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This paper by the three authors is in the spirit of the literature of FDI and licensing increasing the international transmission of technology, which adds to absorptive capacity and efficient production in the receiving country and higher welfare as a result. Our model focuses on a multinational firm's shift of production from a developed country to a developing country to pursue either FDI or technology licensing. The location choice is determined by weighing the lower Research and Development (R&D) efficiency of production against the benefits of lower production costs abroad. One of conclusions is that foreign production is preferred if and only if the R&D effiency of production in the developing country is high enough. The switch could be from a home production to FDI or licensing, depending on parameterisation. Concerning the welfare impact of FDI and technology licensing, the larger the improvement in the host (developing) country's R&D effiency of production, the more benefits it could get from the technology transfer from the multinational firm.
This paper is published in The Word Economy (2013).