How Levels of FDI and R&D Funding impact the Competitive Nature of National Entities and Economies

Aniya Sood, 11/03/2025

Introduction

Before diving into international trade economics and the determinations of economic competition through national and corporate investment in research and development ((R&D), it is essential to define this. International trade is widely classified into two dimensions: micro and macro. The micro-dimension focuses on competition among corporate firms within a country, influencing trade and investment, while the macro-dimension involves competition among countries (Scott and Lodge, 1985). More generally, international competitiveness is defined as "the degree to which a nation can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously maintaining or expanding the real incomes of its citizens" (President’s Commission, 1985). This article explores the relationship between R&D, foreign direct investment (FDI), and economic competitiveness in international markets.

Research and Development and Classifications

R&D encompasses creativity and systematic work to enhance a firm’s knowledge stock. This ‘knowledge capital’ exists in humans, culture, and society, applied to develop innovations that boost competitiveness and infrastructure (OECD, 2015). Experimental development is the most prominent R&D type, visible in national and corporate practices. R&D drives process and product innovation, advancing scientific and technological progress, thereby increasing economic sophistication and prosperity (Li and Hu, 2013). It plays a fundamental role in enhancing a nation’s unique selling proposition (USP) and attractiveness to foreign investors, influencing FDI flows and shaping comparative advantages in global markets.

R&D: The Impact on Economic Implications and Foreign Direct Investment

Economic competitiveness is intrinsically interconnected to R&D investments and funding innovation. R&D boosts total factor productivity (TFP), a key driver of economic expansion. Romer (1990) and Lucas (1988) proposed that technological advancements from R&D significantly contribute to economic growth, with empirical evidence showing that higher R&D expenditures lead to improved economic performance. Additionally, R&D fosters job creation, income generation, and infrastructure development, strengthening political relations and enhancing domestic prosperity (Bilbao‐Osorio and Rodríguez‐Pose, 2024). Countries with strong investment in innovation are more resilient during financial crises and economic downturns, particularly when such crises and volatility is forecast or occurs in the form of manifestation in the performance of certain classes such as poorer persistent performance in equities on the FTSE100 (Woo, 2000).

A robust R&D environment not only boosts domestic innovation but also serves as a magnet for FDI. Multinational enterprises are more inclined to invest in countries where they can collaborate with local firms and research institutions, leveraging existing technological capabilities (Jamison and Jansen, 2001). This collaboration facilitates knowledge transfer and enhances the host country's innovation landscape. Research indicates that FDI can positively affect domestic innovation, particularly in nations with strong absorptive capacities and quality governance. Moreover, the presence of substantial R&D activities signals a conducive environment for innovation, making the host country more attractive to foreign investors seeking to capitalize on innovative technologies and skilled workforces (Doraszelski and Jaumandreu, 2013). Data from 2021 exemplified that the U.S. led with $806 billion in R&D spending in 2021 (NSF, 2021), maintaining dominance in innovation. China's R&D grew 10.6% annually (2010 2019), boosting its global market position, while Europe's slower 4.4% growth risks falling behind (EPFIA, 2021).

Conclusion

I believe that the relationship between R&D, FDI and national competitiveness is a strong one, exemplified by the research positions in this article. it is crucial that we, as the readers, writers, analysts and the wider audience, consider the position of their own country with respect to innovative practice and sophistication relative to the competition in the international landscape and take a moment to ask the question: “Are we where we should be and if not, why?”

References

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