## Knowledge Diffusion Through FDI: Worldwide Firm-Level Evidence

_IMF Working Papers, July 12, 2024_

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**Canonical URL:** [Knowledge Diffusion Through FDI: Worldwide Firm-Level Evidence](https://www.imf.org/en/publications/wp/issues/2024/07/12/knowledge-diffusion-through-fdi-worldwide-firm-level-evidence-551408)

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## Bibliographic details
- Authors: JaeBin Ahn, Chan Kim, Nan Li, Andrea Manera
- Published: July 12, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400280757.001

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### Summary
- Research question: impact of Foreign Direct Investment (FDI) on knowledge diffusion as measured by cross-border patent citations.
- Dataset: novel firm-level panel combining worldwide utility patent and citations data with project-level greenfield FDI and crossborder mergers and acquisitions (M&A) data over the past two decades, covering firms across 60 countries.
- Methodology: new local projection difference-in-differences (LP-DiD) approach applied at the firm level.
- Main headline result: citation flows between investing firms and host countries increase by up to around 10.6% to 13% in five years after the initial investment.

### Data and Methods
- Data components:
  - Worldwide utility patent and citations data.
  - Project-level greenfield FDI data.
  - Crossborder M&A data.
  - Firm-level panel spanning the past two decades and 60 countries.
- Empirical approach:
  - Local projection difference-in-differences methodology tailored to capture dynamic effects of firm-level FDI on cross-border patent citation flows.

### Key Findings
- Magnitude and timing:
  - Citation flows between investing firms and host countries increase by up to around 10.6% to 13% in five years after the initial investment.
- Directionality:
  - FDI significantly enhances knowledge flows both from and to the investing firms (i.e., inward and outward citation effects).
- Heterogeneity:
  - Effects are stronger when host countries have higher innovation capacities.
  - Effects are stronger when host countries are technologically more similar to the investing firm.
- Spillovers:
  - Knowledge spillovers extend beyond targeted firms and industries in host countries.
  - Spillovers are particularly pronounced for sectors closely connected in the technology space.

### Policy-Relevant Implications
- Enhancing host-country innovation capacity can amplify the knowledge-diffusion benefits of attracting FDI.
- Policies that increase technological similarity or connectivity between domestic industries and foreign investors may strengthen cross-border knowledge flows.
- Consideration of sectoral technology linkages is important: sectors closely connected in the technology space experience larger spillovers, suggesting targeted industrial policies could magnify benefits.

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_Source: https://www.imf.org/en/publications/wp/issues/2024/07/12/knowledge-diffusion-through-fdi-worldwide-firm-level-evidence-551408_