Does FDI Generate Technological Spillovers in

the Host Country? Evidence from Patent Citations

Antonio Navas Ruiz

Does FDI generate technological

spillovers in the host country?
Evidence from patent citations
Antonio Navas Ruiz
European University Institute

Abstract
Recent empirical evidence on the existence of positive technological spillovers in the host country fails in nding a positive
evidence for LDCs both at a country and at a rm level. My
paper presents an alternative and more direct measure of technological ows relying on patent citations. Using this alternative
measure we nd that FDI always generate positive technological
spillovers in the host country, but the scope of this technological spillovers will be highly determined by the stock of human
capital available in the economy. Therefore, a necessary threshold of human capital is not required for the existence of positive
technological spillovers contrary to the empirical evidence found
until now, but the stock of human capital will highly determine
the extent to FDI diuses technology in the host country.

Introduction

FDI has been long recognized a one of the main important vehicles of
international technology diusion. MNEs accounts for 70% of the total
R&D carried out by private corporations in the world (Dunning, 1987)
and traditional theory on multinationals identies the necessity to have a
competitive advantage in terms of technological or organizational knowledge that allows themultinational to resist the competition in the host
country. International economists have also identied dierent potential
channels through which the competitive advantage could spill over to
local rms.
I would like to thank, Brownyn Hall, and J.Aitor Erce for useful comments and
suggestions. Remaining errors are mine.

During the 80s and the 90s, FDI has been increasing in importance
not only for developed countries but also for developing economies. Although the developed countries have been not only the main investors
but also the main recipients during the 80s, in the 90s around 30% of FDI
inows were going to developing economies (China, South East Asian
economies, and during the latest 90s also to Lationamerica) (Markusen,
1995). Governments in developing economies use dierent scal incentives, tax incentives in order to attract FDI. The necessity of theoretical
and empirical evidence testing the long-run eects of FDI in developing
countries is relevant for policy perspectives.
In order to measure the extent to which multinational rms have
diused technology over time in the host country empirical evidence has
relied on the eect of FDI on total factor productivity. Empirical evidence has found little scope for technological spillovers above all in less
developed countries (LDCs). Cross country empirical studies mainly
governed by Borenzstein, De Gregorio, and Lee (1998), nd that FDI
will not have a positive eect in total factor productivity for all countries. The authors identify the human capital stock as a potential factor
accounting for dierences between countries. The necessity of having
a certain level of human capital that allows host rms to absorve the
potential spillovers generated by multinational rms could explain this
relationship. On the same line of research Xu (2000) provides evidence
supporting that of BGL (1998) using however a measure of FDI that tries
to control for possible dierences in technology transfer across countries,
not controlled by BGL. He nds the threshold requirement of human
cpaital to be higher than that of BGL (1998) nding that at least 26
countries in the OECD would not overcome this threshold.
Xu (2000) creates a measure of FDI inows weighted by the expenditure of the multinational subsidiaries on royalties and fees paid to the
parent company as a percentage of the value added of the subsidiary rm.
The higher is the weight, the higher is the quantity of technology transferred. The idea of Xu is to control for the inputs of technology transfer
rather than the output of this technology, since it could be that many
resources that we consider in the FDI inows measure are not related to
the technology transfer activity at all. This would be a very interesting
measure if royalties and fees paid by the subsidiaries were determined
by market prices but these usually are internal prices. Althought the
author controls for some of the variability of these prices including xed
eects by country, still some other strategic determinants could play a
role. The parent company could lower prices in case of nancial problems in order to increase the prots of the subsidiary, giving a positive
2

external sign in the stock market.

