Foreign Direct Investment’s Effect on Research & Development Spending in Middle-Income Countries

Abstract

This research delves into the intricate relationship between Foreign Direct Investment (FDI) inflows and Research and Development (R&D) spending in middle-income countries, with a particular focus on the concept of the “middle-income trap.” R&D spending is a key input for innovating and the creation of indigenous technology, which is key for middle-income countries to avoid the middle-income trap and advance towards high-income status. The study aims to determine whether FDI inflows act as a catalyst or a hindrance for R&D spending within the middle-income world. Utilizing Pooled Ordinary Least Squares (OLS) regressions to analyze data across various middle-income nations, a negative correlation between FDI inflows and R&D spending emerges. This counterintuitive result challenges the prevailing notion that FDI invariably promotes domestic innovation and raises questions about its role in potentially perpetuating the middle-income trap. These findings carry profound implications for both theoretical understanding and practical policy-making. They suggest that middle-income countries need to exercise caution in embracing FDI, balancing it with initiatives that foster domestic innovation capabilities. This approach could be pivotal in enabling these countries to successfully transition to high-income status, avoiding the stagnation often associated with the middle-income trap.