Internationalisation of R&D: A Review of Drivers, Impacts, and new Lines of Research

Munich Personal RePEc Archive

Internationalisation of RD: A Review of

Drivers, Impacts, and new Lines of

Research

Dachs, Bernhard

AIT Austrian Institute of Technology

December 2017

Online at

https://mpra.ub.uni-muenchen.de/83367/

I n t e r n a t ion a lisa t ion of R& D : A Re vie w of D r ive r s,

I m pa ct s, a n d ne w Line s of Re se a r ch

Pr e lim in a r y ve r sion

Bernhard Dachs1

This paper review s t he gr ow ing lit erat ure on t he int ernat ionalisat ion of R&D in t he

business sect or. By int ernat ionalisat ion of R&D, t his paper m eans t he fact t hat firm s

conduct r esearch and dev elopm ent at locat ions out side t heir hom e count ries. The surv ey

focuses on t hree issues: first , t he driver s of t he pr ocess at t he count r y, t he sect oral and

t he firm level – w hy fir m s go abroad w it h R&D act ivit ies. Second, evidence on t he effect s

of t he int ernat ionalisat ion of R&D on t he host and hom e count ries of m ult inat ional firm s.

So far, t here is a consensus in t he lit erat ure t hat R&D int ernat ionalisat ion benefit s t he

host count ries. Third, t he paper discusses som e new lines of research on R&D

int ernat ionalisat ion relat ed t o t he r ole of indirect funding for R&D, R&D

int ernat ionalisat ion in ser vices and m ult inat ionals from em erging econom ies.

Ke y w or ds: I nt ernat ionalisat ion, R&D, innovat ion, for eign- ow ned firm s, out sour cing

1

1 .

I n t r odu ct ion

For eign- ow ned firm s ar e am ong t he t op per for m er s of r esear ch and dev elopm ent ( R&D)

in m any count ries. I n 2013, for eign- ow ned firm s account ed for m or e t han 20% of

business R&D in France, Germ any, t he Net herlands, and I t aly; bet w een 30% and 50% in

Spain, Poland, and Sw eden; and for m or e t han 50% in t he Unit ed Kingdom , Aust ria,

Belgium , t he Czech Republic, Hungary, Slovakia and I r eland ( I ver sen et al. 2016) . Thus,

for eign- ow ned firm s have a consider able influence on t he t echnological capabilit ies of

count ries, w hich in t urn det erm ine com pet it iveness t o a considerable degr ee. This m akes

t he int ernat ionalisat ion of R&D a k ey dim ension of science, innovat ion and t echnology

policy.

This paper review s t he grow ing lit erat ure on R&D int ernat ionalisat ion in t he business

sect or . By int ernat ionalisat ion of R&D, t his paper m eans t he fact t hat firm s conduct

research and dev elopm ent at locat ions out side t heir hom e count ries. The surv ey focuses

on t hree issues: first , t he drivers of t he pr ocess – w hy firm s go abroad w it h R&D

act ivit ies. Second, t he effect s of t he int ernat ionalisat ion of R&D on t he host and hom e

count ries of m ult inat ional firm s. Third, I w ill discuss som e new lines of r esearch on R&D

int ernat ionalisat ion.

The surv ey has t hree im port ant lim it at ions. First , it does not pr esent em pirical evidence

on R&D int ernat ionalisat ion; readers can refer t o r ecent publicat ions such as I versen et

al. 2016, Dachs, et al. 2014, or OECD 2008a w hich present t his inform at ion in det ail.

Second, t he survey w ill only include t he lit erat ure on t he int ernat ionalisat ion of R&D in

firm s, and leave int ernat ionalisat ion in higher educat ion or public research cent res aside.

Third, t he lit erat ure on for eign direct invest m ent ( FDI ) and m ult inat ional ent erprises is

only included if it relat es t o R&D. I nt ernat ionalisat ion refers t o t he int ernat ionalisat ion of

business R&D t hrough t he r em ainder of t his paper, unless ot herw ise st at ed.

The int ernat ionalisat ion of R&D is a r elat ively young phenom enon, alt hough scient ist s,

know ledge and art efact s have alw ays crossed border s easily in econom ic hist ory . The

early lit erat ure regarded int ernat ionalisat ion of R&D as an unlikely phenom enon, because

of t he st rong linkages of large firm s t o univer sit ies and ot her research organisat ions in

t heir hom e count ries ( Pat el and Pavit t , 1991) . The oldest lit erat ure on t he

int ernat ionalisat ion of R&D dat es back t o t he end of t he 1960s and t he beginning of t he

1970s ( e. g. Dunning 1958; Brash 1966; Safar ian 1966) . Only few art icles and surveys

em erged in t he 1970s ( exam ples ar e Cream er 1976; Ronst adt 1977; Lall 1979) and in

t he 1980s and early 1990s ( Behrm an and Fischer 1980, Cant w ell 1989, Pearce 1992) .

Since t he year 2000, a grow ing body of lit erat ure pr ovides evidence t hat t he

Hat zichronoglou 2008; OECD 2008a; OECD 2008b; OECD 2008c; Shapira et al. 2009,

OECD 2010, Hall 2010, - Alkem ade et al. 2015 and Laurens et al. 2015 see it different ly) .

This lit erat ure is accom panied by a num ber of int ernat ional com parisons of policies

t ow ards R&D int ernat ionalisat ion ( CREST Wor king Group 2007, OECD 2008a, TAFTI E

2009, Schw aag Serger and Wise 2010, OECD 2016a) .

2 .

Se a r ch st r a t e gy

The paper em ploys a ver y sim ple search st rat egy: w e sear ched at Google Scholar for

t hree search t erm s: int ernat ionalisat ion of R&D, offshoring of R&D, and R&D by

foreign-ow ned firm s. Exist ing review art icles such as Narula and Zanfrei ( 2005) , Veugelers

( 2005) , Cant w ell ( 2009) , Hall ( 2010) , or Sant os- Paulino et al. ( 2014) helped in t he

select ion of t hese search t erm s and pr ovided an addit ional source for ident ifying relevant

research. Google Scholar offer s t he advant age t hat it also pr ovides w orking paper s and

ot her art icles not y et published in academ ic j our nals. The surv ey m ainly considers papers

published aft er t he year 2000. The select ion of papers is subj ect ive, because due t o

space const raint s not every paper can ent er t he r eview . I found it m ost im port ant t o

consider papers t hat can help t o ident ify variables and issues helpful for furt her em pirical

research.

3 .

D r iv e r s of R& D I n t er n a t ion a lisa t ion

The benefit s and cost s associat ed w it h t he int ernat ionalisat ion of R&D var y bet w een

firm s, indust ries, r egions or count ries. I t is t her efor e im port ant t o dist inguish bet w een

t hese t hree lev els. I st art w it h a discussion of t he drivers at t he r egional and count ry

level and t hen go t o t he sect oral and firm level.

3 .1

D r iv e r s a t t h e r e gion a l a n d cou n t r y le ve l

The pot ent ial host count ry or host region shapes t he int ernat ionalisat ion decisions of

firm s by pr oviding differ ent incent ives, as w ell as differ ent fram ew or k condit ions t o invest

in R&D. Drivers at t he r egional or count ry level are also im port ant from a policy

per spect ive, because t hey give room for policy int ervent ion t o increase t he locat ional

advant ages of r egions or count ries.

A first im port ant driver at regional or count r y level is econom ic size, m easured by incom e

and m arket size. Size is an im port ant driver, because high incom e and high incom e

grow t h at t ract s FDI ( Ekholm and Midelfart 2004; Blonigen 2005; Jensen 2006;

At hukorala and Kohpaiboon 2010; Hall, 2010) . The im port ance of m ark et size point s t o

t he r elat ionship bet w een R&D and ot her MNE act ivit ies: R&D invest m ent s oft en follow

FDI , and overseas R&D act ivit ies are, in m ost cases, an ext ension of exist ing over seas

Archibugi and I am m arino 1999, De Back er et al. 2016) . Mor eov er , firm s m ay find it

easier t o cover t he cost of R&D in a count ry w it h a large m ark et w her e t hey expect larger

absolut e r ev enues t han in a count ry w it h a sm all dom est ic m ark et , ev en if w ages are

considerably low er .

