We analyse a two-country model of Foreign Direct Investment (FDI) and R&Doffshoring. In the basic model, two firms, each of which is originally situated in only one of the two countries, first decide whether to build a plant abroad. Then,they decide whether to relocate R&D activities offshore. Finally, they engage in product-market competition. In this model, FDI liberalization causes a relocation of R&D activities if intrafirm communication is sufficiently well developed, external spillovers are substantial, competition is not too strong and foreign markets are not too small. Surprisingly, such a relocation of R&D activities usually nevertheless increases domestic welfare
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