Foreign Direct Investment as a Factor of Increasing Innovation Potential: in the Example of Asia

Abstract

ABSTRACT My Nation’s economic growth depends on my capacity to educate, innovate, and build. Long-term national investments in basic and applied research and development (R&D) play an important role in the flow of market-based innovations through a complex system that leverages the combined talents of scientists and engineers, entrepreneurs, business managers and industrialists. These funds have led to everything from small entrepreneurial initiatives to growth in high technology industries with the concomitant employment of millions of workers. The large impact on employment results from innovation impacts not only in high tech enterprises, but also other industries that benefit from increased capabilities and productivity. Mutually reinforcing and complementary investments in R&D by both private and public sectors work in concert to support the development, production, and commercialization of new products and processes. Foreign direct investment (FDI) has been traditionally considered an important channel in the diffusion of advanced technology. Whether it can promote technology progress for the host country is a focused problem. This paper analyzes the relationship between FDI and regional innovation capability (RIC) in a case of Japanese economy. I find that the spillover effects of FDI are not as significant as it is usually thought. It is found that the impact of FDI on RIC is Iak; the entry of FDI has no use for enhancing indigenous innovation capability. Moreover, inward FDI might have the crowding-out effect on innovation and domestic R&D activity. The research manifests that increasing domestic R&D inputs, strengthening the innovation capabilities and absorptive capacity in domestic enterprises are determinants to improve RIC.