Anot her im port ant at t ract or of R&D of MNEs is a skilled w ork force and t he qualit y of t he

educat ion syst em . I n a surv ey of m ult inat ional firm s, Thur sby and Thursby ( 2006) find

t hat highly qualified R&D personnel is t he m ost im port ant driver for locat ion decisions in

R&D. Tübke et al. ( 2016) com e t o a sim ilar conclusion in a recent sur vey . Ernst ( 2006)

relat es t he success of I ndia and ot her Asian count ries in at t ract ing R&D of foreign MNEs

t o t heir expanding pool of gr aduat es in science and t echnology. Hedge and Hicks ( 2008)

dem onst rat e t hat t he innovat ion act ivit ies of ov er seas US subsidiaries ar e st r ongly

relat ed t o t he scient ific and engineering capabilit ies of t he host count ries.

I n t urn, skills short age and a grow ing dem and for engineers and scient ist s in t he hom e

count ry is oft en a m ot ive for firm s t o go abr oad w it h R&D. Kinkel and Maloca ( 2008) find

t hat capacit y bot t leneck s ar e t he m ost fr equent r eason w hy Germ an firm s m ove R&D t o

locat ions abroad. I n t he r esear ch of Lew in et al. ( 2009) , an em erging short age of high

skilled science and engineering t alent part ially explains t he relocat ion of product

dev elopm ent fr om t he Unit ed St at es t o ot her part s of t he w orld, m ost not ably t o Asian

count ries.

Pot ent ial know ledge spillovers bet w een foreign- ow ned firm s and host count ry

organisat ions are anot her driver for R&D int ernat ionalisat ion. A discussion of spillovers as

an effect of R&D int ernat ionalisat ion is found in t he next chapt er . Spillovers as a

det erm inant for R&D locat ion decisions point t o t he im port ance of t he qualit y of

universit y r esear ch as a driver of R&D int ernat ionalisat ion at t he count ry level ( Belderbos

et al. 2009; Thom son 2013; Siedschlag et al. 2013) . Know ledge spillovers m ay be ev en

m or e relevant at t he regional t han at t he count ry level, because spillovers dim inish wit h

dist ance bet w een sender and r eceiver ( Jaffe et al. 1993; Breschi and Lissoni 2001) . As a

consequence, firm s w hich w ant t o ut ilize such localised know ledge spillovers have t o be

present w here t hey occur, and innovat ive act ivit y t ends t o clust er locally in indust ries

w it h a high level of spillovers ( Audr et sch and Feldm an 1996) . This effect is relat ed t o

inst it ut ional or t echnological condit ions, such as t acit ness of t he know ledge base, but

also t o t he exist ence of specialised local or regional labour m ark et s ( see t he surv ey of

Breschi and Lissoni 2001) .

An exam ple of t he im port ance of spillover s give Siedschlag et al. ( 2013) . They show t hat

agglom erat ion econom ies fr om for eign R&D act ivit ies, hum an capit al, proxim it y t o

cent r es of r esear ch ex cellence and t he research and innovat ion capacit y of t he r egion are

evidence for r egional know ledge spillover s by R&D of foreign- ow ned firm s pr esent

Cast ellani and Pieri ( 2013) .

Differ ences in labour cost bet w een t he hom e count ry and locat ions abroad are one of t he

m ost im port ant m ot ives for t he int ernat ionalisat ion of product ion ( Barba Navaret t i and

Venables 2004; Br ennan et al. 2015) . Em pirical evidence t hat differences in t he cost of

R&D personnel are a m aj or driver for t he int ernat ionalisat ion of R&D, how ev er, is w eak.

Survey r esult s as w ell as econom et ric st udies see only a m odest influence of w age

differences in R&D locat ion decisions com pared t o ot her fact or s ( Booz Allen Ham ilt on and

I NSEAD 2006; Thursby and Thursby 2006; Kinkel and Maloca 2008; Belderbos et al.

2009; Tübke et al. 2017) . How ever, cost differ ences m ay becom e im port ant w hen firm s

can choose bet w een t w o locat ions t hat are sim ilar in m any ot her locat ional fact or s ( Booz

Allen Ham ilt on and I NSEAD 2006; Thursby and Thursby 2006; Cincera et al. 2010;

At hukorala and Kohpaiboon 2010) .

Previous r esear ch has also point ed out t hat geographical proxim it y bet w een host and

hom e count ry leads t o higher levels of cross- border R&D invest m ent s ( Guellec and van

Pot t elsberghe de la Pot t erie 2001) . How ev er , t here is also evidence t hat geographic

dist ance m ay play sm aller role for R&D t han for ot her t ypes of int ernat ional act ivit y

( Dachs and Pyka 2010, Cast ellani et al. 2013) . The dist ance effect is oft en explained by

addit ional co- ordinat ion cost , t he cost of t ransfer ring know ledge over dist ance, and a loss

of econom ies of scale and scope w hen R&D becom es m ore decent ralised ( v on Zedt w it z

and Gassm ann 2002; Sanna- Randaccio and Veugelers 2007; Ger sbach and Schm ut zler

2011) . I n addit ion, t he dist ance effect m ay also be explained by cult ural, social and

inst it ut ional fact ors. The int ernat ional business lit erat ure st resses t hat for eign- ow ned

firm s have t o m ast er addit ional inst it ut ional and cult ural barriers in t heir host count ries.

This disadvant age is know n as t he ‘liabilit y of for eignness’ ( Zaheer 1995; Eden and Miller

2004) or t he ‘liabilit y of out sidership’ ( Johanson and Vahlne 2009) . Foreign- ow ned firm s

m ay suffer fr om a lack of m ar ket know ledge and underst anding of cust om er dem ands,

but also a low er degr ee of em beddedness in infor m al net w ork s in t he host count ry ( Lööf

2009) . Disadvant ages from t he liabilit y of foreignness t end t o decrease over t im e, but

m ay ev en exist in long- est ablished affiliat es w it h a local m anagem ent and st aff, because

t he affiliat e is em bedded in int ra- firm net w orks and have t o st ick t o t he rules, norm s and

st andards of t he m ult inat ional group.

The r ole of policy for R&D locat ion decisions of MNEs has been invest igat ed by a num ber

of em pirical st udies ( Cant w ell and Mudam bi 2000; Kum ar 2001; Cant w ell and Piscit ello

2002; Thursby and Thursby 2006; Kinkel and Maloca 2008; De Backer and Hat em 2010;

At hukorala and Kohpaiboon 2010) . Policy inst rum ent s include subsidies for invest m ent s

ch-m aking, provision of infrast ruct ur e, legal support et c. ( OECD 2016a) . Fost ering

int ellect ual propert y right s – alt hough not a t y pical inw ard invest m ent prom ot ion act ivit y

– can also be regarded as an im port ant policy inst rum ent ( Branst et t er et al. 2006;

Thursby and Thur sby 2006; Holm es et al. 2016 on China; Schm iele 2013 is m ore

scept ical) . Mor eov er, w it h t he expansion of Eur opean and US MNEs int o Asia, local

cont ent r equirem ent s in R&D ( m andat ory t echnology t ransfer, m andat ory j oint vent ures,

requirem ent s t o perfor m R&D in t he host count ry) gained som e prom inence as a policy

t ool ( Walsh 2007, Weiss 2016) .

