How do Local Firms Respond to Foreign Direct Investment through International R&D?

This study unravels the mechanisms through which horizontal FDI affects the strategic responses of local firms. We differentiate an intangibility gap (difference in intangible asset levels) from a productivity gap (difference in productivity levels) and contrast their effects. We argue that productivity gap has a U-shaped effect, whereas intangibility gap has an inverted U-shaped influence on the internal R&D intensity of local firms. Moreover, we introduce the export intensity of local firms as a boundary condition under which the proposed relationships become attenuated. Using a sample of manufacturing firms in China, we find evidence that supports most of our predictions.