Inward FDI and innovation in Asian countries

In many countries, FDI is considered an important component of development, therefore many developing countries have sought investment and designed policies to attract FDI. Countries seek FDI with the expectation that MNEs would bring new technology and know-how to their economy or spillovers. Evidence of this in existing research is contradictory; while some studies have proven the existence of positive spillovers, others have found no trace of such effects in the host country of FDI. Positive spillovers can be seen in, among others, technology and knowledge spillover in the form of innovation activities. Fagerberg et al (2010) suggest that innovation is not limited to high-tech activities; is an aspect in all aspects of economic activities, not only new products and process but also improvements in logistics and distribution, for example. Simple innovations in these areas may have large-scale economic effects. Therefore, innovation is important for developing countries, including the developing Asia. The present research aims to explain the relationship of FDI and innovation in selected Asian countries, and identify the condition in which FDI can have a positive effect on innovation activities. Using the absorptive capacity theory with moderating variables human capacity, infrastructure and institutional environment, the result of statistical analysis is that evidence of this relationship exists, although it is rare and inconsistent across models. The relationship between FDI and innovation depends on the moderating variables and the type of investment. It is found that human capital positively determines the relationship between FDI and innovation. This finding is in line with previous research in this subject. For example, Hall and Mairesse (2006) found that firms with a greater share of highly educated employees are more likely to innovate. Education is necessary for the host country in order to absorb and internalize knowledge from foreign firms and apply it locally. Additionally, investment in the services sector is positive for innovation activities compared to investment sectors such as manufacturing and natural resources. FDI in the service sector may have a positive relationship with innovation activities because much of nature of the investment in this sector is high-tech.