Empirical evidence at a rm level nds also non positive eects of FDI
on total factor productivity of the local rms in the same sector in LDCs .
In a sample of 4000 venezuelan rms over the period 1976 to 1989, Aitken
and Harrison (1999) studies whether foreign equity participation in a
plant and in the sector aects total factor productivity at a plant level.
They nd no evidence of positive spillovers across local competitors but
they observe increases in productivity in the rm receiving the foreign
investment, although this result only holds for small plants. Interestingly
to control for endogeneity they allow for lags up to 8 years nding that
the eects increases along time. A similar study was carried out by
Haddad and Harrison (1993) over moroccan plants. in this case they
nd that in industries were the presence of FDI was higher the dispersion
between total factor productivities had been reduced but the authors nd
no empirical evidence about positive spillovers.
However the latter empirical evidence could have some problems.
These are related to the fact that in the presence of increasing returns
and highly dierentiated industries changes in market structure will affect total factor productivity estimations. The standard theory of multinational rms (see Markusen (2002) for a survey) relies deeply on the
existence of xed costs of entry in each market in terms of setting a
plant and creating a new variety product. Then the rm can exploit
this variety across dierent destinations either by setting a new plant
or by exporting. This theory has been found to being consistent with
stylized facts on multinational rms, (Brainard, 1997)). Other studies
(Markusen, 1995) report that multinationalsoften bring new and usually
complex products to the host country. In this theory the existence of
multinational rms is a consequence of the existence of market power,
and the entry of foreign multinationals will largerly aect the local market structure. Under increasing returns to scale and high dierentiation, the estimation of total factor productivities at an industry level
can underestimate the impact of the technology transfer proccess due to
changes in market structure.
Under increasing returns, the entry of the multinational rm in the
local economy would lead to an increase in competition and a decrease
in rms market share of the local incumbents, what it will redude total factor productivity estimations. Because the new technologies takes
time to be diused to the local rms, likely these eects will predominate at the earlier periods of the entry of the multinational. Total factor
productivity measures will be relying more on changes in market struc3

ture rather than changes in technology. Aitken and Harrison (1999) try
to control for these eects by estimating the equation allowing for lags
up to seven years but they nd the same eects and even larger. Still
however, there is a place for observing negative total eects, induced by
changes in market share when in fact there has been a real transfer of
knowledge and local rms are in fact working with a better technology
and they are more productive.
The aim of the project is to supply and alternative and more adequate measure from technological spillovers and to estimate what it is the
scope for technological spillovers as long as the determinants governing
this relationship. In concrete we will answer to the following questions:
What is the impact of FDI in the technology diusion from the home
country to the host country? What are the cross-country characteristics determining this relationship? In order todo this, our empirical
estimations will be based on a technology transfer index built on data
on patent and patent citations. The advantages of using patent data
or patent citations, lies on the fact that these measures are pure measures of innovative activity and therefore are not subject to changes on
institutional environment or market structure. However, they are also
considered to be noisy signals of innovation and diusion activity and
we will elaborate on the disadvantages of using these measures in the
next section.
We will estimate the technology transfer made by US MNEs to a
set of eight particular countries over the period (1983-1997). The set of
particular countries, was selected under criteria of data availability and
signicant importance of US foreign direct invesments in these countries.
On the one hand, we focus on the South East Asian economies, Japan,
Taiwan, Singapore, Korea, and on the oher hand we focus on the Latin
american economies, Mexico, Brazil, Argentina, Venezuela. These countries were considered because they were important recipients of american
inows during the 80s.and while the South East Asian economies were
considered to be successful in taking advantage of MNEs to create their
own particular industries the second ones appear not to have the same
success.
In section 2 we will describe the patent citations as a source of technology transfer measure and its disadvantages, in section 3 we will discuss how we construct our dependent variable, the technology transfer
index, and possible disadvantages from using it. In section 4 we will
describe the estimation method and we will provide some empirical estimations. On section 5 we will conclude.

