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R&D, FDI, and Efficiencies of Small and Medium Sized Firms

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 researches. Our theoretical proposition suggests that unless the substitution effect dominates the magnification effect, FDI will induce more R&D activities and hence will improve technical efficiency. We use 1989-1996 panel data of FDI by Taiwan’s SMEs to test the proposition. Empirical results show that FDI reinforces the marginal benefit of R&D and that the R&D expenditure of multinational SMEs is far above that for domestic SMEs, supporting the theoretical proposition. Two other major findings are: (1) R&D expenditures significantly improve firms’ technical efficiencies. (2) For those Taiwanese SMEs investing in mainland China, R&D and FDI are found to be substitutes because the substitution effect dominates the magnification effect.