!The effect of R&D capabilities on inward FDI: from macro to meso perspective

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The effect of R&D capabilities on inward FDI:

from macro to meso perspective

Abstract

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Multinational!enterprises!(MNEs)!are!constantly!examining!what!host!countries!provide! the!best!opportunities!to!exploit!their!business.!This!paper!combines!the!macro!and! meso! economic! perspective! to! investigate! the! impact! of! the! host! country’s! specific! advantages!in!R&D!on!inward!foreign!direct!investments.!We!employ!different!proxies! for!R&D:!human!capital,!innovation!linkages,!patents!and!entrepreneurship.!Using!an! original!dataset!of!79!countries!for!the!most!current!year,!I!found!evidence!that!patents! and! entrepreneurship! are! significant! drivers! to! attract! FDI,! while! human! capital! and! innovation!linkages!are!significantly!and!negatively!related!to!inward!FDI.!In!addition,! the!findings!reveal!that!developed!markets!are!still!the!main!receivers!and!investors!of! FDI.!However,!by!considering!three!countries!separately,!the!empirical!results!of!R&D! capabilities!on!inward!FDI!do!not!match!with!the!findings!on!global!level.!This!implies! that!countries!each!have!a!unique!set!of!macroeconomic!indicators.!In!addition,!the! meso! economic! study! shows! that! industries! have! their! own! preferences! in! location! determinants.!!!

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1.! Introduction

In!the!last!decades,!the!awareness!of!the!globalization!process!has!risen!among!scholars.!The! lower! transportation! cost! in! the! “first! unbundling”! and! the! decreased! communication! and! information!costs!in!the!“second!unbundling”!lead!to!the!ability!that!firms!can!locate!their! production!processes!in!different!places!around!the!globe!(Baldwin!and!Evenett,!2014).!Firms! have!changed!their!sourcing!strategies!by!investigating!the!possibilities!for!both!outsourcing! and!offshoring,!making!the!firms!eager!to!optimize!their!governance!modes!and!geographical! location!for!each!of!their!activities!in!the!value!chain!(MartinezMNoya!et!al,!2012).!! ! These!crossMborder!business!activities!of!firms!are!explained!in!literature!to!understand!the! internationalization!patterns.!CrossMborder!investments!are!“all!types!of!investments!–!foreign! direct!investment,!portfolio!equity!securities,!portfolio!debt!securities!and!loans”!to!another! country!(Daude!and!Fratzschner,!2008,!p.94).!Most!of!the!articles!focus!extensively!on!FDI!(e.g.! Ang,! 2008;! Cezar! and! Escobar,! 2015;! Feng! and! Migque,! 2016;! Jayakumar! et! al,! 2014;! Min,! 2003).!The!theoretical!implications!of!internationalization!are!emphasized!in!relation!to!the! firm’s!ownership!advantages!(e.g.!Vernon,!1966;!Hymer,!1976),!economies!of!scale!and!scope! (e.g.!Helpman,!1984;!Helpman!and!Krugman,!1985;!Markusen,!1984)!and!location!advantages! (e.g.!Dunning,!1977,!1985,!2000).!Despite!that!these!theoretical!explanations!are!not!always! confirmed!by!empirical!studies,!many!authors!have!implied!these!theories!into!their!study.!! !

examine!some!effects!of!inward!FDI!to!hostMcountry’s!characteristics,!only!very!few!researches! have! explicitly! investigated! the! hostMcountry! R&D! capabilities! as! determinant! for! the! firm’s! locational!decision!making!process.!In!addition,!all!existing!literature!has!been!restricted!to! examine!single!approaches!of!R&D!capabilities!by!either!taking!one!or!a!small!number!of!R&D! related!variables.!Therefore,!this!Master!thesis!attempts!to!narrow!this!literature!gap!by!using! a!variety!of!literature!that!includes!different!aspects!of!FDI!and!R&D!capabilities.!Subsequently,! these!theoretical!perspectives!are!used!for!working!towards!a!conceptual!framework!and!is! applied!to!answer!the!research!question:!“Are!hostMcountry’s!R&D!capabilities!drivers!of!inward! FDI?”!The!relationship!between!R&D!capabilities!and!inward!FDI!has!been!validated!using!a! crossMsectional! dataset! of! 79! countries! worldwide.! The! broad! set! of! host! country’s! characteristics!and!the!distinction!between!different!types!of!markets!(frontier,!emerging!and! developed)!across!all!continents,!is!hopefully!a!contribution!to!the!empirical!literature!that! explains!global!investment!behavior.!Here!after,!the!perspective!of!this!study!shifts!to!three! countries! that! each! represent! their! own! type! of! market:! Romania! (frontier! market),! Russia! (emerging!market)!and!Singapore!(developed!market).!The!same!set!of!variables!is!used,!only! the! distance! (both! cultural! and! geographical)! and! corporate! tax! rate! is! added.! Finally,! an! analysis!has!been!made!based!on!the!literature!in!order!to!investigate!the!decisionMmaking! factors!of!FDI!on!meso!level.!A!distinction!is!made!between!four!different!industries,!depending! on!the!extent!of!knowledge!and!technology.!It!is!expected!that!this!shift!from!macro!to!meso! crossMborder! investment! behavior! is! also! a! contribution! in! the! economics! and! international! business!literature.!!

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The!results!have!shown!that!identifying!key!determinants!for!FDI!location!is!complex,!because! it!varies!from!country!to!country!and!its!industry!or!sector.!As!it!has!been!proved!that!human! capital! and! innovation! linkages! are! negatively! related! to! inward! FDI,! patents! and! entrepreneurship!are!positively!related!to!inward!FDI.!At!national!level,!however,!the!findings! do!not!show!the!same!conclusive!impact!of!R&D!capabilities!on!inward!FDI,!as!there!is!evidence! that!it!differs!among!the!countries!and!its!economic!development.!This!ambiguity!on!macro! level!has!led!to!a!shift!to!industry!level,!what!gave!more!insights!in!FDI!determinants.!Therefore,! future! research! could! take! into! account! that! macro! economic! studies! neglect! meso,! and! possibly!micro,!specific!factors,!which!can!be!valuable!to!determine!investment!behavior.! !

This!paper!is!structured!as!follows:!the!second!section!gives!an!overview!of!the!theoretical!and! empirical!literature!in!FDI!and!R&D!capabilities.!The!third!section!formulates!the!hypotheses! and!shows!the!conceptual!framework.!The!fourth!section!presents!the!sample!selection!and! methodology,! including! the! empirical! specification! by! first! defining! the! dependent,! independent!and!control!variables!for!the!different!models.!The!fifth!section!interprets!the! empirical!results!and!the!sixth!section!reviews!these!results!and!includes!an!analysis!of!four! different!industries.!Finally,!the!concluding!remarks!are!discussed!and!this!paper’s!limitations! and!recommendations!for!future!research!are!presented.!!

2.! Literature Review

1.! Internationalization!!

Lots!of!economic!and!business!literature!reflect!on!arguments!and!models!related!to!foreign! direct!investment!(FDI)!from!different!perspectives.!This!literature!review!aims!at!providing! these! different! approaches! about! the! movement! of! international! capital! and! identifying! determinants!for!inward!FDI.!

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International! trade! has! changed! since! the! expansion! of! foreign! direct! investments! and! the! growing!existence!of!multinational!enterprises!(MNEs)!(Nayak!and!Choudhury,!2014).!Both!the! classical! and! neoclassical! view! emphasize! the! movement! of! capital! from! a! macroeconomic! point! of! view.! The! classical! assumption! about! international! trade! argues! that! MNEs! should! locate! the! headquarters! (HQ)! in! capitalMabundant! countries! and! the! subsidiaries! in! capitalM scarce!countries!(Caves,!1971).!Smith!(1776)!assumed!that!trade!between!nations!emerged! because!of!absolute!advantage!in!one!good!relative!to!another!good.!So!each!country!has!its! own! ‘superior’! commodity.! Ricardo! (1817)! created! the! technological! theory! related! to! comparative!advantage,!where!he!argues!that!the!factor!input!labor!cannot!differ!much!in!the! country’s!regions,!but!differences!in!labor!productivity!across!countries!leads!to!international! trade.!One!nation!will!produce!the!good!if!the!opportunity!costs!are!less!compared!to!another! country!(and!thus!has!comparative!cost!advantage!of!this!good)!and!imports!products!with! relatively!higher!opportunity!costs.!The!neoclassical!view!involves!the!theory!on!comparative! advantage! created! by! e.g.! Hecksher! (1919)! and! Ohlin! (1933),! based! on! the! following! mechanisms:!“perfect!competition,!absence!of!transaction!costs,!and!homogeneity”!(Rizvanolli,! 2012,!p.68).!Moreover,!trade!flows!exist!because!of!differences!in!factor!inputs!and!intensities.! If! the! factor! inputs! are! immobile,! one! country! will! export! goods! that! requires! intensive! production!in!abundant!factors,!while!the!country!imports!goods!that!require!relatively!scarce! factor! endowments.! In! contrast,! if! factors! are! mobile,! “capital! will! move! to! capitalMscarce! countries! where! returns! to! capital! are! higher! until! the! price! of! capital! is! equalized! across! countries”!(Rizvanolli,!2012,!p.69).!For!this!latter!perspective,!capital!responds!to!changes!in! interest!rate.!Companies!in!countries!with!a!strong!local!currency!are!likely!to!enlarge!their! capital! relatively! cheaper,! and! thus! finance! activities! abroad! for! a! relatively! lower! financial! compensation!than!firms!in!countries!with!weak!local!currencies!(exchange!rate!theory)!(Aliber,! 1970;!Rizvanolli,!2012).!!