Data measurement

Measuring technology diusion has been long recognized as a di cult

task. Multinationals can diuse dierent kind of technologies embodied
in new physical capital goods, (new technologies that for any reason were
not adopted previously) and knowledge developed by the multinational
in dierent ways and that it determines its competitive advantage in international markets. Since the adoption of new physical capital goods is
not restricted across frontiers and can be done through dierent channels
we will focus on the transfer of knowledge.
As we saw previously dierent measures of the output of the technology diusion can be considered. The most common is to simply look at
total factor productivity, the traditional Solow residual. But since the
multinational rm is usually placed in industries with high increasing
returns and high degree of dierentiation, and the entry of the multinational usually leads to important changes in the local market structure,
total factor productivity seems to be not a very adequate measure. A
recent measure in the literature of intenational technology diusion and
which is also going to be the focus of our paper is patent citations.
A patent A cites another patent B when the knowledge embodied in
patent B has been used in the development of the product A. Therefore,
patent citations is a pure measure of the transmission of knowledge because when the patent B cites the patent A, the knowledge contained
in patent A has been absorved by the developers of patent B. Fogarty,
Trajtemberg and Jae (2000) have carried out a survey over inventors
to whom they were asked about the degree of familiarity of patents in
a sample in which cited patents were mixed with some placebo patents
(not cited really by the inventors) and they were also asked in which circumstances they know. They conclude that at least 50% of the patent
citations made are really technology ows.
As outlined by Jae et al. (1993) it is the patent examiner, who is
supposed to be an expert in the techological area who determines the
nal number of patent citations, although the inventor has the legal duty
to disclose any knowledge of the prior art it has been used during the
development of the proccess. When the patent arrives to the patent examiner, he analyses the dierent components of the patent and searches
in the prior art if part of the knowledge the inventor is claiming has been
developed earlier. In order to identify potential problems of measurement we need to analyse rst what are the determinants of the patent
citations. In principle rms have the incentive not to cite because it
5

limits the scope of originality of its patent and therefore the scope of the
claims they are able to obtain. Since it is the patent examiner who nally
decides what patents to include or not, the incentives of private rms to
cite will not generate a big bias. As recognized by Jae et al. (1999)
the intentsity of patent citations can vary as long as the practises of the
patent examiner varies. Time-variation is related to dierent factors, the
fact that the number of potential citations varies along time, the fact
that legislation also varies along time etc... For example, the USPTO
patent citations increases sharply by the early 80s. The fact that patent
examiners start to have access to a computerized database during these
years and therefore to be able to identify patents easily could explain
this. All of these methodological problemas are well-known in the literature and Jae et al. (1999) describe several econometric methods to
control for them. We will discuss the approach we follow in this paper
in the next section.
A particular disadvantage of this measure for our particular inteterests is the fact that we take a very little proportion of the quantity of
knowledge transferred. In particular we focus on the quantity of knowledge transferrred by the multinationl which has two properties, rst is
codiable, and second it has been used to produce new knowledge. Tacit
knowledge, or knowledge it can be transmitted by face to face communication and therefore uncodiable, has been discussed in the literature
but non empirical study has tried to measure its importance because of
data availability. Uncodiable knowledge, by denition, is the knowledge that it can not be transmitted along formal channels and therefore
can not appear in formal sources of knowledge. However, we can expect
that most of this uncodiable knowledge goes hand in hand with the
transmission of formal knowledge ows (Almeida and Kogut (1999)),
Verspagen and Shoenmakers (2000)).
The fact that the knowledge must lead to the creation of a new
patent may be a more controversial issue. Although, under the existence
of positive spillovers our measure is more reliable because the stock of
knowledge transmitted gives as a result a new product. Still there can
be cases in which the multinational has transferred the knowledge to
the subsidiary but the knowledge has not been used to the creation of a
new patent. We could have productivity increases due to the technology
transfer but more relying on the increase in the technological knowledge
used in a particular production proccess and increase e ciency without
creating new knowledge. The fact that industrialized proccesses are
usually based more on imitation than on local innovation could lead
our data to report less technology transfer when in fact the knowledge
6

transferred by the multinational has been very big. However, a great

part of imitation strategies do not exclude from patenting and in fact,
most of the imitation practises nish with patents which slightly diers
from the original patents (dierentiation strategies). If this is true a
high proportion of this knowledge will be accounted in our particular
measure of technology transfer. On the other hand, since we derive
positive technological spillovers this would not be a problem for us.
The other most important caveat from the paper is that we will be
focus on the data available from the USPTO (US patent o ce). In
particular we will wonder how many citations to american rms have
made patents granted by the USPTO to foreign inventors. In a future
extension we will consider also patents granted by the EPTO (European
patent o ce) which have connections with national patent o ces of 19
european countries. A common practise in the literature consists on
focusing in only one patent o ce because patent o ces could have very
dierent practises and these to evolutionate very dierent across time.
However, it is easy to account for these eects by including xed eects
by patent o ce under the assumption to be constant along time. Data
les from the EPTO o ce are not available at the best fo my knowledge,
so these cannot be included. We are conscious of not reporting the whole
sample of patents, but those who decide to patent in the US. But, since
this is a common element for every country, this will not aect to our
estimates.

