Imitate or Innovate? FDI, Technology, and Income Levels in Middle Income Countries

This paper analyzes the impact of foreign direct investment (FDI) and technology on income levels in middle-income countries. These two factors are used as the measures of imitation and innovation of technology respectively. From micro perspectives, technology entails a great deal of incentive for individuals, firms, and industry. But, how innovation and imitation of technology lead a country as a whole to a higher level of economic performance is not as direct as microeconomic perspectives. The focus of this paper is to analyze the individual impacts of these two variables on the level of GDP per capita for two groups of countries: upper-middle-income (UMI) and the lower-middle-income (LMI) countries. The baseline results show a stronger effect of FDI (imitation) compared to technology (innovation) for both sets of countries. However, when we control for potential endogeneity using the instrumental variable approach, imitation favors the LMI countries while innovation favors the UMI countries. The findings can be applied in the context of “more developed†and “less developed†countries suggesting that the less developed countries may be better-off focusing on the imitation of technology instead of innovating new ones, leaving the role of innovation to the more developed countries.