Foreign direct investment and technological upgrading in CPTPP economies: digital infrastructure as a conditioning factor in innovation diffusion

Abstract

Foreign direct investment (FDI) is widely recognized as an important channel for technology transfer and technological upgrading, but these benefits are not automatic. This study examines whether digital infrastructure conditions the relationship between FDI and technological upgrading across 11 Comprehensive and Progressive Agreement for Trans-Pacific (CPTPP) economies during 2009–2023. Technological upgrading is operationalized as high-technology exports as a share of manufactured exports, while digital infrastructure is proxied by internet penetration. Using two-way fixed effects with Driscoll–Kraay standard errors, the analysis evaluates both direct and interaction effects. The direct FDI coefficient is positive but statistically insignificant in the baseline model (β = 0.168, SE = 0.167, p > 0.10), whereas the FDI × Internet interaction is positive and significant (β = 0.024, SE = 0.011, p < 0.05). In scale terms, a 10-percentage-point increase in internet penetration shifts the estimated FDI slope upward by about 0.24 percentage points, although level-specific marginal effects remain imprecisely estimated across the observed internet range. Exploratory sub-sample estimates suggest different coefficient patterns between advanced and emerging CPTPP members, but the small group sizes warrant caution. The findings support a conditional rather than automatic view of FDI-led upgrading and indicate that policy should combine investment attraction with reliable digital connectivity, SME digital adoption, workforce digital skills, supplier-development programs and cross-border digital interoperability. This study shows that attracting foreign direct investment alone may not be sufficient to promote technological upgrading. Using evidence from eleven CPTPP economies, it demonstrates that the relationship between FDI and the technological composition of manufactured exports becomes more favourable as digital connectivity improves. The findings highlight digital infrastructure as an important part of the absorptive environment through which economies can access, exchange, and apply knowledge associated with foreign investment. This perspective shifts policy attention from the volume of FDI toward the complementary capabilities that enable host economies to benefit from it. For CPTPP members, the results support combining investment-promotion strategies with reliable digital connectivity, digital skills, supplier development, and stronger linkages between multinational and domestic firms. More broadly, the study offers a policy-relevant framework for understanding why similar levels of foreign investment can generate different technological outcomes across economies with different levels of digital readiness.