Data description

In order to measure technology transfer we rely on patent citations made

by foreign patents granted by the USPTO over the period 1983-1998.
However the number of citations per se cannot be considered as a measure of technology transfer since the number of citations made to foreign
patents could vary also due to institutional factors not related to the
technology transfer proccess. A good example is given by the huge increase in citations observed from 1982. During the 80s the USPTO relax
the criteria to grant patents. In addition, the database was computerized allowing for a better access to the patent examiners to look for
potential citations. As a consequence the number of citations increases
enormously due to the increase in the patent database and better access
to the stock of patents granted.
In order to deal with these problems, we will follow, what it is traditionally known in the literature as xed eects approach, which assumes
7

that the source of variation in the number of citations across time is

not caused by real movements on innovation or technology transfer, but
they are caused by institutional factors. Then the strategy consists on
removing this eect by dividing the number of citations made by the
total of citations made by patents of the same group. In this rst approximation, in which we dont distinguish across sectors, this would be
equivalent to consider the ratio:
Ctust
Ct
where Ctus , indicates the number of citations made to the US patents
and Ct ; indicates the total number of citations made by a particular
country. Notice that time-xed eects and country xed eects related
to citation activity are eliminated. The second approach which has been
called the estimation approach consists on trying to estimate the potential sources of variation, by imposing certain assumptions, and trying
to estimate the distribution of citations received of a certain group of
patents according to dierent factors. We will follow the xed eect
approach.
However, the previous measure could lead to complicated cases in
which the technology transfer could be underestimated. Consider the
following case: A MNE spreads the knowledge about the patents C, D,
across two countries A and B. As a result, in country A, local companies
patent E which is based in C and D. However, in country B this technology transfer gives as a result 2 patents, patent F based on C and patent
G based on D. Our technology transfer measure would give as a result
two identical indexes for the two countries,assuming these to be also the
total number of citations made. However, although the quantity of technology diused was the same, the number of patents created in country
B was higher than in country A. We would like to control for this, and
following Criscuolo (2002) we correct our measure of technology transfer
by:
Ctust
Ptus
Ct
where Ptus ; indicates the number of patents citing to the US. In order
to remove the eect of the rise in patents in country i; we will include
in our estimation the total number of patents applied in country i in
year t: Therefore the new index will move not only when there are more
citations but also when the number of patents citing the US is higher.1
techdif ft =

Notice that this measure assumes that more patents is better. We should adjust

In order to answer our two initial questions we need to control for

other channels of international spillovers. In this early version of the
model, we particularly deal with two competing channels, international
trade, and human capital.
Data on FDI was relied on statistics provided by the BEA and published on the SCB on a quarterly and yearly basis. From the data on
US multinational rms, this is the database with the best quality data,
at the best of my knowledge. In addition, dierent measures of FDI
operations at an industry level are provided. We are conscious on the
critique on Xu (2000) on the imperfect measure of technology transfer
made by MNEs at an input level when using FDI inows. However it
is not clear whether the dierent terms included in FDI inows do not
account for technology transfer. Data on FDI inows computed by the
BEA include, for example, equity investments, that is, ows destinied to
the acquisition of the new existing local rms. In principle these ows
are not directly related with technology transfer activities at all, but
recent theory of multinationals recognizes that investment in equity can
be also interpreted as both, a signal of the interest of the foreign rm
in investing in this rm and a real measure of the power of the foreign
rm in the decision-taking proccess of the subsidiary rm and therefore
in the ability of carrying out investments of technology transfer.
The traditional theory on multinational rms identies the degree of
ownership as one important factor determining the quantity of technology transferred, since the degree of ownership represents the power of
the multinational to take decissions within the rm. The theory suggests
that it is the degree of ownership rather than the quantity of inows the
measure to be considered for FDI activities. Unfortunately data on equity shares was not available. In a future version we will also control for
these eects.
In principle the level of human capital can play an important role on
the technology diusion since it can facilitates the absortion of foreign
technology However human capital can also play an important role on
the technology diusion since it can facilitates the absortion of foreign
technology. However human capital can also play an important role in
the degree in which local rms could take advantage of the technological spillovers generated by the parent rm, in the case of FDI, or the
degree in which rms can use reverse engineering, the common practise
the variable Ptus by a weighted index in which each patent weight is the ratio of
citations received over the average citation received from a patent of its cohort. We
wil check this possibility in the future.

