FDI and development redux: Is R&D a substitute for FDIs?

Using a sample of 130 countries over the period 2004-2019, we revisit the development impact of foreign direct investment (FDI), but this time examine the role of research and development (R&D) in this framework. We use bilateral investment treaties (BITs) as a novel instrument for FDI. We find that compared to FDI, expenditure on R&D has a more pronounced impact on development outcomes – through increasing growth and human development while reducing poverty and inequality. We also find that countries that spend more on R&D are less dependent on FDI for development. Thus, R&D and FDI are substitutes in the development process with the results showing varying FDI and R&D thresholds at which the substitution takes place. We however find the vanishing effect of FDI on development. It turns out that R&D complements FDI only when FDI reaches its threshold and begins to hurt development – at this stage there is sufficient R&D expenditure which possibly suggest sufficient adaptive capacity.