Licensing versus direct investment: implications for economic growth

We develop a symmetric two country model of foreign direct investment (FDI) that captures the internalization decision and its implications for both t he rate and magnitude of innovations. When mode choice (licensing versus FD I) is fixed, a subsidy to multinational production increases the rate but d ecreases the size of innovations. When mode can switch, the rate and size o f innovations both increase, provided the subsidy is not too large. Althoug h innovation size decreases for industries where firms already were choosin g FDI, innovation size increases for industries where firms switch from lic ensing to FDI because multinationals choose larger innovations than licenso rs. (C) 2002 Elsevier Science B.V. All rights reserved.