INNOVATION AND FOREIGN INVESTMENT IN A DYNAMIC OLIGOPOLY

The paper examines the impact of the firms' choice between export and foreign direct investment on the incentive to innovate, as well as the effects of innovation and technological spillovers on the firms' international strategy and on its changes over time. The innovation process is analysed in the context of a two-country imperfect competition market, modelled as an infinite horizon, non-linear dynamic game, for which Markov perfect equilibria are computed. Where the models are not tractable by analytical techniques, equilibria are calculated by using a computational procedure based on a policy iteration method.