GEP Research Paper 03/49
Intra- and Inter-Firm Technology Transfer in an International Oligopoly
B. Ferrett
Abstract
Foreign-owned firms possess widely-documented 'productivity advantages' over domestic firms. To analyse their sources theoretically, we model the relationships between foreign direct investment (FDI) inflows and outflows and national 'productivity distributions' across firms (plants) in an international oligopoly. Industrial structure is determined endogenously, and both greenfield- and acquisition-FDI flows are allowed for. Two characteristics of the national 'productivity distributions' (across plants) in the industry considered are endogenously determined in our model: plant-level (labour) productivity, and the number of rival plants. There are three ways in which firms' FDI decisions interact with a national 'productivity distribution': via intra- and inter-firm (spillovers) technology transfer, and via their effects on entry incentives. Three principal conclusions emerge. First, relationships between industry greenfield- and acquisition-FDI flows, and structural parameters can be non-monotonic. Second, equilibrium greenfield-FDI flows and trade costs are positively associated. Third, rises in the technological lead of an incumbent firm make that firm 'less likely' to undertake greenfield-FDI in equilibrium, but they make foreign technological laggards 'more likely' to undertake ('technology-sourcing') greenfield-FDI in the leader's home country. We also briefly compare our model's predictions on the sources of MNEs' 'productivity advantages' to those of Dunning's popular OLI (ownership-location-internalisation) paradigm.
Issued in November 2003.
This paper is available in PDF format.