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The effect of outward investment to China on domestic R&D: a two-hurdle model with endogenous ODI

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Outward direct investment (ODI) and domestic R&D are interrelated, but empirical evidence is affected by the nature of a firm's data, which are heavily censored. Firm data contain a firm's yes/no decision to invest in China, yes/no decision of R&D, and the decision of R&D intensity. We thus adopt a two-hurdle model and allow the China investment decision to be endogenous in an R&D model in order to examine the effect of ODI in China on domestic R&D investment in Taiwan's electronics industry. In the model, a two-equation simultaneous subsystem is formed, in which three regression equations are specified: a decision of R&D intensity, and a yes/no decision of location to conduct R&D together with a yes/no decision to invest in China Our results indicate that China investment and R&D intensity are positively related such that ODI in China helps to raise significantly a firm's R&D intensity as compared to the estimate if the endogeneity of China investment and the nature of data were not properly accounted.

Document Type: Research Article


Affiliations: 1: Department of Economics, National Taiwan University, Taipei, Taiwan 2: Department of International Business, Asia University, Taichung, Taiwan 3: The Institute of Economics, Academia Sinica, Taipei, Taiwan

Publication date: April 1, 2009

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