The Impact of FDI on Innovation in Developing Countries: The Mediating Role of Governance

Authors

  • Hannarong Shamsub Thailand Institute of Nuclear Technology (Public Organization), Ministry of Higher Education, Science, and Innovation, 11000 Bangkok, Thailand

DOI:

https://doi.org/10.56225/ijfeb.v2i3.141

Keywords:

governance, foreign direct investment, innovation, spillover effect, generalized method of moments

Abstract

While most studies in the existing literature focused on the direct relationship between FDI and innovation, this paper further analyzes whether governance in developing economies mediates this relationship. A 25-year cross-sectional time-series data from 1995 to 2019 were collected from the World Bank Development Indicators and the Worldwide Governance Indicators (2019) databases. This panel dataset was estimated using a system GMM. A novel finding emerged from the investigation: the positive impact of FDI on domestic innovation is mediated by two governance variables: voice and accountability and regulatory quality. This suggests that the impact of FDI on domestic innovation is strengthened when combined with the effects of mediating variables. The results imply that, in the absence of high governance quality, the traditional policy prescription—such as increasing government spending on R&D and education—may not be adequate to promote FDI's innovation spillovers. The findings suggest that governments in developing nations should work to improve the voice & accountability and regulatory quality indicators by ensuring that citizens take part in the decision-making to promote the flow of knowledge and information that fosters innovation. This will help to strengthen the influence of FDI on domestic innovations. In addition, the governments should foster an environment that is welcoming to foreign investment and implement the appropriate regulatory reforms, such as those that strengthen competition protection, property rights protection, and transparency in the operations of the organizations implementing policies.

References

Al-Sadiq, M. A. J. (2021). The role of e-government in promoting foreign direct investment inflows. International Monetary Fund.

Arrow, K. J. (1962). The Economic Implications of Learning by Doing. The Review of Economic Studies, 29(3), 155. https://doi.org/10.2307/2295952

Baron, R. M., & Kenny, D. A. (1986). The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173–1182. https://doi.org/10.1037/0022-3514.51.6.1173

Bayar, Y., & Alakbarov, N. (2016). Corruption and foreign direct investment inflows in emerging market economies. Ecoforum Journal, 5(2), 303–308.

Belloc, F. (2012). Corporate Governance And Innovation: A Survey. Journal of Economic Surveys, 26(5), 835–864. https://doi.org/10.1111/j.1467-6419.2011.00681.x

Beqiraj, M. (2015). The Role Corporate Governance in Foreign Direkt Investment in Kosovo. European Journal of Economics and Business Studies, 2(1), 247–252. https://doi.org/10.26417/ejes.v2i1.p247-252

Blind, K. (2012). The influence of regulations on innovation: A quantitative assessment for OECD countries. Research Policy, 41(2), 391–400. https://doi.org/10.1016/j.respol.2011.08.008

Bučar, M., Rojec, M., & Stare, M. (2012). Backward FDI linkages as a channel for transferring technology and building innovation capability: the case of Slovenia Ma j a B U čar , Ma Tija rojEC a nd M E TKa STarE. In Governance and Knowledge (Vol. 21, pp. 238–257). Routledge. https://doi.org/10.4324/9780203118450-26

Cheung, K., & Lin, P. (2004). Spillover effects of FDI on innovation in China: Evidence from the provincial data. China Economic Review, 15(1), 25–44. https://doi.org/10.1016/S1043-951X(03)00027-0

Damanpour, F. (2010). An Integration of Research Findings of Effects of Firm Size and Market Competition on Product and Process Innovations. British Journal of Management, 21(4), 996–1010. https://doi.org/10.1111/j.1467-8551.2009.00628.x

Das, A., & Parry, M. (2011). greasing or sanding? GMM estimation of the corruption-investment relationship. Int. J. Eco. Res, 2(2), 95–108.