Tw o findings on t he role of policy in R&D int ernat ionalisat ion find a wide consensus in t he

lit erat ure: first , special financial incent ives and a posit ive discrim inat ion of for eign- ow ned

firm s in general are not regarded as an appropriat e inst rum ent t o at t ract for eign R&D.

At hukorala and Kohpaiboon ( 2010) conclude in t heir analysis of overseas R&D act ivit ies

of US firm s t hat ‘t her e is no evidence t o suggest t hat R&D specific incent ives hav e a

significant im pact on int er- count ry differ ences in R&D int ensit y ( of US firm s) w hen

cont r olled for ot her relevant variables’. This does not m ean, how ever, t hat science,

t echnology and innovat ion policy has no role in at t ract ing foreign R&D. Measur es t o

im prove univer sit y educat ion or t o fost er co- operat ion bet w een firm s and universit ies can

considerably shape t he at t ract iveness of locat ions by im proving t he capabilit ies of t he

nat ional innovat ion sy st em s and leveraging R&D effort s of firm s. These m easur es,

how ev er, should be open t o every firm , dom est ically or foreign- ow ned. Siedschlag et al.

( 2013) , for exam ple, show t hat high public R&D expendit ures increase t he probabilit y of

locat ion of R&D act ivit ies by Eur opean m ult inat ional firm s in a part icular r egion.

Second, gov ernm ent s t hat w ant t o at t ract R&D of for eign m ult inat ional firm s should

inst ead focus on t he econom ic fundam ent als and provide polit ical st abilit y, good public

infrast ruct ure, reasonable t ax rat es, a st able legal syst em , and increase t he

em beddedness of for eign- ow ned firm s in t he dom est ic innovat ion syst em ( Cant w ell and

Mudam bi 2000; Narula and Guim ón 2009; Guim ónh 2009; Ascani et al. 2016) . This

reflect s t he finding discussed abov e t hat t he locat ion of R&D oft en depends on t he

locat ion of pr oduct ion, sales or ot her business funct ions of t he firm .

3 .2 D r iv e r s a t t h e se ct or a l le ve l

A second im port ant level for t he analysis of driver s is t he sect or w here t he firm operat es.

Em pirical st udies found huge differ ences bet w een sect ors in t erm s of R&D

int ernat ionalisat ion ( OECD 2008; Dachs et al. 2014) : R&D int ernat ionalisat ion t ends t o

concent rat e in high- t echnology sect ors, such as pharm aceut icals, com put ers, elect ronics,

explain t hese differences. I w ill t herefor e pr esent som e t hought s based on t he innovat ion

econom ics lit erat ure.

Sect ors m at t er for R&D int ernat ionalisat ion in t w o w ays: on t he one hand, R&D int ensive

sect or s hav e a disproport ionat e share on global foreign direct invest m ent ( Mar kusen

1995, p. 172; Bellak 2004) . Hence, t her e is already a bias t ow ards R&D- int ensive sect ors

in underlying FDI decisions. On t he ot her hand, sect ors m at t er because R&D int ensit y

and R&D processes differ considerably bet w een sect ors ( Marsili 2001; Malerba 2005;

Cast ellacci 2007; Peneder 2010) . These int ersect oral differences shape t he R&D

behaviour of firm s t o a considerable degree, including decisions t o locat e R&D abr oad,

leading t o different degr ees of int ernat ionalisat ion at t he sect oral level.

A first im port ant det er m inant at t he indust ry level is t he degree of t acit ness of t he

know ledge base of a sect or . Tacit ness result s from t he fact t hat cognit ive capabilit ies and

abst ract concept s are not easy t o art iculat e explicit ly and t o t ransfer bet w een people

( Cow an et al. 2000) . A know ledge base w hich is highly t acit and bound t o individuals

m ay be an obst acle t o int ernat ionalisat ion, because it m akes know ledge exchange ov er

dist ance cost ly. Tacit ness, how ev er, m ay also be a driver for int ernat ionalisat ion,

because firm s have t o m ov e t o t he place w her e t his know ledge is available w hen it

cannot be t ransferr ed over dist ance.

Second, sect oral know ledge bases also differ in t heir degree of cum ulat iveness, or, in

ot her w ords, in t he degree fut ur e innovat ion success depends on t he know ledge w hich

has been built up in t he past ( Mar sili 2001) . Cum ulat iveness is high in chem icals,

pharm aceut icals, t elecom m unicat ions and elect ronics, but low in m echanical engineering,

food, clot hing, or civil engineering ( Malerba and Orsenigo 1996; Marsili 2001) . A high

degr ee of cum ulat iveness m ay require a high degr ee of specialisat ion in R&D, w hich gives

advant ages t o cent ralised R&D. Cum ulat iveness m ay also pr om ot e R&D cent ralisat ion

w hen st r ong learning effect s lead t o increasing ret urns t o scale in R&D, or w hen t he R&D

process includes econom ies of scope and effect s from cross- fert ilisat ion. Mor eov er,

cum ulat iveness of t he know ledge base m ay also im ply t hat R&D act ivit ies require a

cert ain m inim um scale in order t o be successful.

Third, sect or s also differ in t erm s of appropriabilit y, t he degr ee t o w hich an innovat ion

can be prot ect ed fr om im it at ion ( Cohen et al. 2000; Cohen 2010) . Firm s in sect or s w it h a

low degree of appr opriabilit y, like m any service sect ors, m ay be reluct ant t o

int ernat ionalise R&D because t hey hav e only w eak m eans t o pr ev ent involunt ary

know ledge spillover s.

Fourt h, anot her source for int er- sect oral differences is t he firm ’s net w or k of ext ernal

relat ions w it h suppliers, client s, universit ies, public adm inist rat ion, et c. ( Marsili 2001;

linkages t o basic science, and firm s in t hese indust ries m ay find it useful t o locat e R&D

close t o excellent research universit ies. Belder bos et al. ( 2009) show t hat firm s w it h a

st rong science orient at ion prefer t o locat e R&D in host count ries w it h st rengt hs in

academ ic research. Anot her v ery im port ant locat ional fact or for high R&D int ensive

sect or s is t he fram ew ork for R&D, including int ellect ual propert y right s ( Tübke et al.

2017) . Firm s in ot her sect or s, such as t he aut om ot ive of t he elect r onics indust ry, are

closely connect ed t o suppliers and cust om ers t hrough int ernat ional product ion net w orks.

Ent erprises in t hese sect or s m ay be forced t o int ernat ionalise t heir R&D t o gain m ark et

access, in part icular have developm ent capabilit ies in proxim it y t o key client s. Tübke et

al. ( 2017) show t hat for m edium - and low - t ech sect or s, m ark et access is m ore im port ant

t han a reliable fram ew ork for R&D. The exist ence of lead user s or ot her pot ent ial

co-operat ion part ner s m ay also pose a st r ong incent ive t o locat e R&D in a part icular

count ry .

3 .3 D r ive r s a t t h e fir m le ve l

The t hird relevant level for t he explanat ion of overall pat t erns of R&D int ernat ionalisat ion

is t he firm level. I nt er nat ionalisat ion pat hs of t w o firm s can be com plet ely different –

ev en if t hey operat e in t he sam e r egion and operat e in t he sam e indust ry – w hen t hey

differ in t heir firm charact erist ics ( for exam ple, size, int ernat ionalisat ion experience) , t he

cost s and benefit s t hat arise for t hem fr om int ernat ionalisat ion, and result ing m ot ives

and st rat egies. The int erplay of t hese t hr ee fact ors, t oget her w it h fram ew ork condit ions

from t he count r y, r egional and sect oral lev el, det erm ines t he degr ee of R&D

int ernat ionalisat ion of firm s.

