Identifying Technology Transfer in Foreign Direct Investment: Influence of Industry Conditions and Investing Firm Motive
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Technology Transfer
Foreign
Influence and
of
Direct
Investment:
Industry
Conditions
Investing
Firm
Motives WilburChung*
NEWYORKUNIVERSITY Firms have different motives for investing abroad, most notably to exercise existing capabilities, but also to build new capabilities by accessing knowledge located abroad. Recognizing this heterogeneity helps determine whether foreign investments transfer technology to their host industries. Using host industries' initial level of competition to differentiate when each of these dichotomous motives is more likely,
WATith inward foreign direct invest-
ment (FDI), whether foreign en-
trants transfer technology to incumbent firms has historically interested researchers. Internationalizing firms are a conduit with clear potential for transfer. Multinational firms possess unique capabilities and use these capabilities both at home and abroad. To obtain the greatest returns, multinationals transfer their capabilities across national boundaries to their foreign subsidiaries.
I examine change in productivity resulting from inward FDI in US manufacturing industries for 1987 through 1991. While controlling for change in industry competition, I find that relatively uncompetitive industries experience productivity growth while competitive industries experience productivity stagnation from FDI. This differential outcome is consistent with heterogeneous investment motives. Whilemultinationalstransfertechnology within themselves,a relatedand potentially more interesting question is whethersome of these capabilitiesare also transferredto otherfirms.Do unaffiliatedfirmsand thereforethe host industry overallalso gain fromthe presence of the multinational'ssubsidiaries? If so, how muchandunderwhatconditions?Beforethese capabilitiesbecome common knowledge,those firmsbetter positionedto observe,absorb,andutilize
*Wilbur Chung is assistant professor of Management and InternationalBusiness at the Stern School of Business, New York University. His researchfocuses on how firms' knowledge and location interact. I acknowledge the helpful comments of ArtursKalnins, Tom Pugel, J. Myles Shaver, and three anonymous reviewers on prior drafts.Errorsremain my own. JOURNAL OF INTERNATIONALBUSINESS STUDIES, 32, 2 (SECONDQUARTER2001):
211-229
211
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IN FDI TRANSFER TECHNOLOGY IDENTIFYING
ogy spillovers. While these studies suggest that unaffiliated firms receive transfers, clearly identifying technology transfer is stymied by only examining how FDI affects productivity. Caves (1996: pg. 185) cautions against concluding that multinationals transfer substantial technology without accounting for other potential sources of productivity growth. Importantly, Caves (1996) notes FDI's effect on productivity occurs via two channels: technology transfer and heightened competition. While some studies include
measures for the level of competition, Caves
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