Eden, L. (2009). Letter from the Editor-in-Chief: FDI spillovers and linkages. Journal of International Business Studies, 40(7), 1065–1069. https://doi.org/10.1057/jibs.2009.46

Farooque, O. Al, & Yarram, S. R. (2010). Corporate governance and foreign direct investment inflows: cross-sectional international evidence. American J. of Finance and Accounting, 2(1), 1. https://doi.org/10.1504/AJFA.2010.034564

Fazio, G., & Talamo, G. M. C. (2008). How “attractive” is good governance for FDI? In Institutional Approach to Global Corporate Governance: Business Systems and Beyond (Vol. 9, pp. 33–54). Emerald Group Publishing Limited. https://doi.org/10.1016/S1569-3767(08)09002-X

García, F., Jin, B., & Salomon, R. (2013). Does inward foreign direct investment improve the innovative performance of local firms? Research Policy, 42(1), 231–244. https://doi.org/10.1016/j.respol.2012.06.005

Griffith, R., Huergo, E., Mairesse, J., & Peters, B. (2006). Innovation and Productivity Across Four European Countries. Oxford Review of Economic Policy, 22(4), 483–498. https://doi.org/10.1093/oxrep/grj028

Huang, Q., & Yuan, T. (2021). Does Political Corruption Impede Firm Innovation? Evidence from the United States. Journal of Financial and Quantitative Analysis, 56(1), 213–248. https://doi.org/10.1017/S0022109019000966

Javorcik, B. S. (2008). Can Survey Evidence Shed Light on Spillovers from Foreign Direct Investment? The World Bank Research Observer, 23(2), 139–159. https://doi.org/10.1093/wbro/lkn006

Jia, N., Huang, K. G., & Man Zhang, C. (2019). Public Governance, Corporate Governance, and Firm Innovation: An Examination of State-Owned Enterprises. Academy of Management Journal, 62(1), 220–247. https://doi.org/10.5465/amj.2016.0543

Kaasa, A., Kaldaru, H., & Parts, E. (2007). Social Capital and Institutional Quality as Factors of Innovation: Evidence from Europe. SSRN Electronic Journal, 55–2007. https://doi.org/10.2139/ssrn.1017754

Kelley, J. G., & Simmons, B. A. (2019). Introduction: The Power of Global Performance Indicators. International Organization, 73(03), 491–510. https://doi.org/10.1017/S0020818319000146

Kettl, D. F. (2022). Weberian Bureaucracy and Contemporary Governance. Perspectives on Public Management and Governance, 5(2), 111–120. https://doi.org/10.1093/ppmgov/gvab026

Krugman, P. R., & Obstfeld, M. (2009). International economics: Theory and policy. Pearson Education.

Lall, S., & Narula, R. (2004). Foreign Direct Investment and its Role in Economic Development: Do We Need a New Agenda? The European Journal of Development Research, 16(3), 447–464. https://doi.org/10.1080/0957881042000266589

Law, S. H., & Azman-Saini, W. N. W. (2012). Institutional quality, governance, and financial development. Economics of Governance, 13(3), 217–236. https://doi.org/10.1007/s10101-012-0112-z

Lee, M.-H., & Lio, M.-C. (2016). The impact of foreign direct investment on public governance and corruption in China. The China Review, 16(2), 105–135.

Lethbridge, J. (2005). The Promotion of Investment Alliances by the World Bank. Global Social Policy, 5(2), 203–225. https://doi.org/10.1177/1468018105053679

Lin, H., & Lin, E. S. (2010). FDI, Trade, and Product Innovation: Theory and Evidence. Southern Economic Journal, 77(2), 434–464. https://doi.org/10.4284/sej.2010.77.2.434

Liu, X., & Zou, H. (2008). The impact of greenfield FDI and mergers and acquisitions on innovation in Chinese high-tech industries. Journal of World Business, 43(3), 352–364. https://doi.org/10.1016/j.jwb.2007.11.004

Mathur, R. D., & Chatterjee, S. (2003). Global Forum on International Investment. 17(8), 1–8.