I nt ernat ionalisat ion decisions in R&D ar e closely connect ed w it h int ernat ionalisat ion

decisions in product ion and t he em ergence of global value chains ( t hese ar e discussed in

Am ador and Chabral 2016; Tim m er et al. 2014) . This relat ionship can be explained by

t w o r easons. First , int ernat ionalisat ion in product ion can be a result of superior , firm

-specific asset s. Firm s int ernat ionalise, because t hey w ant t o exploit t hese asset s at

for eign m ark et s via t heir subsidiaries ( Dunning 1973; Mar kusen 1995; Caves 1996

( 1974) ; Markusen 2002) . Dunning ( 1973; 1981) suggest s t hat firm s ex ploit t hese asset s

via FDI and not via export s or licensing because of ow ner ship, locat ion and

int ernalisat ion advant ages associat ed w it h t his m ode of exploit at ion. Thus, firm

het er ogeneit y leads t o self- select ion in t he int ernat ionalisat ion st rat egies of firm s ( Head

and Ries 2003; Helpm an et al. 2004; Helpm an 2006) . Only t he m ost pr oduct ive ( and

t hus innovat ion int ensive) firm s expand t heir operat ions via FDI , w hile less pr oduct ive

firm s choose t o export or ser ve only dom est ic m arket s. How ev er, t he r elat ionship also

exist s in t he ot her direct ion: globally engaged firm s use m ore innovat ive input s and

2010) . I n addit ion, t here is also evidence for a posit ive relat ionship bet w een innovat ion

and export s at t he firm level ( Gr eenhalgh and Taylor 1990; Lachenm aier and Wößm ann

2006; Har ris and Li 2009) .

Second, t her e is a m ut ual relat ionship bet w een R&D and int ernat ional expansion because

t hey ar e bot h driven by t he sam e det erm inant s. Som e firm charact erist ics t hat are

posit ively relat ed t o R&D int ensit y also drive int ernat ionalisat ion ( Arvanit is and

Hollenst ein 2006, Cer r at o 2009) . Dogson and Rot hw ell ( 1994) , Cohen ( 1995, 2010) ,

Kleinknecht and Mohnen ( 2002) or t he OECD ( 2009) have exam ined t he det erm inant s of

R&D and innovat ion in det ail. R&D and R&D int ensit y is, at first , associat ed w it h firm size.

Ther e ar e differ ent advant ages and disadvant ages of sm all and large firm s in t he

innovat ion process, leading t o a U- shaped relat ionship bet w een size and R&D

( Kleinknecht 1989; Cohen 1995) . Regr ession analysis also finds a significant and posit ive

associat ion bet w een firm size and t he int ernat ionalisat ion of R&D ( Arvanit is and

Hollenst ein 2006; Kinkel and Maloca 2008; Schm iele 2012) . R&D is also posit ively relat ed

t o t he int ernal know ledge and capabilit ies of t he firm ( Cohen and Levint hal 1989 and

1990; Teece et al. 1997) . These capabilit ies enable t he firm t o cr eat e new know ledge,

but also absorb know ledge from ext ernal sources.

Besides firm charact erist ics, anot her source of firm het er ogeneit y in t he

int ernat ionalisat ion of R&D are t he cost s of a decent ralised organisat ion of R&D (

Sanna-Randaccio and Veugeler s 2007; Gersbach and Schm ut zler 2011, Belderbos et al. 2013) .

These cost s first com prise t he for egone benefit s of R&D cent ralisat ion, including

econom ies of scale and scope fr om specialisat ion and a t ight er cont r ol ov er cor e

t echnologies of t he firm . Second, addit ional cost s also arise fr om higher co- ordinat ion

effort s and t he cost of t ransfer ring know ledge w it hin t he MNE. Pr oxim it y also facilit at es

co- ordinat ion of R&D act ivit ies w it h ot her part s of t he firm , such as product ion and

m ark et ing, and m ut ual learning bet w een t hese part s. A gr ow ing lit erat ure discusses t he

need of firm s t o co- locat e pr oduct ion and R&D t o enable m ut ual learning effect s ( Ket okivi

and Ali- Yrkkö 2009, Defev er 2012, Alcacer and Delgado 2016) . Loosing such co- locat ion

advant ages w ould be a ham pering fact or for R&D int ernat ionalisat ion. Third, a

concent rat ion of R&D act ivit y in t he hom e count ry is also favoured by various linkages

bet w een t he firm and t he hom e count ry innovat ion syst em . Pat el and Pavit t ( 1999) ,

Narula ( 2002) , or Belderbos et al. 2013 point out t hat firm s ar e st rongly em bedded in

and dependent on t heir hom e count r y innovat ion syst em . The t ies t hat bind firm s t o t heir

hom e count r y include for m al R&D co- operat ions w it h dom est ic universit ies, but also

inform al net w ork s t hat grew from doing business t oget her in t he past . I nform al net w or ks

bet w een firm s m ay also evolve from r ecruit ing st aff from t he sam e universit ies and

considerable cost s on t he firm s, because t hey w ould need t o re- inst all sim ilar linkages

w it h host count ry organisat ions.

Finally, firm charact erist ics and t he cost s of R&D int ernat ionalisat ion have t o be seen

alongside t he benefit s of R&D int ernat ionalisat ion and t he result ing st rat egies of t he

firm s. A first benefit is t hat R&D can support ov er seas pr oduct ion. Product s and

t echnologies oft en have t o be adapt ed t o consum er preferences, regulat ion, or

environm ent al condit ions of foreign m ark et s in order t o facilit at e t heir exploit at ion in

t hese m ark et s. These adapt at ions can be done m ore easily in proxim it y t o pot ent ial

client s in t he host count ries. MNEs t herefore locat e design, engineering and R&D unit s in

m ain foreign m arket s t o support m ark et ing and product ion facilit ies abroad. Ther e ar e

various nam es for t his m ot ive in t he lit erat ure, including asset - exploit ing behaviour

( Dunning and Narula 1995) , com pet ence- exploit ing subsidiary m andat es ( Cant w ell and

Mudam bi 2005) , hom e- base exploit ing st rat egies ( Kuem m erle 1999) , or m ar ket - driven

int ernat ionalisat ion of R&D ( v on Zedt w it z and Gassm ann 2002) .

A second benefit and im port ant driver of R&D int ernat ionalisat ion at t he firm level is

access t o know ledge and t he cr eat ion of new k now ledge abroad. This m ot ive is know n as

t he asset - seeking m ot ive ( Dunning and Narula 1995) , com pet ence- creat ing subsidiary

m andat e ( Cant w ell and Mudam bi 2005) , hom e- base augm ent ing st r at egy ( Kuem m erle

1999) , or global R&D st rat egy ( von Zedt w it z and Gassm ann 2002) in t he lit erat ure.

Asset - seeking st rat egies ar e driven, on t he one hand, by t he exist ence of superior local

know ledge and fav ourable fram ew or k condit ions for R&D in various host count ries. Som e

t ypes of know ledge ar e t acit , bound t o t heir local cont ext , and t r ansfer able over dist ance

only at high cost s ( Cow an et al. 2000; Breschi and Lissoni 2001) . This know ledge m ay be

found at universit ies and ot her r esearch organisat ions, in clust ers, or be available from

client s, suppliers or com pet it ors. Various aut hor s describe foreign- ow ned subsidiaries as

‘surv eillance out post s’ or ‘ant ennas’ ( Florida 1997; Alm eida 1999) t hat ext ensively

m onit or and assim ilat e know ledge from local sources. On t he ot her hand, asset - seeking

st rat egies m ay also be driven by fact or s relat ed t o t he nat ur e of various t echnologies and

changing firm st rat egies. Narula and Zanfei ( 2005) for exam ple, suggest t hat t he

increasing com plexit y of pr oduct s is a driver of t he int ernat ionalisat ion of R&D. Rising

t echnological com plexit y increases t he know ledge r equirem ent s of firm s and for ces t hem

t o sear ch for new know ledge abroad. A sim ilar argum ent is br ought forw ard by

Chesbr ough ( 2003) . He point s out t hat m any innovat ive firm s have m ov ed t o an ‘open

innovat ion’ m odel w here t hey exploit ideas and know ledge not only provided by int ernal

R&D, but also from a broad range of ext ernal sour ces and act or s. I n t his respect , asset

-seeking can be seen as a variant of ‘open innovat ion’ st rat egies w it h a focus on t heir

Ther e is evidence t hat asset - seeking st rat egies have becom e m ore fr equent in t he recent

years, alt hough asset - exploit ing st rat egies st ill prevail ( Narula and Zanfei 2005;

Sachw ald 2008) . Moreover, som e aut hors ( for exam ple Criscuolo et al. 2005) st r ess t he

fact t hat t he t w o m ot ives cannot be separat ed in a num ber of cases. Firm s – int ent ionally

or unint ent ionally – oft en follow bot h st rat egies sim ult aneously. Microsoft ’s effort s t o

adapt t heir product s t o t he Chinese language result ed in new know ledge t hat could also

be used in ot her cont ex t s ( Gassm ann and Han 2004) .