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1976).!FDI!takes!place!if!the!firm!is!able!to!exploit!the!firm!specific!ownership!advantages!that! outweigh! the! relative! costs! of! doing! business! abroad.! Vernon! (1966)! incorporates! this! ownership!importance!and!the!distribution!of!factor!inputs!in!the!product!cycle!theory.!This! theory!consists!of!four!stages:!innovation,!growth,!maturity!and!decline.!He!assumes!that!U.S.! transnational! firms! first! create! innovative! products! for! local! consumption! and! export! the! surplus! to! serve! foreign! markets,! while! the! U.S.! firm! kept! their! competitive! advantage! in! technology.!In!a!later!stage,!competitors!abroad!will!copy!or!imitate!the!product.!Therefore,!as! the!“product!becomes!standardized!and!consumer’s!demand!becomes!more!priceMelastic,!the! innovating! firms! turn! to! foreign! production! seeking! costMefficiency! by! reducing! their! labor! costs”!(Rizvanolli,!2012,!p.71).!In!fact,!transnational!corporations!are!thus!crucial!players!to! bring!skills,!market!access!and!technological!improvements!abroad!(Ozawa,!1992).!This!product! cycle!theory!was!an!incentive!to!decide!whether!companies!should!invest!abroad.!The!main! drivers! in! international! trade! and! investment! theory! are! that! firms! want! to! maximize! their! profits!abroad!by!either!export!or!foreign!direct!investments!(FDI),!where!most!benefits!from! trade!are!gained!by!MNEs!by!expanding!the!production!activities!to!lowMcost!countries!and! serve!all!markets!(Hirsch,!1976).!!

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expanding!market!with!lots!of!potential!business!opportunities!(Hyelin,!2016).!Alternatively,! firms!could!supply!other!markets!by!exporting!or!production!(Helpman!et!al,!2004).!However,! horizontal!and!vertical!FDI!can!also!be!combined,!called!the!Knowledge!Capital!type!or!Complex! Integration.!In!this!model,!the!production!is!located!in!another!country!to!serve!the!local!market! and! gain! resource! advantages.! MNEs! that! establish! subsidiaries! abroad! under! the! complex! integration!strategy!save!transportation!costs!and!benefit!from!price!differentials!(Carr!et!al,! 2001;!Yeaple,!2003).!Moreover,!‘complex’!MNEs!have!the!characteristic!to!use!this!type!of!FDI! for!exporting!to!a!third!country!(Ekholm!et!al,!2007).!!

Consequently,!Dunning!incorporated!these!two!motives!into!his!own!work!in!order!to!see!the! linkages!between!the!home!and!home!country!and!why!MNEs!want!to!serve!foreign!markets! through! FDI! (Buckley! et! al,! 2012).! The! institutional! environment! and! its! macroMeconomic! environment! could! ensure! competitive! advantage,! what! is! beneficial! for! firms! if! they! can! transform!it!to!their!internal!organization!(Dunning,!1985).!However,!the!degree!of!benefit! depends!on!the!motives!to!invest!in!the!host!country.!Dunning!(2000)!made!a!distinction!in! four!motives!of!MNEs!to!invest!abroad:!market!seeking!(related!to!horizontal!FDI),!resourceM seeking!(related!to!vertical!FDI),!resource!seeking/supply!oriented!(related!to!vertical!FDI),!and! strategicMasset!seeking!(related!to!vertical!FDI).!Where!determinants!for!the!first!motive!consist! of!the!size!of!the!host!market,!the!existence!of!natural!resources,!the!skillMintensity!of!the!labor! market!and!the!technological!knowledge!are!important!drivers!for!the!other!motives!(Buckley! et!al,!2012).!Some!of!these!drivers!are!explained!in!the!traditional!location!theories,!examined! by!i.e.!Richards!(1962)!and!Weber!(1929),!that!address!the!importance!of!maximizing!the!utility! and!profits!in!another!area.!The!reasons!could!be!either!demand!related!(e.g.!potential!growth! of! the! new! market)! or! supply! related! (e.g.! comparative! advantage,! price,! availability! of! resources).!Makino!et!al!(2002)!build!upon!Dunning’s!work!and!distinguished!FDI!motives!into! either! assetMexploitation! (resource,! efficiency! and! marketMseeking! motives)! and! assetM exploration!(strategic!asset!motive)!that!each!have!their!own!preferred!location!determinants.! He!assumes!that!firms!with!assetMexploitative!motives!are!looking!for!host!countries!with!low! labor!costs!and!a!potential!market!size,!while!assetMexplorative!motives!seek!for!host!countries! with!R&D!capabilities!and!high!human!capital!(Makino!et!al,!2002;!Yin!et!al,!2014).!!

Despite! the! different! approaches,! all! theories! show! that! the! location! determinants,! government! policies! and! firmMspecific! advantages! are! main! indicators! in! the! internationalization!process!(Nayak!and!Choudhury,!2014).!The!relationship!between!FDI!and! macro! economic! variables! vary! among! the! different! theoretical! approaches,! but! the! host! country’s!size!and!growth,!economic!stability,!degree!of!openness,!institution!level,!labor!costs,! tax!rate,!labor!cost!flexibility,!unemployment,!competition!level!and!income!level!are!mostly! discussed! (Walsch! and! Yu,! 2010;! Dunning! 1977,! 1985,! 2000;! Rizvanolli,! 2012;! Haaland! and! Wooton,!2001a;!Haaland!and!Wooton,!2001b).!In!this!study,!the!effects!of!host!country’s!R&D! capabilities!on!inward!FDI!are!reviewed!from!the!vertical!FDI!perspective.!!

2.! Research!and!Development!(R&D)!as!tool!for!(economic)!growth!

The! term! Research! and! Development,! cited! in! the! Frascrati! Manual! (2002)),! as! “an! activity! undertaken!for!the!purpose!of!discovering!or!developing!new!products,!including!improved! versions!or!qualities!of!existing!products,!or!discovering!or!developing!new!or!more!efficient! processes!of!production”!(OECD,!2002,!p.176).!Research!and!development!is!a!topic!of!interest! in!the!economic!literature,!as!it!has!proved!to!be!an!important!indicator!for!economic!growth! (Edworthy!and!Wallis,!2009;!Guellec!and!Van!Pottelberghe!de!la!Potterie,!2004).!Many!studies! confirm!the!effect!of!R&D!on!innovation!performance,!productivity!growth!and!the!improved! competition!level!(e.g.!Pessoa,!2010;!Ulku,!2004;!Pece!et!al,!2015;!Teixeira!and!Fortuna,!2004).! Thereby,!investments!in!R&D!could!lower!the!production!costs!as!inputs!are!more!effectively! transformed!in!output!(Zachariadis,!2004).!The!promotion!of!investments!in!R&D!have!thus! become! a! main! priority! within! the! globalized! world! (Edworthy! and! Wallis,! 2009).! This! subsequently!allows!that!“countries!could!benefit!from!external!R&D,!without!great!internal! expenditures!on!R&D,!through!acquisition!of!rights!for!patents,!franchising!and!exchange!of! goods!in!which!external!R&D!is!incorporated”!(Teixeira!and!Fortuna,!2004,!p.!7).!

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capital!or!knowledge!lead!to!innovations.!Third,!new!(technological)!innovations!replace!old! (technological)!innovations,!indicating!the!term!‘creative!destruction’.!!

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Empirically! investigating! the! effect! of! R&D! capabilities! on! exogenous! growth! seems! complicated.! Therefore,! researchers! have! used! approaches! that! include! only! one! or! a! few! technological!factors!or!explanatory!variables.!From!the!Schumpeterian!model!it!is!empirically! found!that!entry!and!exit!effects!impact!the!country’s!productivity!level.!Therefore,!this!impacts! the!governmental!support!in!firm’s!R&D!activities!(Czarnitzki!and!Toivanen,!2013).!Pece!et!al.! (2015)!used!multiple!regression!models!to!estimate!the!longMterm!economic!growth!impacted! by!the!R&D!level!for!Poland,!Hungary!and!Czech!Republic.!The!included!variables!are,!among! others,!the!number!of!patents,!trademarks!and!R&D!expenditure.!The!results!supported!the! endogenous! theoretical! model! as! there! is! a! positive! relationship! between! growth! and! innovation,! and! economic! growth! and! human! capital.! Ulku! (2004)! also! supports! the! endogenous!reaction!of!innovation!on!(short)!economic!growth,!in!the!form!of!GDP!per!capita! in!OECD!countries!in!period!1981!–!1997.!However,!he!did!not!find!evidence!that!innovation! leads! to! longMterm! output.! Westmore! (2013)! investigated! the! OECD! countries! for! a! longer! period,! namely! 1981M2008,! and! found! that! policies! to! support! R&D! matter! to! encourage! innovation!for!the!private!market.!These!policies!include!tax!incentives!and!fostering!patent! granting,! while! he! has! found! no! evidence! for! the! direct! effect! on! productivity! growth.! In! addition,! Petrariu! et! al.! (2013)! show! that! the! economy’s! maturation! is! enumerated! of! the! allocation! of! resources! (Pece! et! al,! 2015).! Coe! and! Helpman! (1995)! investigated! 22! industrialized!economies!in!the!period!1971!–!1990!and!found!that!an!increase!in!the!nation’s! R&D!stock!is!positively!related!to!the!productivity!rate.!This!positive!relationship!tends!to!be! higher!for!bigger!size!economies,!where!a!1%!increase!in!R&D!stock!leads!to!a!0.23%!increase! in!productivity.!Smaller!size!industrialized!economies!show!smaller!productivity!gains.!Next,! R&D!expenditures!influence!productivity!level!of!other!countries.!!This!is!partly!supported!by! Aspergis!et!al.!(2008)!as!they!found!that!domestic!and!foreign!R&D!spillovers!both!positively! influence!the!home!country’s!technological!progress!in!the!manufacturing!industry.!! !

