Multinational Corporations and Knowledge Flows: Evidence from Patent Citations

The purpose of this study is to investigate whether foreign direct investment (FDI) by a multinational corporation (MNC) increases the likelihood that knowledge about new technologies and production processes will be exchanged between foreign and domestic firms.1 In recent years, many economies have striven to attract foreign direct investment by offering tax breaks and other financial incentives.2 Governments have justified this by arguing that FDI will be an important channel for the diffusion of knowledge to domestic firms, in addition to bringing about employment opportunities, transfer of skills, increased competition, and market access effects (Görg and Greenaway 2004). Surprisingly, there have been few studies that tackle the question of whether FDI facilitates knowledge flows. In fact, even the broader benefits that are supposed to be brought in by FDI to developing countries, such as higher productivity of domestic firms, do not seem to be materializing, with many researchers finding that FDI has a negative effect on the host economies (Haddad and Harrison 1993; Borensztein, De Gregorio, and Lee 1998; Aitken and Harrison 1999; Xu 2000). Developed countries, on the other hand, have another potential risk to worry about with respect to FDI: the possible erosionof their technological advantage due to the establishment of "listening posts" by foreign companies to tap into their technological base. © 2011 by The University of Chicago.