Foreign direct investment and development and the role of research and development

Abstract

Using a sample of 130 countries over the period 2004-2019, we revisit the development impact of foreign direct investment (FDI), but novelly examine the role of research and development (R&D) within this framework. To allow us to make causality statement, we use bilateral investment treaties (BITs) as an innovative instrument for FDI in the development equations. We find that, compared to FDI, expenditure on R&D has a more pronounced impact on development outcomes - through increasing growth and human development while reducing poverty and inequality. We also find that countries that spend more on R&D are less dependent on FDI for development. This suggests that R&D and FDI are substitutes in the development process with the results showing varying FDI and R&D thresholds at which the substitution takes place. We however, find a diminishing effect of FDI on development. Further to this, we find that R&D complements FDI only when FDI reaches a threshold level, and then begins to hurt development - at this stage there is sufficient R&D expenditure which possibly suggest sufficient adaptive capacity