The! empirical! studies! on! microMlevel! data! indicate! that! the! level! of! innovation! is! positively! related!to!the!firm’s!financial!performances,!what!in!turn!leads!to!higher!economic!growth! through!productivity!(Norris!et!al,!2010).!In!general,!this!technological!progress!can!be!created! by!conducting!research!at!universities!and!public!institutions,!learning!by!doing!and!executive! innovative! activities! by! firms! (Teixeira! and! Fortuna,! 2004).! The! principal! agent! (firms)! also! responds!to!ministry’s!programs!in!international!trade,!competition,!investment!behavior!and! technological!change.!As!the!national!innovation!and!technological!level!is!the!outcome!of!the! national! economic! and! social! system,! countries! are! constantly! striving! to! provide! good! networks!and!an!attracted!highMtechnological!environment,!that!enables!firms!to!generate!new!

3.! Hypothesis development and conceptual framework

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1.! R&D!capabilities!and!crossMborder!investments!

! 1.1!Human!Capital!!

Despite!the!lack!of!empirical!and!theoretical!models!of!the!relationship!between!inward!FDI! and!human!capital,!both!determinants!are!seen!as!important!indicators!for!economic!growth.! Besides,!these!macroeconomic!variables!show!a!mutually!complimentary!impact,!because!FDI! can!bring!knowledge!spillovers!to!the!host!country’s!labor!force.!On!the!other!hand,!human! capital! also! reflects! the! ability! to! absorb! external! knowledge,! making! it! an! important! determinant!to!attract!FDI.!Therefore,!inward!FDI!and!human!capital!can!reinforce!each!other! (Majeed!and!Ahmad,!2008).!!

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The!importance!of!human!capital!as!tool!for!innovation!has!been!discussed!in!the!endogenous! growth! model! of! Vandenbussche! et! al.! (2006).! This! theory! predicts! that! innovation! and! imitation!lead!to!technological!improvements.!The!authors!argue!that!innovation!depends!on! the!country’s!skillsMintensity!level.!An!increase!in!the!human!capital!leads!to!a!higher!total!factor! productivity!(TFP),!and,!thus,!economic!growth!in!developed!markets.!On!the!other!hand,!the! TFP!in!relatively!lowMskilled!human!capital!countries!is!mainly!affected!through!the!adoption!of! technologies!created!in!developed!markets.!This!nonMlinear!relationship!between!economic! growth!and!human!capital!is!also!supported!by!Romer!(1990)!and!Kottaridi!&!Stengos!(2010).! In!addition,!the!relationship!between!FDI!and!human!capital!is!nonMlinear!(Blomstrom!&!Kokko,! 2003).!It!is!likely!that!countries!with!high!levels!of!human!capital!are!attractive!locations!for! technological!activities!of!MNEs.!On!the!other!hand,!MNEs!that!invest!in!those!relatively!less! advanced! markets! will! use! inordinate! technologies! that,! as! consequence,! only! contribute! slightly!to!the!learning!and!skill!capacity!in!the!host!economy!(Blomstrom!and!Kokko,!2003).!! !

Rizvanolli!(2012)!identified!three!factors!that!influence!the!relationship!between!human!capital! and!inward!FDI:!productivity!level,!technology!adjustment!and!facilitation!of!innovation.!In!this! process,!high!education!institutions!in!the!host!country’s!system!are!of!importance!(Prodan,! 2005).! These! institutions! perform! research! and! educate! researchers! and! other! skilled! personnel!and!administrative!staff.!Therefore,!governments!and!other!private!interested!firms! are! forcing! universities! to! realize! their! impressive! contribution! to! the! country’s! innovation! context,!what!is!dependent!on!the!creation,!transformation!and!generation!of!new!knowledge.! Tertiary!education!institutions!should!thus!invest!in!all!education!levels,!and!programs!should! be!created!if!there!is!a!demand!for!specific!labor.!The!need!to!boost!the!human!capital!level! and!its!positive!effect!on!inward!FDI!is!enumerated!in!the!work!of!Blomstrom!and!Kokko!(2003).! First!of!all,!governments!are!eager!to!invest!in!higher!education!in!order!to!create!a!‘skilled! workers!pool’!for!MNEs.!Subsequently,!these!MNEs!could!offer!employment!opportunities!for! (highly! skilled)! graduates! with! different! backgrounds.! Second,! host! countries! improve! the! human!capital!level,!because!MNEs!are!interested!in!local!skilled!employees!and!experience!in! their! related! business! activities! in! order! to! bridge! the! coordination! gap! between! the! headquarter!and!its!subsidiary!in!the!host!country.!!

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1.2!R&D!! R&D!expenditure!is!a!comprehensive!variable!used!in!the!literature!to!examine!the!level!of! innovation,!information!asymmetry!or!growth!(e.g.!Hirschey!et!al,!2012).!On!macro!level,!the! variables!R&D!intensity!and!GERD!are!often!used.!The!R&D!expenditure!covers!all!R&D! activities!carried!out!for!companies,!academic!or!research!institutions!and!government.! Czarnitzki!and!Toivanen!(2013)!find!that!public!investments!in!R&D!result!in!higher!private! investments!when!the!firm!has!reached!a!certain!level!of!productivity!and!has!experiences!in! innovation!activities.!According!to!Hirschey!et!al!(2012),!R&D!expenditures!fierce!the! competition!position!of!the!country!by!indicating!the!scientific!knowledge!and!it!shows!the! extent!of!creating!new!technologies,!services!and/or!products,!as!well!as!the!raise!in! technological!innovation!that!decreases!the!relative!price!of!a!good.!This!is!supported!by!the! study!of!Hunady!and!Orviska!(2014),!who!argue!that!high!R&D!expenditures!lead!to!economic! growth!through!advanced!technology.!This!also!positively!impacts!the!FDI!flow,!and!even! results!in!more!technology!diffusion!in!the!home!country.!!! ! However,!this!indicator!is!highly!correlated!to!several!other!proxies!for!innovation.!Boyd!and! White! investigated! the! effect! of! several! variables! reflecting! R&D! and! found! that! R&D! expenditure!is!highly!positive!related!to!the!number!of!patents.!This!is!supported!by!Gurmu! and!PerezMSebastian!(2008),!who!mentioned!in!their!paper!that!current!and!past!R&D!spending! lead!to!patent!granting!as!result!of!the!innovative!process!within!the!country.!Hsu!and!Tiao! (2015)!also!confirm!that!patents!are!related!to!R&D!and!the!financial!impact!of!a!country,!as! countries!with!a!high!level!of!patents!are!better!in!innovation!and!technological!improvements.! Moreover,!Prodan!(2005)!empirically!tested!this!possible!effect!from!the!focus!on!R&D!as!input,! meaning! that! R&D! are! resources.! He! also! recognized! the! strong! correlation! between! R&D! expenditure! and! patent! application.! Meo! and! Usmani! (2014)! not! only! found! the! positive! correlation!of!R&D!expenditure!and!patents,!but!also!R&D!expenditure!and!highMtech!exports.! In! addition,! higher! R&D! spending! leads! to! more! scientific! researchers! (Meo! et! al.! 2013;! Bayarcelik!and!Tasel,!2012).!!

!

1.3!Innovation!linkages!!

Policy! makers! should! bear! in! mind! that! the! collaboration! between! universities! and! public! institutions! are! important! to! attract! (R&D! intensive)! FDI! and! to! efficiently! use! knowledge! spillovers,!as!firms!rely!on!these!external!linkages!in!order!to!acquire!the!relevant!knowledge! (Guimon,! 2013).! Because! MNEs! strategies! are! focused! on! creating! the! ‘global! factory’,! an! innovative!environment!in!the!host!country!is!beneficial!for!MNEs!when!they!are!embedded!in! working!with!local!parties,!such!as!companies,!universities!or!(governmental)!institutions.!The! ‘global!factory’!strategy!includes!the!cooperation!between!the!MNE!and!external!parties!in!joint! ventures,! strategic! alliances,! coMproduction! and! coMresearch! in! order! to! limit! the! costs! and! share!the!risks!(Gilroy!and!Elmar,!2005;!Bartels!and!de!Commebrugghe,!2009).!

