Working Paper No. 03-16

Vertical Foreign Direct Investment, Knowledge Spillovers and the Global Growth: A Q-theory Approach
Yin He
November 2003

ABSTRACT

This paper combines several earlier contributions and studies the effects different FDI related knowledge spillovers (intra-industry spillovers, local learning-by-doing spillovers, and FDI spillovers through imitation) on the rate of multinationalization, investment level in R&D in the North and the global long-run capital growth rate. Tobin's Q method is applied and interesting results are shown the higher rate of multinationalization is harmful to the long-run global knowledge capital growth, because of lower local learning-by-doing spillover effects in the North and a higher loss in capital due to the fixed cost premium for multinational corporations. In addition, a lower imitation rate, higher disadvantage cost, smaller wage gap between regions, or a smaller elasticity of substitution between varieties decrease the expected profits for MNCs, leading to a higher rate of multinationalization and a lower level of investment in innovation, which in turn reduces the long-run knowledge capital growth rate.

JEL classification: F0; O0

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