The effect of FDI on innovation in emerging market economies
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2025-07-08
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en
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This study investigates the extent to which inward and outward FDI are related to innovation in emerging markets, and how this relationship is moderated by a country’s absorptive capacity. The study uses panel data for 23 emerging markets from 2000 to 2021. Innovation is measured by two proxies: the number of patent applications and the Global Innovation Index. Both a fixed effects and system GMM model are employed to address endogeneity and improve the robustness of the results. The fixed effects results indicate a positive and significant relationship between inward FDI and innovation and no significance for outward FDI. However, once instrumented via GMM, the inward FDI coefficient loses its significance and outward FDI becomes significant and slightly negative. The interaction term between IFDI and Human capital (measure of absorptive capacity) shows that human capital is a moderator in the relationship between inward FDI and innovation. Via a heterogeneity analysis, where the sample is separated into two groups based on human capital, it can be concluded that inward FDI only boosts innovation above a certain human capital threshold. These findings highlight the conditional nature of FDI-driven innovation and underscore the role of human capital in shaping effective foreign investment policies.
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Faculteit der Managementwetenschappen