These! innovation! linkages! can! be! “supported! by! the! formation! of! supplier! networks! and! technology! clusters! around! MNEs”! (Guimon,! 2013,! p.11).! However,! this! could! lead! to! challenges,!as!the!host!country!should!obtain!a!certain!level!of!absorptive!capacity!in!order!to! combine!the!knowledge!of!MNEs.!Absorptive!capacity!is!“the!ability!of!the!firm!to!recognize! the!value!of!new!external!information,!assimilate!it,!and!apply!it!to!commercial!ends”!(Cohen! and!Levinthal,!1990,!p.128).!Therefore,!a!minimum!level!of!human!capital!needs!to!be!achieved.! The! government! should! facilitate! these! network! creations,! jointMresearch! projects! or! subM contracting!research!activities!with!other!parties!rather!than!only!focus!on!having!cheap!labor! costs!and!low!tax!rates!(Guimon,!2013;!Bartels!and!de!Commebrugghe,!2009)!

!

raise! in! highMtech! imports! attract! inward! FDI,! as! firms! want! to! supply! the! local! market.! In! contrast,!this!point!of!view!is!criticized!by!Lui!and!White!(1997)!and!Liu!and!Buck!(2007).!The! innovation!level!does!not!improve!by!solely!focusing!on!importing!technological!knowledge.!In! addition,! the! highly! skilled! personnel! should! be! able! to! absorb! this! knowledge! in! order! to! leverage.!Liu!and!Buck!(2007)!assume!that!importing!technological!foreign!products!lead!to!the! learning!effect,!that!introduces!the!firm!to!new!products.!! ! ! 1.5!Knowledge!creation! R&D!capabilities!of!a!country!can!be!indicated!by!the!ability!to!create!knowledge,!what!can!be! measured!by!using!the!level!of!patents!(Dutta!et!al,!2016).!Patents,!the!output!of!R&D,!are!main! drivers!for!innovators!by!granting!the!(temporal)!right!of!an!invention.!This!data!is!relatively! easy!to!obtain!and!shows!a!good!comparison!across!countries!(Nillson,!2013).!Despite!the!fact! that!this!variable!only!shows!the!innovations!that!granted!a!patent,!it!is!positively!related!to! the!the!development!of!technologies!and!the!economic!growth!(Zachariadis,!2004).!! ! The!relationship!between!patent!protection!and!international!trade!was!pointed! out!in!the! work!of!Helpman!(1993),!in!which!was!stated!that!patent!protection!leads!to!a!large!number!of! products!in!the!market!that!are!not!imitated.!Later,!the!link!between!patent!protection!and!FDI! was!developed.!Dunning!(2000)!argues!that!countryMspecific!advantages!attracts!investments! from! abroad,! leading! to! the! fact! that! government! should! increase! their! regulatory! environment.!This!is!because!it!is!an!important!driver!in!the!decision!making!process!of!the! location!made!by!firms.!Seyoum!(2006)!investigated!the!effect!of!patent!protection!and!inward! FDI!flows!and!reinforced!the!relationship.!Hsu!and!Tiao!(2015)!also!investigated!the!FDI!inflow! for!the!host!countries!affected!by!the!property!right!protection!for!11!countries!in!Asia!from! 1985!–!2010.!Their!results!indicate!that!property!right!protection!is!positively!related!to!inward! FDI.! Next,! the! variables! market! size,! trade,! market! openness,! R&D! expenditures,! risk! and! investment!costs,!also!impact!the!FDI!inflow.!Furthermore,!Mansfield!(1994)!explained!the!fact! that!patent!protection!leads!to!less!imitation!in!the!market,!making!the!products!of!the!firm! more! demanding.! In! addition,! patents! can! ensure! that! the! technologies! do! not! drain! to! competitors! in! the! market! (Sherwood,! 1990).! Conversely,! a! deficiency! of! patent! protection! leads!to!less!FDI!(Lee!and!Mansfield,!1996).!! ! This!discussion!proposes!that!countries!with!strong!patent!protection!and!high!numbers!of! patents!attract!crossMborder!investment.!! ! Hypothesis%3:% %The%number%of%hostEcountry%patents%is%positively%related%to%inward%FDI%% ! ! 1.6!Knowledge!Impact!!

development!(Dutta!et!al.,!2016).!Lots!of!literature!focuses!on!the!microMeconomic!effect!of! entrepreneurship! and! economic! growth,! or! the! effects! of! FDI! on! host! country’s! entrepreneurship!(e.g.!Albulescu!and!Tămăşilă,!2014;!Barbosa!and!Eiriz,!2007).!However,!little! literature!investigates!the!effect!of!macro!economic!entrepreneurship!and!inward!FDI.!!

!

The!level!of!entrepreneurship!is!seen!as!an!important!factor!in!the!development!and!firms,!as! well!as!the!indicator!for!economic!growth!(Fahed,!2013).!Entrepreneurship!is!linked!to!a!certain! level! of! human! capital,! absorbing! knowledge! and! management! expertise,! what! encourages! inward! FDI.! Moreover,! entrepreneurs! put! pressure! on! the! government! and! its! institutions,! leading! to! a! more! favorable! business! environment! with! the! necessary! technological! and! management! skills.! Such! an! environment! intensifies! the! nation’s! competition! level! and! promotes!local!firms!to!innovate!(Fahed,!2013).!!

!

As!some!MNEs!have!a!‘global!factor’!strategy!that!requires!cooperation!with!local!institutions! and! firms,! the! level! of! entrepreneurship! can! be! a! good! indicator! for! potential! cooperation! opportunities!(Gilroy!and!Elmar,!2005;!Bartels!and!de!Commebrugghe,!2009).!Especially!in!highM technological! manufacturing! industry,! large! firms! are! dependent! on! small! firms! in! order! to! increase!the!R&D!capabilities!via!external!expertise!(Comanor!and!Scherer,!2011).!Therefore,! governments!should!encourage!entrepreneurship!by!creating!favorable!policies!for!starting!a! business,!conditions!and!infrastructure.!!In!this!sense,!existing!companies!and!new!companies! could!benefit!from!those!external!economies!(Guimon,!2013).! ! Hypothesis%4:% The%host%country’s%entrepreneurship%level%is%positively%related%to%inward% FDI.% ! 1.7!Knowledge!diffusion! Most!technological!knowledge!can!be!spread!from!the!home!country!to!other!parts!of!the! world! via! high! technology! exports! (Dutta! et! al,! 2016).! This! variable! shows! the! extent! of! technological! capabilities! in! the! country,! because! the! export! level! reveals! the! stage! of! commercialization!of!final!products!(Furman!et!al,!2002).!The!definition!of!highMtech!exports!is! made!by!Davis!(1982).!He!defined!high!tech!exports!as!products!with!relatively!the!highest!R&D! spending.!This!means!that!he!uses!the!inputMoutput!theory!to!indicate!the!R&D!costs!embodied! to!produce!the!final!products!(Mani,!2000).!The!high!tech!exports!show!thus!the!position!of!the! firm! in! the! industry,! where! only! companies! that! recognize! the! potential! in! technological! capabilities! would! invest! in! this.! The! advancement! of! technology! is! a! crucial! indicator! for! economic!growth!and!international!competitiveness.!!

!

and! lowMtechnology! countries.! Gökmen! and! Turen! (2013)! examined! the! effect! of! high! technology!exports!and!economic!growth,!determined!for!15!European!countries!in!the!period! 1995!–!2000.!They!found!evidence!that!ownership!of!the!technologies!is!a!precondition.!This! precondition!requires!a!high!level!of!economic!freedom!to!produce!highMtechnology!products,! which!can!be!further!exported.!This!positive!relationship!is!supported!by!Manzoor!et!al!(2014)! in!the!case!for!China.!High!technology!exports!is!positively!related!to!FDI,!at!a!significance!level! of!5%.!However,!this!relation!is!area!specific.!As!example,!highMtechnology!exports!and!FDI!are! negatively! related! for! Pakistan,! as! there! exists! a! technology! gap! (Manzoor! et! al,! 2014).! In! addition,! Petri! (2010)! states! that! the! global! investment! behavior! among! highMtechnology! countries!is!different!for!Asia,!where!more!than!60%!of!the!FDI!flows!from!highMtechnology!to! mediumMtechnology!countries.!Moreover,!vertical!FDI!has!the!aim!to!reap!the!host!country’s! comparative! advantage.! These! host! countries! attract! FDI,! because! the! relatively! low! labor! costs.!This!is!likely!to!promote!highMtechnology!exports!from!the!host!country,!making!this!trade! flow!‘complement’!(Sultan,!2014).!When!a!MNE!is!looking!to!expand!its!product!globally!by! operating!in!another!market,!horizontal!FDI,!highMtechnology!export!is!seen!as!substitute.!! ! 2.! Other!effects!on!crossMborder!investment!behavior!! 2.1!Maturity!of!the!market!!

that! the! larger! investors! are! also! the! largest! receivers! of! crossMborder! investments,! as! the! majority!of!the!FDI!flows!do!either!come!from!or!go!to!developed!economies.!!However,!the! inflows!and!outflows!in!FDI!of!developing!economies!have!increased!over!time.!The!raise!of!the! developing!countries!addresses!the!needs!for!using!FDI!as!an!economic!development!tool.!The! FDI!inflow!and!outflow!has!strong!concentrations!in!Asia.!The!raise!of!high!levels!of!FDI!in!this! region!is!through!the!manufacturing!possibilities!and!rich!improvements!in!the!infrastructure,! making!the!region!attractive!for!foreign!investors.!FDI!flows!in!Latin!America,!on!the!other!hand,! dramatically! decreased! after! several! years! of! increases! due! to! lower! commodity! prices! (UNCTAD,!2015).!Finally,!the!FDI!flows!in!transition!economies!grew!for!the!period!2009!–!2013,! while!it!dropped!in!2014!with!52%.!This!decrease!is!motivated!by!the!fall!in!oil!prices!and!lower! investor!interest!in!these!markets!(UNCTAD,!2015).!! This!discussion!proposes!that!the!extent!of!benefits!from!FDI!depends!on!the!country’s!policies! and!institutional!framework.!Countries!are!constantly!striving!to!provide!good!networks,!and! an!attracted!highMtechnological!environment!that!enables!firms!to!generate!new!technologies! and!commercialize!them!in!the!market.!As!the!least!developing!countries!are!attempting!to! bridge!the!gap!with!developed!economies,!their!inward!FDI!has!raised!over!the!last!decade.! This! makes! it! a! valuable! supplement! to! the! national’s! economic! environment.! However,! developed! economies! still! attract! most! FDI! because! of! their! relatively! better! investment! conditions.! ! These! investment! conditions! go! together! with! institutional! factors,! such! as! an! efficient!government,!good!rules!and!laws!in!combination!with!political!stability.!!

