FDI and Technology Spillovers Under Vertical Product Differentiation

39 Pages Posted: 20 Mar 2012

See all articles by Hodaka Morita

Hodaka Morita

Hitotsubashi University - Institute of Economic Research

Xuan Nguyen

Deakin University

Date Written: March 11, 2012

Abstract

When Northern firms undertake FDI in the South, the superior technology they bring to their Southern operations spills over to Southern firms. Technology spillovers accompanied by FDI often enable Southern firms to enhance their product quality. This paper explores a model that incorporates quality-enhancing spillovers in an international duopoly model of vertical product differentiation. We find that the Northern firm, when it chooses to undertake FDI, strategically reduces its product quality to reduce the amount of technology that spills over to the Southern firm. This strategic quality reduction, which is often observed in reality, plays a critical role in welfare consequences and policy implications of quality-enhancing technology spillovers.

Keywords: FDI, international oligopoly, quality-enhancing spillovers, strategic quality reduction, vertical product differentiation, welfare

JEL Classification: F12, F13, F21, L13

Suggested Citation

Morita, Hodaka and Nguyen, Xuan, FDI and Technology Spillovers Under Vertical Product Differentiation (March 11, 2012). UNSW Australian School of Business Research Paper No. 2012ECON19, Available at SSRN: https://ssrn.com/abstract=2020100 or http://dx.doi.org/10.2139/ssrn.2020100

Hodaka Morita (Contact Author)

Hitotsubashi University - Institute of Economic Research ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan

Xuan Nguyen

Deakin University ( email )

Deakin Graduate School of Business
Faculty of Business and Law
Burwood, Victoria 3125
Australia

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