Mengistu, A. A., & Adhikary, B. K. (2011). Does good governance matter for FDI inflows? Evidence from Asian economies. Asia Pacific Business Review, 17(3), 281–299. https://doi.org/10.1080/13602381003755765

Muhammad, F. (2014). Leadership, governance and public policy implementation competencies in the broader public sector. Europian Journal of Business Management, 6(36), 66–74.

Nadeem, M. A., Jiao, Z., Nawaz, K., & Younis, A. (2020). Impacts of Voice and Accountability upon Innovation in Pakistan: Evidence from ARDL and Maki Cointegration Approaches. Mathematical Problems in Engineering, 2020, 1–18. https://doi.org/10.1155/2020/6540837

Nadolny, A. J. (2010). Rethinking The" Innovative Firm": Innovation Creation In The Australian Water Technology Industry. Journal of Knowledge Management Practice, 11(1), 1–15.

Newig, J., & Koontz, T. M. (2014). Multi-level governance, policy implementation and participation: the EU’s mandated participatory planning approach to implementing environmental policy. Journal of European Public Policy, 21(2), 248–267. https://doi.org/10.1080/13501763.2013.834070

North, D. C. (1990). Institutions, institutional change and economic performance (Vol. 10). Cambridge: Cambridge university press NY.

Olson, M. (2022). The rise and decline of nations: Economic growth, stagflation, and social rigidities. Yale University Press.

Pérez-Segura, A. (2014). FDI and Human Development: What is the Role of Governance. In Unpublished Honors Thesis, University of Maryland, College Park, MD (pp. 1–49).

Phene, A., & Almeida, P. (2008). Innovation in multinational subsidiaries: The role of knowledge assimilation and subsidiary capabilities. Journal of International Business Studies, 39(5), 901–919. https://doi.org/10.1057/palgrave.jibs.8400383

Saggi, K. (2002). Trade, Foreign Direct Investment, and International Technology Transfer: A Survey. The World Bank Research Observer, 17(2), 191–235. https://doi.org/10.1093/wbro/17.2.191

Schumpeter, J. A. (2017). Essays: On entrepreneurs, innovations, business cycles and the evolution of capitalism. Routledge.

Shapiro, D., Tang, Y., Wang, M., & Zhang, W. (2015). The effects of corporate governance and ownership on the innovation performance of Chinese SMEs. Journal of Chinese Economic and Business Studies, 13(4), 311–335. https://doi.org/10.1080/14765284.2015.1090267

Tri, V. T., & Anh, N. D. (2016). Experiences of Vietnam in FDI Promotion: Some Lessons for Myanmar. 4(1), 131–174.

United Nations Conference on Trade and Development. (2013). World investment report 2013: Global value chains: Investment and trade for development. UN.

Vedantham, V. M., & Kamruddin, S. (2015). Good governance and public policy in India. International Journal of Social Sciences, 1(1), 878–889.

Weber, M. (1968). Economy and Society (New York, Bedminster). In WeberEconomy and Society1968.

World Bank. (2019). World Development Report 2019: The Changing Nature of Work. Washington, DC: World Bank. https://doi.org/10.1596/978-1-4648-1328-3

Zeneli, V. (2014). The role of institutions and good governance for attracting foreign direct investments: evidence from Southeast Europe. Business and Economics Journal, 5(2), 1–20.

Zou, Y. (2019). OECD and Educational Policy in China. In The OECD’s historical rise in education: The formation of a global governing complex (pp. 155–173). Springer. https://doi.org/10.1007/978-3-030-33799-5_8

Downloads

Published

2023-09-30

How to Cite

Shamsub, H. (2023). The Impact of FDI on Innovation in Developing Countries: The Mediating Role of Governance. International Journal of Finance, Economics and Business, 2(3), 178–194. https://doi.org/10.56225/ijfeb.v2i3.141
Abstract viewed = 98 times