!

channels!over!time,!what!makes!us!believe!that!distance!does!not!matter!anymore,!it!does!not! appear!in!empirical!studies!(Kuo!and!Fang,!2009).!The!negative!effect!of!geographical!distance! on!crossMborder!investments!is!further!examined!by!e.g.!Marimoutou!et!al.!(2009),!who!argue! that!distance!is!positively!related!to!the!fixed!cost!of!entry!in!a!market.!This!positive!effect!of! distance! is! supported! by! Tinbergen! (1962),! as! a! higher! distance! is! concerned! with! higher! transportation! costs.! Furthermore,! the! “greater! the! geographical! distance,! the! greater! the! information!asymmetry,!management!uncertainty!and!risks!management!costs”!(Qi!et!al,!2015,! p.!1121).!Kuo!and!Fang!(2009)!also!argue!that!a!lower!distance!is!associated!with!a!lower!extent! of!perceived!uncertainty,!derived!from!a!lack!in!familiarity.!The!higher!the!distance!with!the! host! country,! the! less! familiarity! in! the! destination! country,! except! countries! that! share! historical!events!as!colonies!(Guerin,!2003).!He!also!mentions!that!geographical!distance!lowers! the!control!of!investors.!!

3.! Conceptual!Framework!

This!conceptual!framework!gives!a!clear!overview!of!all!hypothesis!developed!in!the!previous! sections! related! to! crossMborder! investment! behavior.! These! hypotheses! will! be! tested! on! macro!level.!It!is!expected!that!all!R&D!capabilities!are!positively!related!to!the!inflow!in!FDI!on! global!level,!because!MNEs!are!looking!for!the!hostMcountry!with!high!R&D!capabilities!in!order! to!gain!specific!knowledge,!reduce!the!risks!of!operating!abroad!and!have!the!possibility!to! learn,! upgrade! and! exploit! their! business! activities! (Erdal! and! Gocer,! 2015;! Porter,! 1994;! Buckley! et! al,! 2012).! In! contrast,!the! type! of! the! market! and! distance! effect! are! negatively! related!to!inward!FDI.!!

!

However,!as!introduced!in!paragraph!2!of!this!section,!not!all!countries!are!able!to!build!these! R&D!capabilities!into!their!policies!and!institutional!framework,!leaving!them!behind!in!sense! of!competition!level!and!economic!development.!This!is!due!to!a!lack!of,!among!others,!quality! of! education,! health! and! regulatory! policies,! what! subsequently! leads! to! an! unevenly! distribution! of! FDI! across! different! types! of! economies! (KurtishiMKastrati,! 2013).! In! order! to! explain! these! differences! for! the! different! types! of! economies! (frontier,! emerging! and! developed),!this!thesis!will!also!test!all!hypotheses!for!three!separate!countries:!Singapore,! Russia!and!Romania.!

!

!

Graph 1 – Conceptual model%

!

4.! Research design and methodology

1.! Data and sample selection

The!aim!of!this!investigation!is!to!analyze!the!effect!of!R&D!capabilities!on!FDI!behavior!from! macro!to!meso!perspective.!The!empirical!analyses!presented!in!section!5!are!based!on!the! inward!FDI!stock!data!on!global!and!national!level.!! ! The!sample!of!the!global!study!is!derived!from!the!MCDI!ACWI!&!Frontier!Market!Index!(2016)! in!order!to!discover!the!global!patterns!of!location!determinants!for!FDI!related!to!R&D!and!to! detect!differences!among!inward!FDI!stocks!across!developed,!emerging!and!frontier!markets.! The!initial!sample!of!this!index!contains!85!countries.!As!a!measure!of!inwards!FDI,!the!inward! FDI!stock!data!provided!by!UNCTAD!for!the!year!2015!is!used.!Consequently,!countryMlevel! information! is! acquired! for! the! most! current! available! year,! ranging! from! 2013! –! 2015,! assuming!that!the!macroeconomic!determinants!did!not!critically!differ!over!this!time!period.! The!datasets,!however,!lack!in!providing!data!for!all!countries!considered!in!the!initial!sample.! Therefore,!the!final!sample!consist!of!79!countries.!Appendix!1A!shows!the!sample!selection! used!for!the!crossMsectional!global!study.!!

!

Variables! Global! study! National! Study!M! Romania! National! study!M! Russia! National! study!–! Singapore!! Total!Inward!FDI!stock! X! ! ! ! Inward!FDI!stock!by! partner!country! ! X! X! X! Human!capital! X! X! X! X! Innovation!linkages! X! X! X! X! Patents! X! X! X! X! Entrepreneurship! X! X! X! X! Geographical!distance! ! X!! X!! X!! Cultural!distance! ! X! X! X! Size! X! X! X! X! Labor!costs! X! X! X! X! Institutional!environment! X! X! X! X! Income! X! X! X! X! Inflation! X! X! X! X! Openness! X! X! X! X! Market!Development! X! X! X! X! Tax! ! X! X! X! Table!2!M!Overview!of!variables!used!per!study! ! !!!!!!!!2.1!Dependent!variables!! In!recent!literature,!countries!with!economic!growth!have!experienced!larger!proportions!in! international!business,!in!particular!foreign!direct!investments!(FDI)!(Kornecki!and!Borodulin,! 2011).! FDI! is! a! commonly! used! variable! to! determine! the! economic! development! and! productivity.!In!this!study,!I!specifically!want!to!investigate!the!R&D!indicators!in!the!recipient! country! that! attract! these! foreign! direct! investments.! Kornecki! and! Raghavan! (2007)! emphatically! used! the! inward! FDI! stock! data,! because! this! variable! “is! the! total! amount! of! productivity! capacity! owned! by! foreigners! in! the! host! country”! (P.! 4).! FDI! stock! is! an! accumulation!of!foreign!direct!investments!over!time,!that!have!a!value!at!each!moment.!In! contrast,!inward!FDI!flow!only!measures!the!amount!of!FDI!that!enters!the!recipient!country!at! a!certain!interval!of!time,!what!could!give!a!distorted!view!as!this!study!only!considers!country! data!from!the!latest!available!year.!Therefore,!the!dependent!variable!in!this!study!is!measured! as!the!FDI!Inward!Stock!in!US!Dollars!for!the!year!2015.!! ! 2.2! Independent!variables! The!macro!economic!crossMborder!investment!behavior!is!influenced!by!the!human!capital,! innovation!linkages,!patents,!entrepreneurship!and!distance!(both!geographical!and!cultural).!! !

INLINK!indicates!the!hostMcountry’s!level!of!innovation!linkages.!Innovation!linkages!gain!a!lot! of! attention! by! governments,! as! this! lead! to! the! collaboration! between! academia! and! private/public!businesses,!positively!affecting!the!economic!growth.!The!innovation!linkages! are!derived!from!the!study!of!Dutta!et!al!(2016),!who!argue!that!this!variable!includes!both! qualitative!and!quantitative!data!regarding!business/university!collaboration!on!R&D,!cluster! development!and!the!number!of!joint!ventures!and!strategic!alliances.!! PAT!indicates!the!level!of!patent!applications.!This!is!an!important!tool!to!assess!the!country’s! policies,!technology!and!business,!as!patents!reflect!inventive!activities!within!the!country!and! the!capabilities!to!exploit!knowledge!and!economic!benefits!(Zachariadis,!2004).!Antoniette!et! al!(2015)!suggests!that!developed!countries!that!have!a!high!level!of!patents!have!a!favorable! position!in!attracting!FDI.!!

ENT! is! the! hostMcountry’s! entrepreneurship! level.! The! data! is! derived! from! the! Global! Entrepreneurship!Index!(2015)!indicating!R&D!output.!

CULD!indicates!the!cultural!distance!and!investigates!whether!the!cultural!distance!from!the! homeMcountry!to!hostMcountry!influences!the!crossMborder!investment!behavior.!The!variable! is! measured! according! to! Hofstede’s! dimensions:! power! distance,! uncertainty! avoidance,! individualism!and!masculinity!(Hofstede,!2011).!Kogut!and!Singh!(1988)!developed!a!model!to! determine!the!aggregate!cultural!distance!by!using!Hofstede’s!values.!!

