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R&D in foreign affiliates and technology transferred from their parent firms are important potential drivers of productivity in host countries. In this paper, the authors examine the simultaneous impact of local R&D and intra-firm international technology transfer on productivity growth in foreign affiliates. They estimate a dynamic productivity model on a large sample of Japanese manufacturing affiliates worldwide in 1996-1997 and 1999-2000. They find that both affiliate R&D and intra-firm technology transfer contribute to productivity growth, while technology transfer exhibits decreasing marginal returns. The two sources of technology are complements: use of one source of technology increases the marginal impact of the other.
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