Vertically Integrated FDI, Technology Transfer And Host Country's Industrial Development

Introducing Foreign Direct Investments(FDI) has been regarded as an important method to promote technology upgrade and industrial development in a host country. However, the pattern of vertically integrated FDI might not benefit to local industries. Within the framework of two-tiered oligopolistic industry, we add technology transfer decision-making and technology diffusion effect to the model of Lin & Saggi(2011), then analyze the relative impacts to transferred technology and industrial development in the host country under the vertically integrated FDI and non-vertically integrated FDI patterns.The results indicate that when the imitation capacity of local upstream firms is relatively weak, the vertically integrated FDI can bring more advanced technology to the host country. However, more advanced technology can also enhance the competitive advantage of FDI and when the amount of local upstream firms satisfy certain conditions, the vertically entry pattern can eliminate the “double marginalization” of multinational firms and exacerbate the “double marginalization” of local firms, therefore squeezing the profits of local upstream and downstream firms and leading to a negative impact on the firm profits in the host country. Besides, this paper also explores two different situations where the final products will be sold and analyzes how the vertically entry pattern affects social welfare in host country. We find that the impact mechanism of vertically integrated FDI to industrial profits keeps same as above, while how vertically integrated FDI affects social welfare is uncertain.This paper not only offers a theoretical explanation to the “Industrial Upgrading Paradox”, but also provides related policies to improve FDI quality of developing countries, such as prohibiting the organization pattern of FDI integration, improving the localization level of foreign capital and adjusting upstream market access threshold.