The Effects of Foreign Direct Investment on R&D and Innovations: Panel Data Analysis for Developing Asian Countries

In global market, the wealth of natural resources or factor endowments is no longer key factors of competitiveness. Due to dynamic structure of international competition, it is inevitable to develop new technologies and products for the countries who want to increase their competitiveness. Now, the ability to produce different and more high-tech products which obtained by R&D and innovation, provided by Foreign Direct Investments (FDI), have become more important. FDI, providing substantial financial capital, technological know-how and managerial expertise to the recipient economies, play a crucial role. FDI is one of the most important factors behind high economic growth achieved, in South Korea, China, India, Malaysia and Singapore. These countries are primarily provided tax incentives, monopoly rights and cost advantages facilities to foreign investors. After they internalized the knowledge and technology by means of producing high-tech and high value-added products, they have managed to export. This paper has attempted to investigate the effects of FDI on R&D and innovation using the panel causality and cointegration methods in 10 developing countries (China, South Korea, India, Iran, Pakistan, Malaysia, Singapore, Thailand, Saudi Arabia and Turkey) in Asia for the 1996-2013 periods. The Fisher-type tests using ADF and PP tests (Maddala and Wu, 1999) and Breitung (2000) and unit root have been identified in observed series. Causal relationships between the series have been searched using Granger (1969) and Dumitrescu and Hurlin (2012) tests. The cointegration relationships between the series were determined by Fisher-type tests using Johansen's test (Maddala and Wu, 1999). Cointegration coefficients were estimated by Panel Fully Modified Least Squares (PFMOLS). It is expected that FDI inflows would increase countries’ R&D and innovation activities. The study, once more, will be tried to draw attention to the need of FDI for countries who want to increase level of R&D and innovation.