Foreign direct investment with endogenous technology choice

In this paper, we analyze optimal foreign direct investment of a firm operating in a duopolistic market. Foreign direct investment induces technological spillovers to a competitor in the foreign country to intensity of which depends on the absorptive capacity of the foreign firm and the size of the technological gap. We characterize a technology spillover threshold and show that for an intensity of spillovers below this threshold, there is a unique locally asymptotic stable steady state with a positive capital stock in the developing country. Furthermore, we characterize how optimal foreign investment patterns and the investor’s value function depend on the level of technology transferred and characterize the optimal level to be used for the foreign direct investment.