The!geographical!distances!GEOD!are!retrieved!from!the!CEEPI!database!that!includes!the!single! distance!between!2!capital!cities.!! ! 2.3! Control!variables! The!control!variables!are!influencers!of!the!experimental!results!of!this!study,!and!confirms!the! relationship!between!the!dependent!and!independent!variables.!In!this!study,!we!control!for! diverse!characteristics!of!recipient!countries,!which!might!influence!the!inward!foreign!direct! investments.!The!control!variables!in!this!study!are!derived!from!the!literature!and!include!size! of! the! economy! (e.g.! Lunn,! 1980),! labor! costs! (e.g.! Saunders,! 1982;!Charkrabarti,! 2001),! institutional!environment!(e.g.!Zeshan!and!Talat,!2014;!Daude!and!Stein,!2007),!income!(e.g.! Ang,!2008),!inflation!(e.g.!Demirhan!and!Masca,!2008;!Walsh!and!Yu,!2010),!openness!of!the! economy!(e.g.!Kravis!and!Lipsey,!1982;!Edwards,!1990)!and!tax!(e.g.!Hartman,!1994).! ! 2.4! Verification!of!variables!! Both!empirical!studies!use!crossMsectional!data!with!the!most!recent!macro!economic!data!to! determine!the!dependent!variable!by!several!independent!variables!in!a!multiple!regression! (OLS).!The!trustworthiness!of!the!data!should!be!tested!before!running!the!regressions.!This! research! will! discuss! the! following! assumptions:! (1)! detect! unusual! data,! (2)! normality,! (3)! multicollinearity!and!(4)!homoscedasticity.!!

!

outliers! are! detected! by! graphically! representing! the! data! in! several! scatterplots,! in! which! extreme!values!are!located!far!from!this!pattern.!As!our!dataset!is!relatively!small!(N=79),!we! detect!some!unconditionally!used!values!(univariate!outlier).!However,!these!values!are!not! regression!outliers,!that!have!an!unusual!effect!on!the!dependent!variable!Y.!The!leverage,!the! position!of!observation!relative!to!the!mean,!indicates!that!data!further!away!from!the!mean,! the!more!leverage!it!has!on!the!regression!analysis.!This!is!tested!by!transforming!the!data!into! standardized!scores!(ZMscore).!The!Rule!of!Thumb!argues!that!values!with!a!standardized!score! <M3!and!>3!are!unusual!data,!and!could!influence!the!dependent!variable!(Adkins!et!al,!2011).! Finally,!influential!observations!do!exist!when!the!observation!has!both!high!leverage!and!a! significant!outlier!that!influence!the!regression!analysis.!! ! Second,!this!thesis!tests!whether!the!residuals!(errors)!are!normally!distributed.!Histograms!are! created!and!JarqueMBera!tests!are!performed!to!assess!the!normal!distribution.!Violating!the! normal!assumption!could!impact!the!significant!tests,!and!the!interpretation!of!the!rules!are! less! reliable! (Osborne! and! Waters,! 2002).! For! some! variables! that! show! nonMnormally! distributions,!we!transform!these!data!into!natural!logarithms!(ln).!!

!

Third,!this!study!tests!for!multicollinearity.!In!a!multicollinear!situation!are!several!independent! variables!correlated!to!each!other!in!a!multiple!regression!model.!!Multicollinearity!can!lead!to! wider! confidence! interval! and! less! reliable! probability! intervals! (Adkins! et! al,! 2011).! In! this! study,! we! determine! potential! multicollinearity! by! the! variance! inflation! factor! (VIF).! The! opinions! of! scholars! are! divided! about! the! maximum! VIF! value! score! and! its! existence! of! multicollinearity.!Where!e.g.!Hair!et!al!(1995)!argue!that!10!is!the!maximum!VIF!scores,!others! argue!that!a!value!of!4!or!5!indicates!collinearity!among!variables!(e.g.!Rogerson,!2001).!Our! VIF! results! are! shown! in! appendix! 3A.! By! further! delving! into! the! potential! problem! in! this! dataset,!correlation!matrices!are!created!(see!appendix!3B).!Correlation!means!the!strength!of! a!relationship!between!two!variables.!According!to!Pearson,!a!correlation!of!>70%!indicates!a! very!strong!relationship!between!two!variables,!while!a!‘r’!≤!29%!indicates!a!weak!positive! relation.!As!indicated!in!our!correlation!matrix,!there!are!some!variables!that!do!not!meet!the! threshold!of!70%.!Multicollinearity!is!detected!for!the!variables,!allowing!me!to!exclude!these! from!the!study.!However,!the!rule!for!dummy!variable!is!slightly!different,!as!multicollinearity! of!this!type!of!variable!is!acceptable!(Allison,!2012).!The!variables!labor!costs!(LABC),!income! (INC)!and!institutional!environment!(INSTIT)!have!been!excluded!in!all!studies.!Moreover,!the! study!of!Singapore!shows!a!strong!correlation!for!the!variables!human!capital!(DHUMC)!and! entrepreneurship!(DENT).!However,!as!the!correlation!is!70%,!it!does!not!need!to!impact!the! regression!results.!Therefore,!the!variables!remain!included!in!the!model.!! !

low!ChiMscore!indicates!that!heteroskedasticity!is!not!a!problem.!Appendix!3C!shows!the!results! of!the!BreushMPagan/CookMWeisberg!tests!for!our!studies!and!find!some!(relatively)!high!ChiM scores!for!the!global!study!(19.34)!and!the!nationals!studies!for!Russian!Federation!(5.21)!and! Singapore!(3.70).!This!indicates!that!the!null!hypothesis!of!homoscedasticity!is!rejected,!and! thus! heteroskedasticity! exists.! This! is! a! common! problem! for! crossMsectional! data! analyses! (Long! and! Ervin,! 2000).! There! are! several! ways! how! to! deal! with! heteroscadasticity:! transforming!model!specification!and/or!using!robust!standard!errors.!In!this!study,!we!perform! the!latter!option:!robust!interference!as!standard!errors!in!order!to!make!the!t!and!F!statistics! valid.!!

!

3.!Empirical!approach!

The! global! study! contains! pooled! data,! meaning! that! the! research! observes! the! universal! investment! behavior! affected! by! R&D! capabilities.! This! implies! that! there! are! no! unique! attributes!of!individuals!within!the!measurement!set.!Appendix!2A!shows!an!overview!of!all! variables!and!Appendix!4A!shows!all!descriptive!statistics!for!the!global!study.!The!detailed! econometric!model!is:!

!

(1)!!!! !"#$= &'0+ &'1+,-._$+ &'2#01#02_$+ &'3456_$+ &'4806_$+ +&'5:#;8_$+ &'6#0!_$+!

! &'7>480_$+ &'8"_@A+ '9"_CA+ &'10"_DA+ EF&!

! !!!!!!!!!!!!!!!! &!

Where!FDIi!is!the!inward!FDI!stock!of!recipient!country!i;!the!independent!variables!are!the!level!of!human!capital!(HUMC),!

innovation!linkages!(INLINK),!patents!(PAT)!and!entrepreneurship!(ENT)!of!recipient!country!i;!all!others!are!control!variables! for!the!recipient!i.!!

!

The! national! study! examines! inward! FDI! behavior! for! Romania,! Russia! and! Singapore.! The! following!model!adopts!the!Gravity!Model!approach,!what!observes!the!impact!of!push!and! pull!factors!on!FDI.!The!push!factors!include!home!country!characteristics,!whereas!pull!factors! include! host! country! characteristics.! To! bridge! the! gap! to! what! extent! recipient! (R&D)! characteristics! are! beneficial! to! attract! inward! FDI,! the! second! empirical! model! employs! a! difference! model! approach! for! all! variables! in! the! model.! This! identifies! inward! FDI! determinants! related! to! capabilities! for! the! country! pairings! under! comparative! advantage! (recipient! country! and! its! partner! country! i).! The! detailed! econometric! models! (2)! runs! separately!for!all!countries!in!order!to!avoid!any!misconceptions!or!fallacies.!Appendix!2B!shows! an!overview!of!all!variables!for!the!national!studies.!The!descriptive!statistics!for!these!samples! are!presented!in!Appendix!4B!M!4D.!

!

(2)! ! &!"#$G = &'0 + &'1"+,-$G+ &'2"#01#02$G+ &'3"456$G+ &'4"806$G+ '5GEOKFL!

! &+&'4.,1_DFL + '5":#;8_$G+ &'9"#0!_$G+ &'10">480_$G&+ &'11"65M_$G+ E_$G&!

!

Where!FDIij!is!the!inward!FDI!stock!of!recipient!country!i!(either!Romania,!Russia!or!Singapore)!from!partner!country!j;!the!

