Innovation and FDI: Applying Random Parameters Methods to KIS Data

According to the “FDI-as-market-discipline” hypothesis, inward FDI acts as a mechanism of change in market structure affecting innovative activities of domestic firms. We used panel KIS data for testing this hypothesis. Binary probit estimation shows that, in contrast to the German case of Bertschek (1995), FDI is insignificant in Korean case for explaining product innovation. This result maybe comes from the fact that the industries in Korea are more monopolistic or oligopolistic than those of Germany. Using panel data, we tried random parameter estimation using matrix weighted average of GLS and OLS. The result shows different estimates from cross-section outcome and panel estimation with parameter homogeneity, so we can infer large parameter heterogeneity across firms. But, interpretation for FDI variable is similar across panel and cross-section estimation.