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Foreign Direct Investment, Imports and Innovations in the Service Industry

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Abstract

The paper analyses for the first time empirically the impact of foreign competition due to inward foreign direct investment and imports on the innovation activities using data of German service firms. Based on the hypothesis that foreign competition has a disciplining effect on domestic markets derived from the manufacturing sector, a positive impact can be expected on innovation in the service sector, while other theoretical considerations do not absolutely support this optimistic view. In the empirical analysis, variants of two probit models are estimated for a sample of 2,019 service firms to explain their product and process innovation activities. The results show that both foreign direct investment and imports have highly significant positive effects on product and process innovations. Vice versa, the export and foreign production activities of domestic firms support innovations, too.

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Authors and Affiliations

  1. Fraunhofer Institute for Systems and Innovation Research, Breslauer Straβe, Karlsruhe; Economics Department, University of Kassel, Mora-Platiel Straβe 4, Kassel, 34127, Germany

    Knut Blind

  2. Macroeconomic Theory and Policy, FB B, University of Wuppertal, Gaußstraße 20, Wuppertal, 42119, Germany

    Andre Jungmittag

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  1. Knut Blind
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  2. Andre Jungmittag
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Blind, K., Jungmittag, A. Foreign Direct Investment, Imports and Innovations in the Service Industry. Review of Industrial Organization 25, 205–227 (2004). https://doi.org/10.1007/s11151-004-3537-x

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