5.! Empirical results

! ! 1.! Regression!results!M!global!study! Table!3!reports!the!regression!results!of!the!global!study.!Model!(1)!is!regressed!using!the! control!variables!and!the!dependent!variable.!!Moreover,!this!basic!model!was!complemented! with!each!of!the!main!independent!variables!in!model!(2)!to!(5)!simultaneously.!Finally,!the!full! effect!of!R&D!capabilities!on!inward!FDI!is!captured!in!model!(6).!Model!(7)!to!(9)!are!derived! from!model!(6),!where!the!dummy!variables!type%of%market%complement!the!model.!! ! The!fit!parameters!show!that!the!variables!explain!a!significant!share!of!the!variance!levels!of! inward!FDI!(R2!_{at!least!0.38)!and!models!(1)!to!(8)!are!valid!(FMvalue!significant!for!1%).!Although!} the!control!variables!size%(SIZE)!and!openness!(OPEN)!show!no!significant!outcomes,!the!other! control!variables!inflation!(INF)!and!the!dummy!variables!for!type%of%economy!(DEM!and!DDM)! show!positive!and!(mostly)!significant!results!in!all!models.!In!the!preferred!model!(6),!human% capital%(HUMC)!and!innovation%linkages!(INLINK)!are!slightly!negatively!related!to!inward!FDI! (5%! significance),! whereas! the! number! of! patents! (PAT)! and! entrepreneurship! (ENT)! show! positive! and! significant! results! (respectively! 1%! and! 5%! significance).! In! addition,! the! most! mature!markets!(developed%markets%=%DDM)!show!a!stronger!relationship!with!inward!FDI!(β!=! 1.7345)! compared! to! less! mature! markets! (emerging% markets% =% DEM;% β! 0.7948)! at! 1%! significance!level.!However,!model!(7)!to!(9)!show!that!each!type!of!market!should!posses!a! different! set! of! R&D! capabilities! to! attract! FDI.! Where! frontier! markets! appear! to! have! a! negative!effect!of!innovation%linkages!(INLINK)!and!a!positive!effect!of!entrepreneurship!(ENT),! both!frontier!markets!and!emerging!markets!show!a!positive!effect!of!patents!(PAT)!on!inward! FDI.!In!contrast,!none!of!the!R&D!capabilities!is!significant!for!inward!FDI!in!developed!markets.!!

Table 3 – Estimation results global study

2.! Regression!results!M!national!studies! As!in!the!global!study!is!identified!that!different!type!of!markets!shows!different!relationships! between!R&D!capabilities!and!inward!FDI,!this!section!contains!the!regression!results!of!the! national!studies!that!each!represent!a!market!in!order!to!elaborate!on!the!previous!findings.! ! Romania!–!Frontier!market!! In!the!global!model!(table!3)!is!reported!that!frontier!markets!show!significant!relationship! between!innovation%linkages!(M),!patents%(+)!and!human%capital!(+)!on!inward!FDI.!The!national! model!for!Romania!(table!4,!p.30)!does!not!confirm!these!results.!In!contrast,!the!results!reveal! that!Romania’s!level!in!patents!(PAT)!with!its!partner!economy!is!negatively!related!to!inward! FDI!(β=!M0.2895;!P=0.05!in!preferred!model!8),!like!the!geographical%distance!(GEOD).!The!more! distance! between! Romania! and! its! partner! economy,! the! least! inward! FDI! in! Romania! (β! M 1.2024;!P=0.01).!These!results!have!the!same!effects!in!the!univeriate!models!(4)!and!(6).!In! addition,!if!the!difference!in!inflation!(INF)!rate!between!Romania!and!its!partner!economy! increases!by!1,!the!inward!FDI!increases!by!0.0843!(at!10%!significance!level).!Furthermore,! developed% markets! (DDM)! have! a! significant! impact! on! the! inward! FDI! in! Romania,! with! respectively!β=!2.3801!(at!5%!significance!level).!Model!(9)!and!(10)!show!no!valid!results.!!! ! Russian!Federation!–!Emerging!market!! Although!the!variables!human%capital,%innovation%linkages,%entrepreneurship%and%geographical% distance%all!have!independently!impact!on!the!inward!FDI!level!in!Russia!(table!5,!p.31),!in!the! combined!model!(8)!only!geographical%distance!(GEOD)!between!Russia!and!its!partner!country! negatively!affects!the!inward!FDI!(P=0.05).!The!size!(SIZE)!also!shows!a!significant!impact!on! inward!FDI,!what!indicates!that!the!difference!in!annual!growth!rate!between!Russia!and!its! partner! country! slightly! negatively! affects! inward! FDI! stock! in! Russia.! Thereby,! partner! economies!with!frontier!markets!show!a!strong!positive!relationship!between!patents!(PAT)! and!inward!FDI!(β=0.5727),!the!difference!in!entrepreneurship!(ENT)!between!Russia!and!its! emerging! market! reveals! a! negative! effect! on! FDI,! while! the! difference! with! Russia! and! its! developed! market! partner! in! patents! (PAT),! geographical% distance% (GEOD),! size! (SIZE)! and! openness%(OPEN)%significantly!indicate!lowers!the!inward!FDI!in!Russia.!!

!

Singapore!–!Developed!market!!

6.! Discussion

! !

1.! Macroeconomic!debate!

could!benefit!from!the!harmonization!of!patents!(Park!and!Lippoldt,!2003).!Moreover,!strong! patent! protection! makes! MNEs! eager! to! own! or! control! the! asset! rather! than! foreign! production!(Primo!Braga!and!Fink,!1998a;!Ferrantino,!1993).!Nevertheless,!this!contradicts!to! the! results! for! the! national! studies,! showing! that,! under! comparative! advantage,! I! cannot! support!the!literature!on!patent!protection!and!inward!FDI.!The!number!of!patents!in!the!host! country!reflects!the!inIhouse!R&D!and!thus!assumes!assetIseeking!motives!(Hall!et!al,!1986).! Finally,! a! good! entrepreneurship! level! stimulates! inward! FDI,! as! seen! in! the! global! study.! Entrepreneurship!raises!the!amount!of!local!firms!and!competition,!putting!pressure!on!local! firms!to!innovate!to!overcome!the!competition.!Foreign!MNEs!are!interested!to!invest!in!those! innovative! and! dynamic! markets,! and! gives! them! access! to! cooperative! networks! (Fahed,! 2013).!However,!the!outcomes!for!the!national!studies,!under!comparative!advantage,!do!not! support!this!positive!effect.!!

!

Besides!the!R&D!capabilities,!governments!should!take!into!account!that!the!distance!effect! still!plays!a!strong!role!in!crossIborder!investment!behavior.!On!the!one!hand,!cultural!distance! does! not! show! evidence! in! this! thesis,! possibly! because! our! aggregate! measure! of! cultural! distance!for!power!distance,!uncertainty!avoidance,!individualism!and!masculinity.!According! to! Bhardwaj! et! al! (2007),! MNEs! are! more! willing! to! invest! in! countries! with! low! levels! of! uncertainty!avoidance!and!high!levels!of!trust.!Moreover,!Cesar!and!Escobar!(2015)!examined! that!developed!economies!are!better!in!adapting!to!attract!FDI,!as!they!adapt!more!easily!to! ‘distance!matters’.!On!the!other!hand,!the!geographical!distance!between!the!two!main!cities,! is!still!crucial.!The!higher!the!distance,!the!less!FDI,!either!due!to!the!fixed!costs!MNEs!have!to! cover,!greater!risks!or!transportation!costs!(Marimoutou!et!al,!2009;!Tinbergen,!1962;!Qi!et!al,! 2015;!Guerin,!2003;!Kuo!and!Fang,!2009).! ! Governments!should!also!realize!that!the!maturity!of!the!market!is!still!positively!related!to!the! level!of!inward!FDI.!Developed!markets!are,!based!on!the!mean!inward!FDI,!both!the!main! receivers!and!investors!of!FDI!(graph!2).!This!is!mainly!due!to!the!strong!global!economy,!policy! certainty!and!political!stability!(UNCTAD,!2015).!Thereby,!these!economies!are!liberalized!with! main!policies!in!entry!conditions!and!reduced!investment!restrictions.!The!descriptive!statistics! of!inward!FDI!for!the!global!study!in!Appendix!4A!show!that!the!sum!of!total!inward!FDI!stock! per!type!of!economy!is!also!the!highest!for!developed!markets,!followed!by!emerging!markets.!!! !

Graph 2 - Overview of mean inward FDI stock per type of economy!

