The effects of foreign entry on local innovation by entry mode

Abstract

This paper studies the potentially heterogeneous effects that innovative asset-seeking foreign direct investments (FDIs) pursued through different entry modes have on the technological innovation of receiving economies. The analysis covers a balanced panel of European regions receiving FDIs between 2003 and 2016, and accounts for the endogeneity of FDI inflows by means of an instrumental variable approach. For greenfield FDIs, we find a negative effect on the patenting output of receiving regions. This is driven by a drop in the patenting output of inventors who have never patented before, in regions with historically high co-patenting of new and experienced inventors. This is consistent with the idea that greenfield subsidiaries recruit some of the best local inventors, disrupting local teams, so that less experienced inventors miss out on interactions with more experienced collaborators. In the case of cross-border mergers and acquisitions, the patenting activity of receiving regions remains unchanged, but for a slight increase in the patenting activity of experienced inventors in the first few years after the acquisition, possibly to show their value to the entrant multinational enterprise (MNE). Our findings suggest that policies aimed at attracting greenfield FDIs could be combined with those aimed at embedding newly established subsidiaries in the local environment. For instance, entrant MNEs could be required to engage with local actors in collaborative R&D activities and in the development of local skills, in order to access the economic incentives (e.g., R&D tax credits, grants and subsidies) that are often devised to attract innovative greenfield FDIs.