Finally, an im port ant aspect of firm st rat egy t ow ards R&D int ernat ionalisat ion is t he

degr ee of decent ralisat ion. I n order t o m ak e int ernat ionalisat ion of R&D possible, t he

head office of t he MNE has t o allow a higher degr ee of decent ralisat ion by changing firm

organisat ion and giving a higher degree of aut onom y t o t he subsidiaries ( Birkinshaw and

Hood 1998; Birkinshaw et al. 1998; Zanfei 2000) .

4 . I m pa ct s of M N E R& D Act ivit ie s on H ost a n d H om e

Cou n t r ie s

The t echnological and econom ic charact erist ics of count ries provide different locat ional

advant ages and disadvant ages for foreign- ow ned firm s t o set up R&D and innovat ion

act ivit ies. How ever, R&D act ivit ies of MNE affiliat es m ay also influence t he innovat ion

syst em s of t heir host and hom e count ries t o a consider able degr ee. The lit erat ure has

ident ified various pot ent ial opport unit ies and challenges for host and hom e count ries

from t he int ernat ionalisat ion of R&D and innovat ion ( see Table 1) .

Table 1 Pot ent ial opport unit ies and challenges for nat ional innovat ion syst em s from t he int ernat ionalisat ion of R&D and innovat ion

Opport unit ies Challenges

H

o

s

t

c

o

u

n

tr

y

I ncreases in aggregat e R&D and innovat ion expendit ure

Knowledge diffusion t o t he host econom y

Dem and for skilled personnel

St ruct ural change and agglom erat ion effect s

Com pet it ion wit h dom est ically owned firm s for resources; crowding- out

Loss of cont rol over dom est ic innovat ion capacit y

Separat ion of R&D and product ion

H

o

m

e

C

o

u

n

tr

y I m proved overall R&D efficiency

Reverse t echnology t ransfer

Market expansion effect s

Exploit at ion of foreign knowledge at hom e

Loss of j obs due t o relocat ion

‘Hollowing out ’ of dom est ic R&D and innovat ion act ivit ies

Technology leakage and involunt ary knowledge diffusion

Source: Adapt ed from Sheehan ( 2004) , UNCTAD ( 2005) , Veugelers ( 2005) .

4 .1 I m pa ct s of M N E R& D a n d in n ova t ion a ct iv it ie s on h ost coun t r ie s

I first discuss t he per spect ive of t he host count ry ( t he t w o upper cells in Table 1) . The

presence of MNE affiliat es in a count ry can considerably raise aggr egat e R&D expendit ure

of t his count ry over t he short and m edium t erm . Mult inat ional firm s spend huge am ount s

on R&D, ev en com par ed w it h aggregat e R&D expendit ure of count ries ( OECD 2010, p.

121) . A new R&D act ivit y of an MNE m ay t herefore considerably affect aggr egat e R&D

act ivit y of t he host count ry, in part icular in sm all and m edium - sized count ries. Em pirical

evidence suggest s t hat sm all count ries benefit m ost in relat ive t erm s, also because t hey

usually exhibit higher degr ees of int ernat ionalisat ion in FDI t han large count ries ( Lonm o

and Anderson 2003; Cost a and Filippov 2008) . MNE affiliat es – in cont rast t o

dom est ically ow ned firm s – can access financial m eans of t heir parent ent erprise abroad;

expansion of R&D act ivit y is t herefor e not lim it ed by a lack of int ernal resour ces or

incom plet e cr edit m arket s in t he host count r y . Ther e is also evidence t hat affiliat es of

for eign- ow ned firm s per form bet t er in m any aspect s of innovat ion behaviour t han

dom est ically ow ned firm s ( Frenz and I et t o Gillies 2007, Dachs et al. 2008, Sadow ski and

Sadow ski- Rast ers 2008, Cozza and Zanfei 2016) . This includes, for exam ple, higher

levels of innovat ion out put and higher labour product ivit y , and a higher propensit y t o

co-operat e t han dom est ically ow ned ent erprises aft er cont r olling for size, sect or and

innovat ion input .

A second benefit for t he host count ry is t he diffusion of inform at ion and know ledge

( know ledge spillovers1) t o host count ry or ganisat ions. Pot ent ial receivers of t his

know ledge are dom est ic firm s, univer sit ies, or r esearch cent r es. The lit erat ure gives

considerable at t ent ion t o know ledge diffusion and spillovers by for eign- ow ned firm s ( see

t he sur veys by Keller 2004, 2010, May er and Sinani 2009, or Hay akaw a et al 2010) .

Mor e r ecent ly, t he lit erat ure also discusses spillovers from R&D bet w een for eign- ow ned

According t o Blom st r öm and Kok ko ( 2003) , spillovers ar e t he st rongest argum ent as t o

w hy count ries should t ry t o at t ract inw ard invest m ent . Em pirical evidence on t he size and

t he effect s of spillover s, how ev er, is m ixed. Met a- st udies ( Görg and St robl 2001, Görg

and Greenaw ay 2004; Mayer and Sinani 2009; Havránek and I ršová 2010) show no clear

relat ionship bet w een foreign presence and t he perform ance of dom est ically ow ned firm s.

Görg and St robl ( 2001) for exam ple indicat e t hat t he num ber of st udies t hat ident ify

posit ive spillovers roughly equals t hose ident ifying no effect s or ev en negat ive

consequences from t he presence of for eign- ow ned firm s. I n t he m aj orit y of cases

consider ed by Görg and Gr eenaw ay ( 2004) , no significant effect of MNE pr esence on

dom est ic firm product ivit y is observ ed. Veugelers ( 2005, p 37) finds t hat it is ‘fair t o

conclude t hat t he r esult s on posit ive spillover s on host econom ies are not st rong and

robust ’. Em pirical evidence is clearer below t he aggr egat e lev el. Cont ribut ions by Singh

( 2007) , Keller and Yeaple ( 2009) and by Coe et al. ( 2009) rev eal subst ant ial spillover

effect s from for eign R&D st ock s and t he pr esence of foreign- ow ned fir m s at t he sect oral

level. Marin and Bell ( 2006) provide a sim ilar result at t he firm level.

A m ain reason for t his vagueness of t he r esult s, besides m easur em ent issues, is t he fact

t hat spillovers from foreign- ow ned firm s t o t he local econom y ar e bound t o specific

indust ry and econom y- w ide condit ions t o occur. These fact or s include a cert ain level of

absorpt ive capacit y ( Cohen and Levint hal 1989, 1990; Cant ner and Pyka 1998) of

dom est ic organisat ions; w eak inst rum ent s of for eign- ow ned firm s t o prot ect propriet ary

know ledge, w hich is m ost ly sect or- specific; and t he propensit y of t he t r ansfer channel or

t ype of int eract ion bet w een foreign- ow ned firm s and dom est ic organisat ions ( Veugelers

and Cassim an 2004) .

