Market Access and Technology Adoption in the Presence of FDI∗

This paper theoretically investigates whether improved access to the domestic market speeds up new technology adoption by a foreign firm adopts new technology. In our model, foreign firms choose between exporting and foreign direct investment (FDI) to serve the domestic market. In the absence of other foreign firms, a reduction in the fixed cost of FDI promotes and accelerates technology adoption by the foreign firm, while tariff-free access to the domestic market induces technology adoption most rapidly and realizes maximum consumer welfare. If two firms compete in the domestic market and choose the time for technology adoptions, a reduction in the fixed cost of FDI or the elimination of the trade cost may deter or delay technology adoption. Technology adoption can be quickest and consumer welfare greatest when the fixed cost of FDI and the tariff are neither very high nor very low. Preferential liberalization of FDI promotes the technology adoption of the targeted firm but it may not help consumers because it discourages technology adoption of the non-targeted firm. These results suggest that improved access to the domestic market does not necessarily contribute to the technological upgrading of foreign firms.