The literature on foreign direct investment (FDI) suggests that technological spillovers from multinational firms to local firms are, at least potentially, significant (Blomström and Kokko, 1998). Typical channels for spillovers associated with the activities of multinational enterprises (MNEs) include backward and forward linkages between foreign affiliates and local firms, demonstration ... [Show full abstract] effects, and labour turnover in the host country. Audretsch and Feldman (1996), Bransetter (2001) and Keller (2001) report that such spillovers are primarily local in nature — that is, intranational, rather than international. Hence, technological spillovers can affect a firm’s mode of entry into a foreign market. Analyses of entry choice in the presence of spillovers include Ethier (1984), Ethier and Markusen (1996), Siotis (1999), Fosfuri (2000), Fosfuri, Motta and Ronde (2001) and Markusen (2001). One insight from the existing literature is that spillovers reduce the incentive for technological leaders to invest in foreign markets. Typically, the literature suggests that, in order to limit spillovers, the MNE may be more inclined to choose exports or perhaps to expose its foreign competitors to a less advanced version of the MNE’s technology.