R&D, FDI, and Efficiencies of Small and Medium Sized Firms Li Yang1, Hu Jin-Li2,* 1National University of Kaohsiung, Taiwan 2Institute of Business and Management, National Chiao Tung University, Taiwan *Corresponding Author
Online published on 17 February, 2014. Abstract This study analyzes how small- and medium-sized enterprises’ (SMEs) R&D and foreign direct investment (FDI) affect their technical efficiencies in an environment of globalized production in order to complement previous research studies. When the magnification effect (the network effect of FDI magnifies the marginal cost savings effect of R&D) dominates the replacement effect (for production cost savings there is a substitution between R&D and FDI), FDI and R&D are complements; otherwise, both are substitutive strategies. Our theoretical propositions suggest that unless the replacement effect dominates the magnification effect very much, FDI will indirectly improve technical efficiency through R&D activities. We use 1989–1996 panel data of FDI by Taiwan's SMEs to test the proposition. Our major empirical findings are: (1) FDI not only directly improves technical efficiencies, but also indirectly enhances technical efficiencies through complementing R&D activities. (2) R&D expenditures significantly improve firms’ technical efficiencies. (3) For those Taiwan's SMEs investing in mainland China, FDI and R&D are more likely to be a substitutive strategy; however, FDI still indirectly amplifies technical efficiency through R&D activities. (4) Currently, it is more efficient for Taiwan's SMEs to focus on the globalization of production than on market globalization. Top Keywords R&D, foreign direct investment, technical efficiency, replacement effect, magnification effect. Top |