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Trade, Foreign Direct Investment, and R&D Spillovers


Attempts to measure the spillover effects of multinational enterprises on host countries have generally been cross-sectional and limited to labour productivity in manufacturing for a single country. Recent work in growth theory has measured the extent to which growth in total factor productivity in a country depends not only on domestic R&D capital stocks but also on foreign R&D capital stocks. This paper extends such work by adding foreign direct investment stocks to foreign trade as a channel linking total factor productivity levels between countries. This is done by considering the role of trade and FDI as diffusion channels for G6 R&D to the OECD countries. There are three main results: the coefficient estimates for FDI are higher than those for trade in the standard model; the importance of the trade channel is much reduced once FDI is included; and the overall spillovers increase significantly with the inclusion of FDI.

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*Walid Hejazi (PhD Toronto) is assistant professor in the Division of Management at the University of Toronto at Scarborough. His publications analyze the links between trade and foreign direct investment, the role of financial market development in the process of economic growth, and the predictive content of the term structure of interest rates.

**A.E. Safarian (PhD Berkeley) is a Professor of Business Economics in the Faculty of Management at the University of Toronto. He is author of Multinational Enterprise and Public Policy (1993).

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Hejazi, W., Safarian, A. Trade, Foreign Direct Investment, and R&D Spillovers. J Int Bus Stud 30, 491–511 (1999).

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