Inward foreign direct investment and innovation: Which comes first?

This study re-examines the direction of causality between inward foreign direct investment (FDI) and innovation (residents and non-residents) by considering balanced panel data of 56 countries (2000-2020). The vector auto-regressive (VAR) Granger non-causality tests show a direction from FDI inflows to innovation (non-residents), where FDI comes first (FDI-led innovation), while there is bidirectional causality between innovation by non-residents and residents, in general. For developed economies, FDI causes innovation by non-residents, but is caused by residents' innovation. There is no causation between FDI and innovation in either developing economies or economies in transition. These findings were further complemented by impulse response functions and various decomposition tests. Some policy relevance is highlighted.