LINK BETWEEN DOMESTIC R&D AND INFLOW OF FDI: A GAME-THEORETIC ANALYSIS

The empirical literature has generated mixed correlations between research and development (R&D) undertaken by domestic firms and the inflow of foreign direct investment (FDI) by their multinational rivals. Further, the existing theoretical explanations of such empirical results appear to be inadequate. This study presents an alternative game-theoretic explanation for the observed correlations. The results show that the seemingly contradictory observed mixed correlations can be explained in an encompassing model in terms of the multinationals' competitive and interactive assessment of the efficiency and expenditure consequences that domestic R&D could generate for the undertaking domestic competitors. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd