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Authors:

• Yifan HU
  University of Hong Kong

• C. Simon FAN
  Lingnan University

Do the technological transfers and spillovers associated with the influx of FDI reinforce or crowd out indigenous technology creation? While the answer to this question has been a serious concern to both economists and policy makers, systematic empirical studies are surprisingly lacking. This research attempts to help fill this gap by conducting a theoretical and empirical investigation into the effects of FDI on indigenous technological creation. The theoretical analysis examines the complementary effect and substitution effect of FDI on domestic research and development (R&D). Our regression analysis yields several interesting findings. First, a firm’s expenditure on R&D decreases with the degree of its foreign ownership. Second, domestic R&D effort increases with the aggregate FDI at the sector level. Third, there is weak evidence that the technological spillover effect from aggregate FDI is larger for the firms with more foreign equity.