UiS Business School Seminar: The Birth of a Multinational: Innovation and Foreign Acquisitions

Abstract

This paper studies firms’ joint decision to innovate and become a multinational. Using a panel data of Spanish firms with detailed information on innovation and international activities we show that innovation is a lumpy and disruptive process: it occurs sporadically and is followed by an immediate drop in productivity. We incorporate this technological feature into a continuous- time stochastic model of the firm, which endogenously decide if and when to expand inter- nationally. Through the lens of this model, we quantify the impact of foreign investment on the innovation decisions at the Headquarter firm, and the transfer of HQ’s productivity to the affiliated foreign unit.