Knowledge Diffusion Through FDI: Worldwide Firm-Level Evidence

By JaeBin Ahn, Chan Kim, Nan Li, Andrea Manera

July 12, 2024

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JaeBin Ahn, Chan Kim, Nan Li, and Andrea Manera. Knowledge Diffusion Through FDI: Worldwide Firm-Level Evidence, (USA: International Monetary Fund, 2024) accessed December 3, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines the impact of Foreign Direct Investment (FDI) on knowledge diffusion by analyzing the effect of firm-level FDI activities on cross-border patent citations. We construct a novel firm-level panel dataset that combines worldwide utility patent and citations data with project-level greenfield FDI and crossborder mergers and acquisitions (M&A) data over the past two decades, covering firms across 60 countries. Applying a new local projection difference-indifferences methodology, our analysis reveals that FDI significantly enhances knowledge flows both from and to the investing firms. Citation flows between investing firms and host countries increase by up to around 10.6% to 13% in five years after the initial investment. These effects are stronger when host countries have higher innovation capacities or are technologically more similar to the investing firm. We also uncover knowledge spillovers beyond targeted firms and industries in host countries, which are particularly more pronounced for sectors closely connected in the technology space.

Subject: Absorptive capacity, Balance of payments, Financial institutions, Financial sector policy and analysis, Foreign direct investment, Spillovers, Stocks

Keywords: Absorptive capacity, Brownfield FDI, Cross-border M&A, FDI activity, FDI measure, Foreign direct investment, Global, Greenfield FDI, Impacts of FDI, Investing firm, Inward FDI, Knowledge spillover, LP-DiD, Outward FDI, Patent citation, Spillovers, Stocks

Publication Details

Pages:

57
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/152
Stock No:

WPIEA2024152
ISBN:

9798400280757
ISSN:

1018-5941

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