R&D act ivit ies of foreign- ow ned firm s in a part icular count ry m ay also help t o enhance

t he level and qualit y of hum an resources. New R&D labs by MNEs m ay creat e addit ional

dem and for r esear chers and give incent ives t o governm ent s t o im prov e higher educat ion

syst em s. MNEs are at t ract ive em ploy er s, because t hey can offer int ernat ional career

per spect ives and pay higher w ages t han dom est ically ow ned ent erpr ises ( Lipsey 2002;

Bailey and Driffield 2007; Hij zen et al. 2013; Nilsson Hakkala et al. 2014) . Moreov er ,

j obs creat ed by for eign- ow ned firm s appear t o be m or e persist ent t han j obs generat ed in

dom est ically ow ned plant s ( Görg and St robl 2003) .

Finally, foreign- ow ned firm s can also cont ribut e t o st ruct ural change t ow ards a higher

share of t echnology- int ensive firm s and t o t he em ergence of clust er s in t he host count r y.

St ruct ural change is relat ed in t w o w ays t o t he presence of foreign- ow ned firm s. On t he

one hand, for eign- ow ned firm s operat e pr edom inant ly in t echnology- int ensive indust ries.

Mark et ent rance and subsequent gr ow t h of t he for eign- ow ned firm w ill t herefor e shift t he

Slaught er 2001; Driffield et al. 2009) . On t he ot her hand, MNE subsidiaries t rigger

st ruct ural change because t heir dem and for input s favours t he gr ow t h of t echnology

-int ensive suppliers in t he host count ry. This dem and m ay lead t o t he em ergence of

clust ers and ot her agglom erat ions at t he r egional level in t he host count ry ( Young et al.

1994; Bellandi 2001; Pavlínek 2004) . Foreign- ow ned subsidiaries in clust ers oft en

st rongly em bedded locally, but have also a lot of t ies w it h int ernat ional part ners inside

and out side t heir com pany group, and can t herefor e act as bridges for know ledge

t ransfer bet w een dom est ic organisat ions and abroad ( Birkinshaw and Hood 2000;

Lorenzen and Mahnke 2002) .

I now t urn t o pot ent ial challenges for host count ries t hat em erge fr om t he presence of

for eign- ow ned firm s. One st riking aspect in t he lit erat ur e on FDI spillov er s is t he num ber

of st udies t hat report negat ive effect s ( see, for exam ple, Ait ken and Harrison 1999;

Konings 2001; Cast ellani and Zanfei 2002; Dam ij an et al. 2003; Marin and Sasidharan

2010; Dam ij an et al. 2013, Roj ec and Knell, 2015) . These negat ive spillovers ar e oft en

found in st udies on developing and t ransit ion econom ies. Wang ( 2010) , for exam ple,

invest igat es t he det er m inant s of R&D invest m ent at t he nat ional lev el for 26 OECD

count ries fr om 1996- 2006 and finds t hat foreign t echnology inflow s t hrough t rade and

FDI had a r obust and negat ive im pact on dom est ic R&D. One explanat ion for t hese

negat ive im pact s is increased com pet it ion in product and fact or m ark et s due t o foreign

presence ( Ait ken and Harrison 1999; Konings 2001) . I n t he cont ext of R&D, com pet it ion

for st aff ( Figini and Görg 1999; Driffield and Taylor 2000) seem s t o be relevant in

part icular. Addit ional dem and by MNEs for sk illed personnel is beneficial for t he host

count ry in t he short run w hen t here ar e unem ploy ed scient ist s, engineers and t echnicians

and alt ernat ive em ploy m ent opport unit ies – for exam ple at dom est ic universit ies – ar e

scar ce. How ev er, it m ay have negat ive consequences for t he host count ry w hen t he

supply for r esear ch per sonnel is inelast ic and foreign- ow ned firm s and dom est ic

organisat ions com pet e for qualified st aff. I n t he long run, t he effect s of t he dem and by

for eign- ow ned firm s on t he labour m arket for R&D st aff look m or e posit ive. St ronger

dem and for high- skilled labour due t o m arket ent ry of for eign- ow ned firm s and st ruct ural

change m ay fost er academ ic t raining and increase t he num ber of gr aduat es in science

and t echnology in t he long run. A higher skill int ensit y in t he econom y, in t urn, m ay

fost er locat ional advant ages and furt her increase t he at t ract iveness of t he count ry for

inw ard invest m ent . Bar r y ( 2004) illust rat es such a ‘virt uous circle’ for t he case of I r eland.

Fear s t hat a high share of foreign- ow ned firm s on aggregat e R&D expendit ure m ay lead

t o negat ive effect s ar e also nurt ured by m or e general concerns against MNE presence

( see Barba Navar et t i and Venables 2004; Jensen 2006; For sgr en 2008 for a sum m ary of

t his discussion) . This is less an academ ic and m or e a general policy discussion, so t her e

t he assum pt ion t hat t he int ernat ionalisat ion of R&D leads t o a loss of cont r ol over

dom est ic innovat ion capacit y, because decisions on R&D of foreign- ow ned firm s m ay not

be t ak en by t he subsidiaries t hem selves, but by corporat e headquart ers abroad; t he

assum pt ion t hat R&D act ivit ies of MNEs ar e m or e ‘foot loose’ t han t hose of dom est ically

ow ned firm s, because t hey can be easily t ransferr ed bet w een count ries; t he assum pt ion

t hat for eign- ow ned ent erprises act in w ays t hat are not in accordance w it h t he nat ional

int erest ; t he assum pt ion t hat an im port ant m ot ive for R&D int ernat ionalisat ion is rent

-seeking in select ing locat ions. Anot her concern against foreign ow nership is t hat R&D of

for eign- ow ned firm s is associat ed w it h a higher degree of adapt at ion and less basic,

st rat egic resear ch, because MNEs oft en concent rat e st rat egic, long- t erm R&D in t he

hom e count ry; rising shares of for eign ow nership on aggregat e innovat ion act ivit y m ay

t herefor e lead t o few er radical innovat ions t han in t he case of dom est ic ow nership.

Em pirical evidence t hat support s t hese concerns is t hin. I nt ernat ionalisat ion cert ainly

leads t o a shift of cont rol from dom est ic head offices t o MNE headquart er s abr oad.

How ev er, dom est ic policy does not necessarily have a higher abilit y t o influence R&D

decisions w hen ent erprises are dom est ically ow ned ( Dunning and Lundan 2008, p. 249

ff) . I n addit ion, it seem s t hat aut onom y of MNE subsidiaries ov er t heir R&D act ivit ies has

been rising over t im e ( Dunning and Lundan 2009, chapt er 8) . The quest ion if for eign

ow nership is associat ed w it h a dow nsizing of R&D act ivit y has been evaluat ed bot h for

t ake- overs as w ell as for all foreign- ow ned and dom est ically ow ned firm s. I n t he case of

t ake- overs, t here ar e bot h, exam ples of dow nsizing as w ell as exam ples of expansion,

depending on t he com plem ent arit y bet w een acquiring and acquired firm s and ot her

fact ors ( Cassim an et al. 2005; Bert rand 2009; Bandick et al. 2010; St iebale and Reize

2011) . St udies t hat com pare innovat ion input and out put of dom est ically ow ned and

for eign- ow ned firm s find no negat ive effect of for eign ow nership aft er cont r olling for firm

charact erist ics such as size, sect or, or export int ensit y ( Sadow ski and Sadow ski- Rast ers

2006, Dachs et al. 2010) .

