How does outward FDI in developed economies affect the R&D of emerging economy firms? An attention-based view

Abstract

Internal R&D and outward foreign direct investment in developed economies (OFDI-in-DE) are recognized as two important elements for emerging economy firms (EEFs) attempting to innovate. However, it is less clear whether these elements act as complements or substitutes to each other. Building on the attention-based view, we explore how OFDI-in-DE affects internal R&D in terms of input scale and output efficiency. Using a longitudinal sample of Chinese listed firms from 2006 to 2018, we find that OFDI-in-DE not only leads to a reduction in EEFs' R&D investment, but also weakens the positive effect of the investment on firms' innovation performance, measured by the number of patent applications filed during a specific period. This suggests that EEFs' OFDI-in-DE substitutes for internal R&D investments in both scale and efficiency aspects. Our results also show that these effects vary depending on market competition and organizational slack. Specifically, the substitution effects become stronger in EEFs operating in highly competitive industries, but weaker in those with ample organizational slack. Our study sheds light on the interrelation between internal R&D and OFDI-in-DE activities for EEFs.