of technological spillovers through trade. Data on human capital was

taken from the Barro-Lee data set on international schooling comparisons. Among the dierent indicators provided in the dataset we choose
the average years of secondary schooling, since this is the measure mostly
used in cross-country regressions due to the high correlation found between this measure and the growth rate of output. On the other hand it
seems also plausible to think that a higher level of formal skills can be
needed for the technology transfer concept we are using in the model.
International trade has been long identied as a channel of potential technological spillovers. Since FDI can potentially be correlated
with internatinal trade activities, a good measure for international trade
operations is required. We will use the degree of openness measured
by Summer-Herston for the Penn-World table at constant prices for the
benchmark year. Notice that by using constnat prices we will account for
changes in quantities exported and imported isolating price eects. Since
we are interested in controlling for international technological spillovers
due to export and import activities we will not deal with recent measures
about trade policy.

Econometric model and econometric results

A multivariate analysis could be appropiated to generate the estimations,

but a problem of potential omitted variables could generate e ciency or
biasedness, if these variables are correlated with the regressors. Empirical studies on the avor of Jae and Zu (2001) or Branstetter (2000)
have focused on the proximity technology as an important variable determining our technology transfer measure. It seems plausible to think
that if the two countries are quite closer in technology it is more common that they cite each other, even if there is no technology diusion
playing a role. On the other hand important institutional measures as
the scope of property rights in the host country could aect indirectly
the innvation eort of the local rms, aecting the number of patents
and therefore the estimations of the regressors. However these factors
could be assumed to be constant along the period we study. Under these
assumptions it is easy to control for the heterogeneity of the dierent
countries by including country xed eects in a multivariate analysis
model.
Whenever the xed eects approach technique has been used (Branstetter (2000), Criscuolo (2001)), the equation purposed to estimate the
technology diusion proccess is:
10

Obs. 112
Count obs:
14
Ln Patents
Trade
FDI
Hus

FIXED EFFECTS OLS

(Regressors in current
level)
Coeff.
t-value
0.8154
13.91
(0.00)
0.0053
2.57
(0.012)
0.00580
1.37
(0.125)
0.0699
0.55
(0.580)

FIXED EFFECTS OLS

(Regressors lagged 1)

FIXED EFFECTS OLS

(Regressors lagged 2)

Coeff.
0.8607

Coeffic.
0.6814

0.0003
0.01054
0.02347

t-value
15.33
(0.00)
0.16
(0.873)
2.70
(0.0008)
0.21
(0.835)

0.0001
0.01505
0.5681

t-value
8.63
(0.00)
0.03
(0.4761)
2.17
(0.033)
3.41
(0.0001)

Figure 1

techdif ft =

pit e

1 F DIT + 2 T RADET + 3 HUT

eit

where i are theparameters controlling for xed eects, pit are the
number of patents granted to the country i in the USPTO, and F DIt; T RADEt ; HU t;
are respectively our measures of FDI, trade openness and human capital.
This equation can be easily estimated by ordinary least squares by
taking logs:

