Home Country Innovation Performance: Moderating the Local Knowledge and Inward Foreign Direct Investment

Abstract

The inward foreign direct investment (FDI) has been emphasized in the literature, and although the benefits related to innovation are known, there is not much information about their effects on emerging economies. This study investigates how local domestic factors such as research and development (R&D), exports and foreign technology acquisition moderate with inward FDI to improve the innovation performance. The empirical findings from a generalized method of moments (GMM) estimator suggest, at short term, that the FDI has a positive effect in the Brazilian manufacturing industry. As a complementary effect, there is an interaction between FDI inflows and exports, increasing the innovation performance. However, improvements in R&D-related FDI is not observed. For this reason, the results suggest FDI-related exports could indicate a mere product adaptation to the foreign market. There is a predominance in import substitution of machines, equipment and software and no evidence of internal R&D investments or R&D-related FDI. Our results suggest managerial and policy implications, once it was observed the high-technology intensity industry sectors show better innovation performance than medium- and low-technology industries. Policymakers should implement better policies to encourage more R&D-related FDI to decrease import substitution and improve the local innovation performance to strengthen the local industry R&D investments.