Technological innovation and multinational expansion: A two-way link?

The paper examines how investment in research influences the form of foreign expansion chosen by the firm, and vice versa. We consider a two-country model where a monopolist producing in one country can choose between export and foreign direct investment. We assume process innovation, where the cost-reducing technological innovations are an outcome of the firm's investment in R&D. The role of technology transfer costs is explored. The model shows that, with low costs of technology transfer, there is a two-way link between the firm's R&D effort and multinational expansion. We also prove that both the research choice and the multinational choice have a positive effect on consumers' welfare in both countries.