R&D, FDI, and Innovation: Examination of the Patent Applications in the OECD Countries

Abstract

This paper analyzes the effect of research and development expenditure (R&D) on innovation in the Organization for Economic Cooperation and Development (OECD) member countries over the period 1996-2015. Innovation, the dependent variable, is measured using two different proxies: patent applications by residents (PAR) and the patent applications by non-residents (PANR) in the host countries. R&D is the main variable of interest which is also interacted with foreign direct investment (FDI) to see how the entry of foreign competitors influence the role of R&D on innovation in the host country. The findings show that R&D alone promotes innovation by residents but impedes innovation by non-residents. However, when FDI interacts with the R&D in the host country, it produces opposite results. Specifically, increasing FDI in the presence of certain level of R&D in host countries impacts PAR negatively and the PANR positively. These results have important policy implications.