"Inward Foreign Direct Investment, Firm Capabilities, and Innovation"

Extant research on the impact of inward foreign direct investment (FDI) on local firms has continued to generate mixed results, with evidence supporting a positive spillover effect of inward FDI in some cases and a negative competition effect in others. To address these conflicting results, we investigate the moderating role of firms’ technological capabilities on the relationship between inward FDI and local firm innovation. To do so, we use firm-level data for 1,806 Spanish manufacturing firms from 1990 to 2009. In general, we find negative externalities of inward FDI for local firms. Interestingly, we further find that local technological leaders apply for fewer patents and introduce fewer new products than do local technological laggards subsequent to foreign entry. These results imply that in the presence of a strong competition effect, local technological leaders are more negatively impacted on by inward FDI than are local technological laggards.