R&D, Technology Spillovers and Firms Without Advantage

We analyze a two-country (developing country and developed country) game model of Foreign Direct Investment (FDI) based on the productivity of imitation R&D, innovation R&D and intrafirm technology spillovers. The model presents the FDI strategies of developing country. Our main points are: first, at infant stage, when mutual investment becomes a Nash equilibria, technology-sourcing FDI undertaken by developing countries is most likely to succeed if external and intrafirm technology spillovers are sufficiently good and the size of markets is not too small. Second, at mature stage, if firms without advantage become strong enough through absorbing substantial technology spillovers, asymmetric FDI can occur, that is, leading firms in developed country give up FDI. Thus, there are strong motivations for China to conduct technology-souring FDI.