We analyse a two-country model of Foreign Direct Investment (FDI) and RDoffshoring. In the basic model, two firms, each of which is originally situated in only one of the two countries, first decide whether to build a plant abroad. Then, they decide whether to relocate RD activities offshore. Finally, they engage in product-market competition. In this model, FDI liberalization causes a relocation of RD activities if intrafirm communication is sufficiently well developed, external spillovers are substantial, competition is not too strong and foreign markets are not too small. Surprisingly, such a relocation of RD activities usually nevertheless increases domestic welfare.
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Gersbach et al. (2010) studied this question.
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