Frontier(market Emerging(Market Developed(Market

Although!the!long!standing!debate!about!the!critical!set!of!variables!that!attract!FDI,!this!thesis! assumes!that!a!strong!global!economy!does!not!need!to!be!a!driver!for!inward!FDI.!In!fact,! neither!a!positive!annual!growth!rate,!inflation!rate,!market!openness!and!low!corporate!tax! rate!are!seen!as!significant!determinants!for!inward!foreign!direct!investments.!This!can!also! be!partly!explained!by!the!dependence!on!type!of!investments.!Where!an!increasing!annual! growth!rate!of!GDP!attracts!horizontal!FDI!because!of!market!potential,!it!is!presumably!not! essential!for!vertical!FDI!(Iamsiraroj!and!Doucouliagos,!2015).!Besides,!MNEs!with!exportIdriven! FDI! are! rather! interested! in! low! labor! and! transportation! costs! (Torrisi,! 1985).! Additionally,! marketIseekers!could!locate!in!countries!with!less!openness!to!serve!the!local!market,!while! exportIoriented!MNEs!are!interested!in!open!economies!with!low!trade!restrictions!(Jordaan,! 2004).!! ! Therefore,!the!macro!economic!studies!indicate!no!concrete!impression!of!the!effect!of!R&D! capabilities!on!inward!FDI.!This!may!be!because!this!study!only!considers!data!from!the!most! current!year!available!or!the!three!countries!considered!in!this!thesis!show!unique!countryI specific!determinants.!Therefore,!a!panel!dataset!could!contribute!to!the!future!literature,!as! well!as!observing!other!frontier,!emerging!and!developed!countries!for!the!national!studies.! However,! in! the! previous! discussion! it! appears! that! the! type! or! motive! of! investment! also! determines!the!location.!For!this!reason,!the!following!session!includes!an!industrial!analysis!to! go!deeper!into!the!location!determinants!of!four!different!industries,!each!having!their!own!set! of!investments!types!and!motives.!! ! 2.! Industry!analysis!–!meso!perspective!view!on!FDI!determinants! The!R&D!location!determinants!for!FDI!on!meso!level!differs!among!industries,!as!the!extent!of! knowledge!and!technology!varies.!This!analysis!focuses!on!the!pull!(host!country)!determinants! by!enumerating!factors!emphasized!in!the!theoretical!and!empirical!literature.!These!industry! differences!are!measured!by!delving!into!four!different!sectors!in!the!2x2!matrix!(graph!3):!highI tech!manufacturing,!lowItech!manufacturing,!knowledge!intensive!business!services!(KIBS)!and! lowIknowledge!intensive!services!(LIBS),!derived!from!OrtegaIArgiles!et!al!(2009,!p.8I9)!and!the! industry!classification!of!Eurostat.!!

Relatively!limited!literature!exists!in!FDI!determinants!for!low%knowledge!intensive!services!(1),! or! so! called! more! traditional! services.!In! general,! these! services! are! characterized! by! its! moderate!innovative!capacity!and!considerably!high!number!of!lowIskilled!employees!(SegarraI Blasco,!2010).!As!this!industry!has!low!technological!innovation,!R&D!capabilities!are!not!FDI! location! determinants.! Instead,! macroeconomic! linkages! are! decisive! for! those! relatively! restrictive!MNEs!(Walsh!and!Yu,!2010).!As!such,!services!need!faceItoIface!contact!with!the! client,!making!close!distance!to!the!customers,!a!good!reputation!building!location!and!a!large! consumer!base!important!(Feng!and!Mingque,!2016;!UNCTAD,!2004;!Raff!and!von!der!Rurh,! 2007).! This! ensures! that! both! low! geographical! distance,! cultural! distance! and! speaking! a! common!language!are!crucial!(Ramasamy!and!Yeung,!2010).!Moreover,!the!annual!growth!in! GDP,!indicating!the!economic!growth,!is!associated!with!a!larger!domestic!demand!and!possible! business!opportunities!(Walsh!and!Yu,!2010;!Yin!et!al,!2014).!Especially!the!service!sector!is! featured!by!its!initial!investments!and!low!marginal!costs,!making!economies!of!scale!essential! (Yin!et!al,!2014).!However,!the!marketIseeking!motives!of!lowIintensive!knowledge!(mostly! nonItradable)!services!do!not!show!any!significant!effect!related!to!openness!of!the!market,! while!real!exchange!rate!is!positively!related!to!inward!FDI!(Walsh!and!Yu,!2010).!! !

Among!others,!the!textile!and!apparel!industry!represent!the!low%tech!manufacturing!(2).!This! industry! distinguishes! three! types! of! operations:! “preIassembly! (design,! grading,! marking,! curing),!assembly!and!post!assembly!(distribution,!marketing!and!retail)”!(Sørensen,!2008,!p.6).! The!ends,!both!preIassembly!and!postIassembly,!focuses!on!R&D!and!userIdriven!innovation! that!are!either!eager!to!improve!the!product!development!and!patent!protection!within!the! firm,! as! strategic! knowledge! about! the! consumer! markets! (Sørensen,! 2008).! This! requires! qualified,! tacit! knowledge! and! precision.! This! makes! MNEs! eager! to! locate! in! geographical! clusters! in! developed! markets,! with! high! levels! of! human! capital! and! capital! intensity.! The! assembly!stage,!which!consist!of!standardized!or!nonIreplenishment!goods!that!are!not!bound! to!a!certain!location,!concentrate!on!costIdriven!innovation!and!are!often!located!in!lowIcost,! laborIintensive!markets!(van!Tot,!2014).!Moreover,!the!FDI!location!of!these!activities!depends! on!the!low!(transaction)!costs,!because!the!goods!crosses!border!several!times!before!it!is! bought!by!the!consumer!(Nordås,!2004).!In!addition,!favorable!trade!policies,!positive!exchange! rate!and!natural!resources!available!in!the!host!country!are!important!determinants!(Nordås,! 2004;!Gereffi,!1999).!Likewise,!the!market!must!be!able!to!be!quickly!responsive!and!ensure! justIonItime!delivery,!what!explains!the!raise!of!this!industry!in!Central!America!sine!the!1990s,! because!90%!of!the!goods!are!sold!in!US!market!(Sørensen,!2008;!Gereffi,!1999).!! !

spillovers! (Guimon,! 2013).! This! ‘global! factor’! strategy! requires,! among! others,! cooperative! joint!ventures,!strategic!alliances!or!co!research!with!external!parties!(Gilroy!and!Elmar,!2005;! Bartels!and!de!Commebrugghe,!2009).!Even!though!the!most!highItechnological!players!are! large!firms,!the!role!of!small!firms!has!raised!in!the!regional!innovation!systems.!This!allows!for! a!mutual!dependence!between!those!type!of!firms!in!order!to!augment!more!R&D!capabilities! (Comanor! and! Scherer,! 2011).! Moreover,! strategic! assets! are! also! determinants! for! highI manufacturing!MNEs,!such!as!patents.!The!highItechnological!sector!is!shaped!by!technological! innovation,! making! this! strategic! asset! beneficial! to! have! competitive! advantage! over! competitors! (Sherwoord,! 1990;! SegarraIBlasco,! 2010).! Therefore,! most! of! these! R&D! capabilities!are!located!in!more!advanced!environments,!where!tax!havens!show!the!best!FDI! locations!for!highItechnology!firms!(Jones!and!Temouri,!2016).!!

!

The!knowledge! intensive! business! services! (KIBS)! (4)!are! characterized! by! its! relative! high! knowledge!intensity!and!low!R&D!investments.!While!some!authors!claim!that!this!sector!is! complemented! to! FDI! (e.g.! Yin! et! al,! 2014),! others! argue! that! this! sectors! is! motivated! by! marketIseeking!and!clientIfollowing!determinants!(Moshirian,!2001;!Nigh!et!al,!1986).!The!KIBS! uses!explicit!and!tacit!knowledge!about!their!customers!necessary!to!create!and!commercialize! new!services.!This!leads!to!innovations!at!organizational!and!marketing!level!(SegarraIBlasco,! 2010).!Although!the!rise!of!ICT!has!become!a!driver!for!internationalization!strategies,!services! are!features!by!the!locationIbound!relationship!between!service!provider!and!client!(Dachs!et! al,!2012;!Cohen!and!Levinthal,!1990).!In!general,!access!to!highly!skilled!employments!is!crucial! to! FDI! in! business! services,! because! the! KIBS! have! strict! preferences! in! a! labor! force! with! significant!experiences!and!skills!(Falk,!2012;!Yin!et!al,!2014).!Moreover,!corporate!taxes!and! geographical!distance!are!negatively!related!to!inward!FDI,!while!a!proper!legal!system!is!a!host! country!to!protect!equity!rights!and!bankruptcy!processes!(Davies!and!Killeen,!2015;!Herrero! and!Simon,!2003;!Claessens!and!Van!Horen,!2014a).!However,!different!types!of!FDI!have!their! own!characteristics.!Financial!FDI!seems!to!be!attracted!by!neighbor!countries,!wage!costs!that! reflect! the! human! capital! level,! the! same! language,! market! annual! growth! rate,! low! macroeconomic!volatility!and!the!development!of!financial!system!(Claessens!and!van!Horen,! 2014a;!Herrero!and!Simon,!2003;!Yin!et!al,!2014).!Besides,!Herrero!and!Simon!(2003)!argue! that! an! open! economy! positively! affects! inward! FDI.! In! case! of! nonIfinancial! FDI,! cultural! distance,!level!of!GDP!and!agglomeration!effects!are!crucial!(Davies!and!Killeen,!2015;!Yin!et!al,! 2014).!Accordingly,!knowledge!externalities!and!specialized!workers!in!agglomeration!areas!are! interesting!for!KIBS,!due!to!the!greater!uncertainties!in!unfamiliar!areas!(Yin!et!al,!2014).!! ! From!this!basic!industry!analysis!is!shown!that!industries!differ!in!FDI!determinants,!which!are! not!noticed!in!the!aggregate!inward!FDI!analysis!on!macro!economic!level.!This!indicates!that! a!variety!of!facets!plays!a!role!in!the!FDI!location!process,!making!that!authorities!may!not!be! able! to! meet! the! requirements! of! all! industries.! In! turn,! it! is! also! likely! that! even! on! micro! economic!level!there!exist!firmIspecific!preferences!and!differences.!!

7.! Concluding remarks

!

Conclusion!

8.! References

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