Moving ideas across borders: Foreign inventors, patents and FDI

Abstract

This paper explores the link between innovation, migration and Foreign Direct Investment (FDI) empirically within a theoretically consistent framework. It analyses how migrant inventors enhance multinational firms' adaptive innovation performance and ultimately foster FDI towards the migrant's country of origin. Foreign migrant inventors (migrants who filed a patent in their host country) possess a unique mix of technical knowledge and cultural background that contribute to adapting Research and Development (R&D) activities for foreign markets. Therefore, FDI increases in country-pair-sectors with specific endogenous investment in quality, which depends on the migrants in the R&D sector. We constructed a novel panel country-sector data set including FDI, patents and migrant inventors and applied a two-stage structural gravity estimation procedure using migrant inventors as a valid instrument for patents. The results show sizable effects on the extensive and intensive margins of greenfield FDI.