Vertical foreign direct investment, knowledge spillovers and growth: Theory and evidence

This thesis examines the impact of foreign direct investment (FDI) to developing countries by multinational enterprises from developed countries, on the growth rates of the global knowledge capital and the global economy.; In current literature, the effects of FDI to developing countries on the investing country and the world are usually neglected. In addition, knowledge is usually contributed homogenously innovation in theoretical models, but empirical studies show that knowledge contributes differently to sectors and locations.; This thesis develops a dynamic general-equilibrium model that fills these two gaps. It studies the effects of different FDI related knowledge spillovers (intra-industry spillovers, local learning-by-doing spillovers, and FDI spillovers through imitation) on the rate of multinationalization, R&D investment level and the long-run growth rate.; The model finds that a lower imitation rate generates higher expected profits for multinational firms, thereby leading to a higher rate of multinationalization and a lower level of R&D investment. The lower level of local learning-by-doing spillovers in the North and larger loss in fixed cost reduces the efficiency of innovation, thereby reducing the rate of innovation and long long-run growth rate. These effects also result from lower disadvantage cost, larger wage gap between regions, and bigger elasticity of substitution have the same effect.; Data on 7 developed countries and 9 developing countries from 1991 to 2000 are used to test the predictions of the theoretical model. Regressions show that both investment barrier and enrollment rate in tertiary education are negatively correlated with the rate of multinationalization as predicted. The rate of multinationalization is negatively correlated with the level of R&D expenditure. And the later variable is positively associated with the growth rate of labor productivity. Most importantly, the rate of multinationalization reduces labor productivity growth rate and proves the existence and importance of local learning-by-doing spillovers.