Capital outflow and R&D investment in the parent firm

Outward foreign direct investment (OFDI) from emerging countries to relatively low-wage countries has raised important questions about its impact on domestic technological development because of the small gap in terms of a technological lead. This paper develops hypotheses linking the impact of OFDI on R&D-investment growth in the parent firm to the underlying motivation for investment and firm size. These hypotheses are tested using available data from Taiwanese information and electronics firms for 1993-2008. The findings are that the R&D growth is not only relevant to conventional factors, such as the knowledge stock, demand factors and institutions, but is also importantly explained by the firm's long-term investment in the home country and abroad, and the industry's OFDI and IFDI. This paper also shows that home R&D growth is negatively relevant to the wage gap between the home and the host country, and changes in OFDI policies can significantly affect the R&D growth. The implications are that multinationals have important reasons for investing abroad. An open economy can maintain a technological lead only by improvements in its domestic R&D environment and by encouraging R&D entrepreneurship and social responsibility to promote long-term and R&D investments locally. (C) 2012 Elsevier B.V. All rights reserved.