 1) a reduction in the resource requirement in adapting technology relative to improving products, 2) an expansion in the portion of production that can be outsourced, 3) an increase in production taxes in the North, 4) an increase in production subsidies in the South, and 5) an increase in the subsidy to adapting technologies. Each of these causal forces generates a lower relative wage and a faster rate of innovation, in addition to a greater extent of international outsourcing.

Licensing versus direct investment: implications for economic growth

We develop a symmetric two country model of foreign direct investment (FDI) that captures the internalization decision and its implications for both the rate and magnitude of innovations. When mode choice (licensing versus FDI) is fixed, a subsidy to multinational production increases the rate but decreases the size of innovations. When mode can switch, the rate and size of innovations both increase, provided the subsidy is not too large. Although innovation size decreases for industries where firms already were choosing FDI, innovation size increases for industries where firms switch from licensing to FDI because multinationals choose larger innovations than licensors.

FDI Policies under Shared Factor Markets

Note: The following is a description of the paper and not the actual abstract. We consider a model where firms from a high-cost source country shift some of their production to a low-cost host country. Firms earn profits since the output market is a Cournot oligopoly. Due to a fixed supply of skilled labor in each country, such foreign direct investment (FDI) raises the host wage and reduces the source wage. A subsidy to FDI results in higher profits for source firms but lower profits for host firms. Thus, each country experiences conflict in setting its policy toward FDI. Workers favor inward FDI but local firms resist it in the host country, while firms favor outward FDI but workers resist it in the source country. We characterize how the optimal host and source policies toward FDI depend on resource supplies, resource demand, and ownership of firms across countries. Subsidies can be effective in raising national welfare, even in the presence of shared factors available in fixed supply, provided the opportunity to undertake FDI is present.

Product Cycles and Market Penetration

This paper constructs a quality ladders product cycle model with multiple quality levels. A lower quality level of each product sells due to differences in willingness to pay for quality across consumers. The model determines how far Southern firms penetrate high-technology product markets. Expanded resources or weakened protection of intellectual property rights in the South relative to the North lead to increased Southern market penetration as observed with East Asian countries. Either cause of increased Southern market penetration implies a reduction in the wage in the North relative to the South and a reduction in the rate of innovation. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Foreign Direct Investment and the Nature of R&D

To study the impact of foreign direct investment (FDI) on innovation, imitation and technology transfer, we introduce FDI into Grossman and Helpmans quality ladders product cycle model, thus allowing technology transfer between countries to occur through both FDI and imitation.

Imitation as a Stepping Stone to Innovation

This product cycle model captures how imitation can serve as a stepping stone enabling firms from Southern countries to undertake innovation. Successful imitation of the state-of-the-art quality level makes inventing an even higher quality level attractive for Southern firms. Subsidizing Southern innovation increases the rate of Southern innovation relative to imitation but also decreases the rate of imitation. Taxing (Southern) imitation or Northern innovation has the same effect, as does decreasing Northern resources. Only increasing Southern resources has the potential to increase the rate of Southern innovation relative to imitation without decreasing the rate of imitation.

Exporting Versus Direct Investment Under Local Sourcing

This paper examines a setting where foreign direct investment (FDI) shifts demand for an intermediate good from the source to the host country. A do- mestic and a foreign firm choose between exports or FDI, always sourcing the in- termediate locally. We show that by increasing the price of the intermediate, out- ward FDI can act as a cost-raising strategy for a firm and that attracting FDI can raise host country welfare. Two-way FDI is the equilibrium when the countries have similar market sizes. However, such FDI reduces global welfare relative to two-way exporting since it eliminates indirect competition between suppliers. JEL no. F12, F13, F23, L13