lntechdif ft =

+ pit +

1 lnF DIt

2 lnT RADEt

3 lnHUt

+ uit

where uit = lneit

The results are reported in Figure 1, (p-values are given below in
parenthesis). As it can be seen the relationship is almost explained by
the control variable, the number of patents. The variable FDI and human
capital are both non-signicant neither at 5 or 10% level. However, this
result can be expected, since the technology diusion proccess as it was
dened previously takes some time in the economy. Remember that not
only the technology needs to be diused but also the technology needs
to be enough absorved by the local rms to be able to generate a new
proccess or a new product. It is reasonable to think that this proccess
will take more than one year.
As interesting point to notice is that trade is statistically signicant
at 5% level. We should be cautious on taking any further conclusion
11

of this result because this coe cient is also expected to be biased due
to endogeneity prolems. An economy with a higher level of technology
transfer could improve its competitive position in foreign markets and
this could aect the level of exports aecting the degree of openness
measure. In order to deal with endogeneity problems we will follow the
tradition on the literature and we will use trade lags as instruments.
Since economic theory in principle is not able to determine which
lag should be included, we try our estimations using dierent lags. It
turns out that FDI was positive and signicant dierent from zero in all
lags up to the lag 3, however trade appears not to be signicant across
the dierent lags. Our estimations reports that FDI acts as a channel
of international technological spillovers whenever trade not. This is a
very shocking result, basically it means that no technological spillovers
can be derived from international trade. Human capital measured as
average years of secondary schooling turns out to have a positive impact on technology transfer. In principle the coe cient is quite large as
compared with the other channels of technology diusion but this is also
due to the units in which they are measure. The data on human capital are measured in average years of schooling, constructed multiplying
the number of years the secondary shooling level takes in a particular
country by the proportion of population over 25 which has a secondary
degree as the highest educational level. An increase in one year in this
measure represents a great change.
So far, we answer one of the two questions. Controlling for dierent
channels, we nd that FDI acts as a vehicle for international technological spillovers. In order to answer the question about what kind of
country characteristics could determine the degree ofspillovers we are
going to include interaction terms with what we consider are the relevant characteristics. In this preliminar exercise we are going to include
the stock of human capital as a possible determinant. Previous studies
on aggregate data found that FDI generates technological spillovers but
only when the stock of human capital of the economy is above a certain
period. We also wonder about whether this result is reported in our
estimations. Further research will include data on the quality of institutions, identifying what kind of institutions are more likely to inuence
the generation of spillovers.
Including interaction terms, we also nd that the impact of FDI in the
technology diusion phenomena is non trivial. Human capital reinforce
the eect of the entry of multinationals in the proccess of technology
diusion. However previous estimations found that there is a necessary
threshold of human capital needed in order the spillovers to occur. In our
12

Obs. 112
Country
Obs. 14

Ln
patents
Trade

RANDOM EFFECTS
OLS
(Regressors lagged 2)

FIXED EFFECTS OLS

(Regressors lagged 2)

Coeffic.
0.8676

Coeffic.
0.63627

-0.0005

FDI

0.01787

Hus

0.1636

FDI hus

t-value
26.98
(0.00)
-0.96
(0.337)
2.74
(0.006)
1.88
(0.06)

0.009
-0.0208
0.38421
0.0023182

Trade
hus

t-value
8.18
(0.00)
0.27
(0.191)
-1.48
(0.142)
2.22
(0.029)
2.84
(0.005)

FIXED EFFECTS
OLS
(Regressors lagged
2)
Coeffic. t-value
0.7041
9.47
(0.00)
-0.1382 -2.86
(0.005)
-0.76
0.00355 (0.198)
0.0589
0.33
(0.744)
0.0131
1.67
(0.098)
0.0043
4.02
(0.00)

Figure 2

estimations this threshold is not needed. FDI always generate technological spillovers, but the scope of these technological spilllovers it will be
determined by the stock of human capital existing in the economy. Although the coe cient accompanying FDI is negative, in our estimations
this is statistically non signicantly dierent from zero. By correcting
possible measurement errors due to the use of total factor productivity as
a proxy for technology diusion we get a negative but non-signicantly
dierent from zero coe cient.
Fixed eects estimation could be a good approach if the variables behind the xed eects, could be correlated with the regressors. However,
this estimator is not e cient because it can not explote the variability
between countries. Although these estimators turn out to be consistent,
the lack of e ciency could lead to some problems in inference analysis.
Random eets models can correct for e ciency problems. In table 2
we run the random eects model for the independent variables lagged
two periods. It turns out that the coe cients are pretty similar but the
human capital variable is not signicant at 10% level.
Previously to enter in a discussion to whether this change in the human capital coe cient is important or not, we apply the Hausman test
for random eects in order to check for the consistency of the random
eects estimator. Under the null hypothesis, the random eects estimator is consistent and e cient, while under the alternative, the random
13