R&D int ernat ionalisat ion m ay also be associat ed w it h a separat ion of R&D and pr oduct ion

( Pear ce 2004; Pearce and Papanast assiou 2009) . MNEs have m uch m or e choices in t he

locat ion and organisat ion of R&D and pr oduct ion t han m ono- nat ional firm s. R&D and

product ion is not necessarily locat ed in t he sam e count ry, because MNEs m ay find it

useful t o dev elop pr oduct s in one count r y and m anufact ure in anot her count ry w here

condit ions for pr oduct ion seem m or e favourable. As a consequence, policy m easures t o

prom ot e R&D and product developm ent m ay yield only few j obs and give only a w eak

st im ulus t o grow t h w hen foreign- ow ned fir m s decide t o pr oduce abr oad. To m y

know ledge, no em pirical st udy has t horoughly exam ined t he effect s fr om t he separat ion

of R&D and pr oduct ion so far . I t is, how ev er, plausible t hat such a leaking- out is st ronger

w eak er w hen for eign- ow ned firm s hav e a high degr ee of aut onom y and st rong m andat es

in t heir ent erprise gr oups, because t hese firm s m ay t r y t o concent r at e not only R&D, but

also product ion at t heir locat ion t o m axim ise influence in t heir ent erprise gr oup.

4 .2 I m p a ct s of R& D a n d in n ova t ion a ct iv it ie s a b r oa d on t h e h om e cou n t r ie s

The int ernat ionalisat ion of R&D has also im plicat ions for t he hom e count ry of t he

m ult inat ional firm . D’Agost ino ( 2015) pr ovides a r ecent surv ey of t hese effect s, so t his

sect ion w ill be short .

As discussed above, a m ain reason for firm s t o go abr oad w it h R&D act ivit ies is t o get

access t o know ledge not available in t he hom e count ry. Hence, a fir st m ain benefit for

t he hom e count ries is t he t ransfer of r esult s fr om ov er seas R&D act ivit ies w hich brings

new know ledge int o t he hom e count ry. Various st udies provide evidence for such r everse

know ledge t ransfer s ( For s 1997; Feinberg and Gupt a 2004; Todo and Shim izut ani 2005;

Am bos and Schlegelm ilch 2006; Piscit ello and Rabbiosi 2006; Narula and Michel 2009;

Rabbiosi 2009; AlAzzaw i 2011) . Rever se know ledge t ransfers can increase ov erall

t echnological capacit ies, help t o dev elop new pr oduct s and fost er gr ow t h and

em ploym ent in t he hom e count ry . R&D act ivit ies abroad can t herefore st rengt hen t he

grow t h of t he par ent com pany in t he hom e count ry ( Ram m er and Schm iele 2008) . The

size of t hese benefit s depends on t he absorpt ive capacit ies and ot her firm charact erist ics

of t he par ent com pany ( Schm iele 2012) , on t he degr ee of com plem ent arit y bet w een

act ivit ies abroad and at hom e ( Ar vanit is and Hollenst ein 2011) , and on t he m ot ives for

R&D act ivit ies abr oad. Todo and Shim izut ani ( 2005) dem onst rat e for Japan t hat effect s of

reverse t echnology t ransfer on t he product ivit y of firm s in t he hom e count ry is large

w hen foreign- ow ned affiliat es undert ake R&D t o t ap int o advanced k now ledge abr oad.

Adapt ive R&D how ev er w as found t o im prov e product ivit y in t he host count ry, but did not

cont ribut e t o enhanced product ivit y in t he hom e count r y. Griffit h et al. ( 2004) find t hat

R&D by UK firm s in t he US have result ed in benefit s from reverse t echnology w it h t he

effect s being larger in t he case of R&D unit s set up t o source t echnology. Result s for

Sw eden, how ev er ( For s 1997; Braconier et al. 2002) indicat e t hat t her e hav e not been

significant spillover s t o t he hom e count ry , possibly because m uch R&D has been of t he

adapt ive t ype. AlAzzawi ( 2011) finds t hat R&D abroad had a posit ive im pact on t he hom e

count ry ’s lev el of innov at ion act ivit y in bot h developed and new ly indust rialised count ries,

but finds product ivit y benefit s for new ly indust rialised count ries only. Moreov er, t her e

seem s t o be a posit ive relat ionship bet w een int ernat ionalisat ion and t he r et urns fr om

R&D at hom e ( Criscuolo and Mart in 2009; Añón Higón et al. 2011) w hich m ay furt her

increase t he benefit s for t he hom e count ry .

Pot ent ial challenges or cost s fr om t he int ernat ionalisat ion of R&D for t he hom e count ry

act ivit ies abroad. This t ype of subst it ut ion has becom e an im port ant t opic in int ernat ional

econom ics ( see t he sur vey of Crinò 2009) . I t m ay lead t o a ‘hollowing out ’ ( Criscuolo and

Pat el 2003) of dom est ic innovat ion capacit y, a loss of j obs in R&D, and a dow nw ard

pressur e on w ages of R&D personnel in t he hom e count ry. Despit e public discussions on

t he offshoring of R&D and possible consequences for hom e count ry innovat ion syst em s,2

em pirical result s t hat confirm such ‘hollow ing out ’- effect s ar e rare. The reason for t his

are com plem ent arit ies bet w een overseas adapt at ions and R&D at t he hom e base

( D’Agost ino and Sant angelo 2012) . St udies based on pat ent dat a give no indicat ion for a

subst it ut ive relat ionship bet w een R&D abr oad and hom e- based R&D act ivit ies

( D’Agost ino et al. 2013) . How ev er, dat a on R&D expendit ure of dom est ic firm s abroad is

available only for a v er y sm all num ber of count ries, w hich m akes a t est of t he

assum pt ion difficult .

5 . N e w dir e ct ion s

for

r e se a r ch on R& D

in t e r n a t ion a lisa t ion

R&D int ernat ionalisat ion t oday is a w ell- est ablished resear ch field w it hin int ernat ional

econom ics lit erat ure, t he int ernat ional business lit erat ure and w it hin t he econom ics of

innovat ion and t echnological change. There is a consensus on t he m ain drivers as w ell on

t he im pact s of t he pr ocess. How ev er, som e quest ions r em ain open, and new quest ions

arise. This is w hy t he final chapt er – inst ead of a sum m ary - point s t o t hree fields w here

m or e research in needed in t he fut ure.

5 .1 Ta x cr e dit s for R& D a s policy in ce n t iv e s

Ther e is a consensus in t he lit erat ure t hat t he best count ries can do t o at t ract R&D of

for eign- ow ned firm s is t o cr eat e fav ourable condit ions for doing business and R&D t hat

benefit bot h, dom est ic and for eign- ow ned count ries ( see Sect ion 3.1) . Financial

incent ives for for eign- ow ned ar e not r egarded as a suit able inst rum ent t o at t ract t hese

act ivit ies.

This consensus has been challenged in recent years by t he em ergence of t ax incent ives

for R&D. I n 2015, t his t ype of incent ive is offer ed by 28 of t he 34 OECD count ries and a

num ber of non- OECD count ries ( OECD 2016, chapt er 4; Appelt et al. 2016) . Bellak and

Leibrecht ( 2016) discuss t ax incent ives for R&D and t heir w elfare effect s in t he cont ext of

general invest m ent incent ives for for eign direct invest m ent .

The effect of R&D t ax incent ives on locat ion choices of MNEs is st ill an unexplored t opic

( Appelt et al. 2016, 19) . From t he argum ent s brought forw ard in t he lit erat ur e, how ever,

it seem s t hat t ax credit s for R&D are a very appealing inst rum ent for MNEs ( Mohnen

• MNEs operat e m or e oft en in R&D int ensive sect ors and m ore perform R&D

fr equent ly t han single- nat ional firm s. Thus, a subsidy t hat focusses on R&D seem s

m or e appealing t o MNEs t han ot her non- R&D invest m ent incent ives.

