Foreign Direct Investment and International Knowledge Diffusion: Evidence Using Patent Citation Data

iii This thesis examines the effect of foreign direct investment (FDI) on knowledge diffusion between countries. Standard theory suggests that the extent technological knowledge diffuses across national borders plays an important role in determining long run economic growth and income equality. Because governments of developing countries often compete to attract FDI using tax credits and subsidies, an important question is whether knowledge spillovers are one of the benefits of such policies. To measure knowledge flows, we use all patent citations from the United States Patent and Trademark Office (USPTO), yielding an unbalanced panel of patent citations from 90 countries between the years 1985 to 2010. We model knowledge flows using a gravity framework, and test whether bilateral FDI increases the likelihood that patent applicants in the host country will cite patents originating from the investing country. For developing countries, we find that aggregate FDI inflows have a negative effect on knowledge flows. However, stronger intellectual property rights in the host country stimulate relatively more knowledge flows via FDI and may lead to positive knowledge spillovers in the medium term. i