Jota Ishikawa, Hitotsubashi University

Abstract

Using a simple North-South trade model, we show that a North firm may have incentive to strategically utilize technology spillover through foreign direct investment (FDI) in vertically related markets. A North downstream firm invests in the South if the South firm's capacity to absorb the North technology is neither too high nor too low. Technology spillover through FDI benefits all producers and consumers. Our analysis suggests that neither very lax nor very tight intellectual property rights protection may induce FDI. Moreover, subsidies in the South may attract FDI, but its welfare may deteriorate even if FDI generates technology spillover.