• Tax credit s for R&D favour large R&D spender s ( Mohnen 2013) MNEs m ay in

part icular favour fiscal incent ives because t hey offer t hem oppor t unit ies t o

m inim ize corporat e incom e t ax es single- nat ional firm s or sm aller firm s do not

have, for exam ple by shift ing R&D cost s bet w een count ries.

• Large firm s have considerably low er applicat ion cost s in R&D t ax credit schem es

t han in t he case of direct R&D funding w hich usually involves various eligibilit y

checks. This m ay again favour large R&D spenders, w hich do not have t o

adm inist er a large num ber of single funding applicat ions. Mor eover, A num ber of

count ries hav e no upper ceiling for R&D t ax cr edit s.

• I ncom e- based t ax incent ives for R&D ( t ax br eaks for incom e fr om t radem ark s,

pat ent s and ot her form s of int ellect ual capit al) in t he form of pat ent boxes et c.

m ay be part icularly appealing for MNEs w it h m ult iple R&D locat ions because it

m ay also pr ovide t hem w it h incent ives for shift ing profit s via licence incom e.

As a consequence, R&D t ax incent ives m ay be m uch m ore effect ive t han ot her for m s of

policy incent ives t o at t ract for eign- ow ned firm s. There is som e em pirical support for

t hese argum ent s; Dachs ( 2016) report t hat for eign- ow ned firm s in Aust ria – in cont rast

t o dom est ically ow ned firm s – r eceive t he bulk of t heir public support for R&D via t ax

cr edit s. Result s by Pot i and Spallone ( 2016) indicat e a significant and posit ive cor relat ion

bet w een R&D t ax cr edit s and R&D of for eign- ow ned firm s.

5 .2 R& D in t e r n a t ion a lisa t ion in se r vice in d u st r ie s

Ser vices ar e t he ‘dark m at t er’ of R&D int ernat ionalisat ion – w e know t here should be a

lot of it , but so far, w e cannot see it . Only a lim it ed num ber of count ries ( m ost prom inent

t he USA) provide dat a on R&D by foreign- ow ned firm s in t he services sect or s. This dat a

indicat es t hat services account for around a t hird of t ot al R&D by for eign- ow ned firm s. I f

w e generalize t hese observat ions t her e should be m uch m or e R&D by for eign- ow ned

firm s t han w e cur rent ly observ e in official st at ist ics.

The expansion of ser vices in R&D int ernat ionalisat ion cannot be explained by a single

reason. On t he one hand, t he use of new t echnologies m akes service firm s increasingly

R&D int ensive, like in t he case of inform at ion and com m unicat ion ser vices. On t he ot her

hand, R&D int ensit y in services incr eases because ser vices and part s of t he service value

chain becom e increasingly t radable ( O’Mahony 2013) . As a result , m anufact uring firm s

out sour ce R&D t o specialized suppliers of R&D services. The m ost pr om inent exam ple of

t his developm ent is t he pharm aceut ical indust ry ( Ram irez 2013) w hich m oves clinical

of sm all biot echnology firm s has cr eat ed a new t ype of divisions of labour bet w een sm all

and large firm s in t he pharm aceut ical indust ry.

Bot h developm ent s lead t o a higher int ernat ionalisat ion in ser vices, and t o m or e ov er seas

R&D act ivit ies in service firm s in part icular, because of t he asset - augm ent ing and t he

asset - exploit ing m ot ive discussed above. Quest ions, how ever, r em ain about t he ser

vice-specific driver s and obst acles of service firm s, as w ell as t he co- ordinat ion cost s and

condit ions for know ledge- t ransfer w it hin service firm s w hich m ay be shaped by differ ent

degr ees of t acit eness com pared t o m anufact uring.

5 .3 M u lt in a t ion a l f ir m s f r om e m e r gin g e con om ie s

Mult inat ional ent erprises originat ing from em erging econom ies ( EMNEs) becam e

im port ant players in foreign direct invest m ent in recent y ear s. Accor ding t o t he 2014

World I nv est m ent Report , t he share of developing and t ransit ion econom ies on t ot al FDI

out flow s has clim bed from 7% in 1999 t o 39% in 2013 ( UNCTAD 2014, p. 7) . The rise of

is not surprising; t he int ernat ional business as w ell as int ernat ional econom ics lit erat ure

predict s t hat firm s wit h superior know ledge capit al and asset s w ill increasingly t urn

invest abroad t o exploit t hese asset s at int ernat ional m arket s. I n r ecent years,

expendit ures for R&D have increased considerably in em erging econom ies – m ost not ably

in China ( OECD 2014) , a st rong indicat or for t he build- up of know ledge and superior

asset s.

Mor eov er, w e can ex pect t hat EMNEs – once t hey have est ablished int ernat ional

product ion – increasingly m ov e fr om asset - exploit ing t o asset - creat ing st rat egies in t heir

for eign act ivit ies. This m eans t hat EMNEs increasingly cr eat e and collect know ledge

out side t heir hom e count ries by locat ing R&D and innovat ion act ivit ies in various host

count ries. Various aut hor s ( Di Minin and Zhang 2010; Di Minin et al. 2012; Giuliani et al.

2014, Cr escenzi et al. 206) are observing t he first R&D act ive EMNE subsidiaries in

Eur ope and t he US.

The rise of EMNEs creat es new quest ions for r esearch on t he int ernat ionalisat ion of R&D.

I t challanges old view s on t he global diffusion of know ledge from t he m ost t o least

dev eloped count ries, and raises new quest ions on t he nat ure of superior asset s of

EMNEs, given t hat t hese firm s ev olve in m ore rest rained environm ent s t han firm s in

advanced econom ies ( Narula 2012) . Moreover, it brings back fam ily and st at e ow nership,

t w o m odels of gov ernance w hich have becom e quit e unfam iliar am ong US and Eur opean

m ult inat ional firm s. Fam ily- and st at e- ow ned firm s m ay hav e differ ent cult ures of

decision- m aking, and follow different rat ionales in R&D int ernat ionalisat ion. For exam ple,

t he rise of EMNEs has cr eat ed fears of ‘pr edat ory behaviour’ - t hat st at e- ow ned EMNEs

how ev er, ar e not new , and have also been raised against MNEs fr om ot her count ries as

w ell.

Ack n ow le dge m e n t s

The aut hor w ant s t o t hank t he European Com m ission, DG Research and I nnovat ion, for

it s financial support of t he pr oj ect " I nt ernat ionalisat ion of business invest m ent s in R&D

and analysis of t heir econom ic im pact " , cont ract num ber 30- CE- 0677869/

00-21/ A4/ 2014, specific cont ract under t he fram ew or k cont r act for t he pr ovision of services

t o t he Com m ission in t he fields of r esearch ev aluat ion and resear ch policy analysis, Ref.

OJ 2010/ S 172- 262618.

N ot e s

1. The concept of spillovers found in t he int ernat ional econom ics lit erat ure differ s in som e respect from t he concept of know ledge flow s in t he innovat ion econom ics lit erat ure w here know ledge flow s ar e also fr equent ly labelled as spillover s. Spillover s in t he cont ext of t he int ernat ional econom ics lit erat ur e do not exclusively focus on t he t ransfer of inform at ion or know ledge, but also include ot her non - com pensat ed effect s like com pet it ion, labour m arket or agglom erat ion effect s ( see Har ris and Robinson 2004 for a t y pology of spillovers) . One exam ple is a low er price level in a cert ain m arket due t o increased com pet it ion aft er m ark et ent r y of a for eign- ow ned firm . Anot her form of spillover not r elat ed t o k now ledge is t he t hreat of m ark et ent ry by R&D int ensive MNEs t hat m ay spur R&D act ivit ies of dom est ically ow ned firm s ( Aghion et al. 2009) .

2. An exam ple is t he June 2010 issue of t he Journal of Technology Transfer w hich

discusses pr oduct ion offshoring and it s effect s on US m anufact uring R&D in det ail.

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