Interrelationships between inward FDI and indigenous innovation in developing economies

The purpose of this study is to explore possible simultaneous relationships between inward FDI and indigenous innovation in developing economies. The results of simultaneous-equations analysis reveal that there exist reciprocal relationships between the two; however, in opposing directions. While increasing innovation attracts more foreign direct investment, more inward FDI reduces innovation. Indigenous innovation is increased mainly through improvements in absorptive capacity, particularly in research and development (R%D). Government effectiveness, as the mediating factor, lessens the adverse impact of FDI on innovation while amplifying the positive effect of R%D spending on innovation. Because innovation and FDI are crucial policies that enhance economic growth, this study suggests improving overall government effectiveness as well as increasing R%D activities in order to channel FDI spillovers to trigger more indigenous innovations, which may eventually induce more foreign direct investment.