The interconnection between fiscal policy and foreign direct investment with R&D: Insights from East Asian countries

Abstract

As a technological powerhouse, Asia should not be overlooked. The region has been responsible for 87% of patent filings, 43% of startup investment, 51% of expenditures on research and development, and 52% of the global growth in tech company revenues during the past ten years. Within this framework, the current paper investigates the impact of fiscal policy and FDI on research and development in East Asian countries during the last 20 years. It further analyses the direction and shocks of these impacts. The methodological framework included theories of public policy and R&D management, the concept of absorptive capacity, etc. The database includes fiscal policy, FDI, domestic credit, and R&D data for 2000–2020. As a result, the paper adopted Autoregressive Distributed Lag (ARDL) and Granger causality tests to capture the short-run and long-run dynamic relationship among the variables. Next, we utilized Fully Modified Ordinary Least Square (FMOLS) and Dynamic Ordinary Least Square (DOLS) models to capture the cointegration between fiscal policy, FDI, domestic credit, and R&D. In light of this, the research revealed that the region’s fiscal policy and FDI outflows had a negative impact on the spending on R&D. Conversely, the results showed that FDI inflows and domestic loans provided to the private sector had a large favourable influence on research and development. It is also crucial to emphasize that the ARDL model produced results that were equivalent to the FMOLS and DOLS. Lastly, the Granger causality demonstrated a one-way causal relationship between fiscal policy and research and development. The study will help policymakers on how to promote R&D and enhance a country’s competitiveness in the global economy by paying enough attention to their fiscal policy. It will also assist policymakers to develop strategies to attract FDI that can benefit their R&D sector.