FDI and quality-enhancing technology spillovers |
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| Institution: | 1. Institute of Economic Research, Hitotsubashi University, Tokyo, Japan;2. Department of Economics, Faculty of Business and Law, Deakin University, Geelong, VIC, Australia;1. University of Bologna, Department of Economics, Piazza Scaravilli 2, Bologna 40126, Italy;2. Lear, Via di Monserrato 48, Rome 00186, Italy;3. Ofcom, Riverside House, 2a Southwark Bridge Road, London SE1 9HA, United Kingdom;4. Deutsches Institut für Wirtschaftsforschung (DIW Berlin), Technische Universität (TU) Berlin, Berlin Centre for Consumer Policies (BCCP), CEPR, and CESIfo. Mohrenstr. 58, Berlin 10117, Germany;5. Lear, Via di Monserrato 48, Rome 00186, Italy;1. Goethe-Universität Frankfurt, Theodor-W.-Adorno-Platz 4, Frankfurt 60323, Germany;2. Düsseldorf Institute for Competition Economics (DICE), Heinrich-Heine-Universität Düsseldorf, Universitätsstr. 1, Düsseldorf 40225, Germany;1. Sloan School of Management, Massachusetts Institute of Technology USA;2. Department of Economics and Rotman School of Management University of Toronto Canada |
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| Abstract: | When Northern firms undertake FDI in the South, their superior technology spills over to Southern firms and enables Southern firms to enhance their product quality. This paper explores quality-enhancing technology spillovers in an international duopoly model of vertical product differentiation. We find that the Northern firm strategically reduces its product quality to limit the amount of technology spillovers upon FDI. The trade-off between the Northern firm’s endogenous product quality choice and technology spillovers—similar to that between R&D and technology spillovers as discussed previously–plays a critical role in welfare consequences and policy implications of quality-enhancing technology spillovers. |
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