eects estimator still would be e cient but the consistency property

fails. Implementing this test we nd that the hypothesis of consistency
of random eects estimation cannot be rejected at a 5% level. Therefore, random eects estimator should be used because it corrects for
heteroskedasticity problems due to country heterogeneity.
Since random eects model presents no evidence about positive relationship between human capital and the level of technology diused,
I allow for a broader specication where an interaction eect with the
variable FDI is introduced. The relationship found previously holds.
FDI alone does not have any impact on technology dusion in the host
country. The relationship between both FDI and the stock of human
capital available in the economy justies the existence of technological
spillovers due to FDI.
Traditional literature on international technology diusion (Keller,
1998), has also suggested the existence of an interaction eect between
the stock of human capital available in the host country and the degree of technological spillovers due to international trade. The reverse
engineering proccess in which spillovers through trade are commonly
identied, depends clearly on the ability of local scientists to disclose
the knowledge embodied in the machine. Therefore an interaction term
was included to control for this eect but it turns out that while these
eects where highly signicant, the coe cients associated with human
capital, foreign direct investment it turns out to be insignicant. The
regressors correlation matrix was checked in order to identify possibly
problems of collinearity since it is quite plausible that there is a high
correlation between the interaction terms and the individual regressors.
We nd that the correlation between trade and the interaction regressors. We nd that the correlation between trade and the interaction
term is 0.9, while the analogous coe cient for FDI and the interaction
term was that 0.8510. High correlation between the regressors as long
as the small number of observations could explain the non-signicance
of the rest of the coe cients of the table.

Conclusion

Empirical studies on the existence of technological spillovers derived from

the multinational activity fails in nding positive eects in LDCs both
at aggregate level and at a rm level. The use of a non-pure measure
of technological activity based on patent citations could explain these
results. By taking a more direct measure of technological activiy based
14

on patent citations, we explore whether the entry of foreign inows have

had an impact on the proccess of technology diusion between the home
and the host country. Our estimates suggests than the entry of foreign
inows has a positive eect on the technology diusion proccess and that
this eect is non trivial. Contrary to previous ndings, our paper nd
that no threshold level of human capital is necessary to derive positive
spillovers from foreign inows but the magnitude of these spillovers could
be highly determined by the stock of human capital in the host country.
Dierent lines of the research can be followed.An interesting determinant of the scope of technological spillovers could be the institutional
level of the host country. Good institutions in terms of property rights,
and more directly related to FDI like the expropiation risk, or the extent
to what licensing contracts can protect foreign investments could lead
the multinational to invest in transferring more new technologies. Data
constructed by Knack and Keefer (1995) for the institutional country
risk guide are between the best data on institutional quality. The dierent measures on institutions and the indexes that this agency builds on
these institutional measures are quite often consulted by multinational
rms to evaluate their investment projects. Therefore this data source
is an unvaluable source for our particular research. However these data
are not publicly available. However we will include alternative indexes
in brief.
Dierent attempts to increase the number of observations will be
carried out. Data on updated patent citations was got and it allows to
increase the sample until 2002. This would mean 4 observations more
per country which clearly will improve our inference analysis. On the
other hand the possibility of increases the sample by obtaining disaggregate data at a sectorial level would increase the number of observations
per country in a considerably manner. The xed eects approach described in Jae, Hall and Trajtenberg (2001) will allow to construct a
measure of technology diusion that controls for variation across paractises in dierent sectors, and the coe cients for data on human capital,
or institutions, will be perfectly identied because including xed eects
by sector will not be necessary. However, we can have problems with
these measures due to the small variation that they present both a t a
sectoria level (which it does not vary) and a year level.

15

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