Internationalisation of R&D

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					Internationalisation of R&D

Trends, Impact and Policy Implications
                 By
        Reinhilde Veugelers
       EC(BEPA), KUL & CEPR
  Internationalisation of R&D: Trends, Drivers and Impact


•Trends in the internationalisation of R&D
•Impact on host and home economies
•Policy implications


        Note: Focus on Multinational Firms
               and the internationalisation of their R&D
                     through R&D-FDI
1. Trends in Internationalisation of R&D
                    Note: Poor data
• Internationalisation of R&D on the rise
• High-tech sectors most internationalised
   – Pharmaceuticals versus ICT
• Mostly an intra-Triad phenomenon
   – EU most internationalized
   – US major destination
   – EU still major destination for US
• More recently, emerging markets are attracting overseas
  R&D outlays by MNEs
• HOST perspective: increasing importance of foreign
  controlled R&D in total country R&D
• HOME perspective: increasing importance of R&D done
  abroad by domestic enterprises
                           Internationalisation of R&D on the rise
                 Evolution of the main driving forces of globalisation
                           in the OECD1 area (1995=100)
                                         R&D under foreign control                   Turnover under foreign control
                                         FDI inward stocks                           Imports
                 350

                 300

                 250

                 200

                 150

                 100

                  50

                    0
                          1995        1996       1997        1998        1999       2000        2001        2002       2003




1. Countries included: United States, Japan, United Kingdom, France, Germany, Canada, Netherlands, Sweden, Czech Republic, Finland, Hungary,
        Ireland and Poland.
Source: OECD, AFA, International investment, International trade databases, June 2006.
     High-Tech sectors most internationalised
Share of R&D under foreign control by industrial sector, total OECD, 2001
       %
           50


           40


           30


           20


           10


           0
                Pharmaceuticals   Motor vehicles   Chemicals (exc.    Manufacturing ICT
                                                   Pharmaceuticals)
              Growing ‘foreign’ R&D expenditures
        US still major destination, growing importance of “other OECD
Billion USD
   75
                                                  70.6 billion USD
   70

   65

   60

   55
                                                                     United States
                                          41.8%
   50

   45

   40
                       33.9 billion USD                              Germany
   35                                     14.3%

   30
                                                                     United Kingdom
   25          51.7%                      13.9%

                                                                     Japan
   20
                                          5.2%
               10.0%                                                 France
   15
               12.8%                      7.7%                       Canada
   10           2.2%                      4.9%
                8.7%                                                 Other OECD (1)
    5                                     12.3%
                5.8%
                8.9%
    0
                             1995                       2003
     Intra-Triad phenomenon
US major destination, EU important source
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           ne lan
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                                                                                                                                      Current foreign R&D locations




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                                                                                                                                                                      US and UK still major location




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                 Ire
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                                                                                                 Most attractive foreign R&D locations




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                                                                                                                                    Increasing attractiveness of emerging




                     an
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            Home perspective:
R&D is done increasingly by affiliates abroad
(% of domestic R&D expenditures) Source: OECD, STI 2007
                                                      1995   2003

 % 120




   100




    80




    60




    40




    20




     0
         Switzerland (1)   Germany   Sweden   Finland (2)    Belgium   United States   Japan (3)   Italy
                 Host perspective:
Increasing share of foreign R&D in total country R&D:
   R&D expenditures by Foreign Affiliates (as % of BERD)
2. Drivers of the Internationalisation Process
         The recent evidence suggests a shift
           towards supply related motives
        (access to scientific and technological
         skills) becoming more important as
                    location factor.
             Main Findings on R&D
          internationalisation strategies
• The rapid growth of non-home R&D is realized through acquisitions of local
  firms, but also the research intensity of foreign based production increases.
• Although technology sourcing motives are becoming a major force for locating
  R&D abroad, both demand (close to local markets) and supply related (access to
  S&T resources) motives remain heavily intertwined.
• Technology sourcing MNEs allocating research activities to their local
  subsidiaries are more attracted to industries and countries with a relative
  technology strength, while countries offering strategic market access attract
  more development type of R&D activities.
• Intra-firm reverse technology transfers from the subsidiary to the parent is more
  likely to occur for R&D internationalisation investment driven by technology
  sourcing motives, when the degree of host country embeddedness is higher and
  lower when the subsidiary has been acquired
                                                              G
                                                               ro
                                                                       w
                                                                           th




                                                                                                            1.5
                                                                                                                      2.5
                                                                                                                                3.5
                                                                                                                                          4.5




                                                                                                        1
                                                                                                                  2
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Source: Thursby&Thursby (2006)
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                                                                                     qu
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                                                                                                                                                                                            Location factors for R&D in emerging countries
3. Impact of R&D Internationalisation


    (3.1) Host and (3.2) Home Economy effects
         from spillovers through R&D-FDI
3.1 Host economy effects
   3.1. Impact on Host Economies
• Macro-perspective: economic growth of host economies linked
  to international transfers of technology through FDI
• Micro/meso-perspective: FDI affects home economy directly
  (contributing to employment, growth..) and indirectly by affecting
  local firms’ productivity)
   – Allocative and X-efficiency improvement from competition
   – Speeding the diffusion of technology through spillovers

        Positive spillovers on the host economy are
                       not straightforward
        (i) Do MNEs generate technology transfer?
             (ii) Effects of MNEs on local firms’
                            productivity
3.1.(i) Does FDI generate spillovers?
     Motives for generating transfers/protecting know-how
•   technology available in exchange
•   value of the underlying technology to protect:
                        How to protect?
•   Choice of entry mode: EXPvsFDIvsLIC (Fosfuri(2000),
    Ethier & Markusen (1996), Siotis (1999), Fosfuri & Motta
    (1999)
•   Labour mobility (higher wages) (Fosfuri et al 2001)
•   Complexity, lead time, secrecy

MNEs with technology leading position have a higher interest
 & higher capability to protect their know-how
  Endogeneizing spillovers through FDI:
             some evidence
Belderbos, R., Lykogianni, E. and R. Veugelers 2006,
  Strategic R&D Location in European Manufacturing
  Industries, CEPR Discussion Paper

 For technology leaders: appropriability concerns
  drive foreign R&D, while for technology laggards:
  technology sourcing motives drive foreign R&D
leaders are significantly more likely to increase foreign
              R&D in response to better IPR protection
      Survey evidence from CIS-I/BELGIUM on
            Local Technological Transfer


                    TOTAL         FSUB=0         FSUB=1
                    N=445          N=281          N=164
TRANSFERnat        80 (18.0%)    52 (18.5%)     28 (17.1%)
COOPEXnat         150 (33.7%)    82 (29.2%)     68 (41.5%)
  BUYinat         259 (58.2%)    135 (48.0%)    124 (75.6%)




Veugelers & Cassiman, 2004, Foreign subsidiaries as channel of
international technology diffusion:some firm level evidence from
                         Belgium, EER.
Veugelers & Cassiman, 2004, Foreign subsidiaries as channel of international
     technology diffusion:some firm level evidence from Belgium, EER.


• Having controlled for the acquisition of technology
  internationally, foreign subsidiaries are significant less
  likely to transfer technology locally.
    – Most important mechanisms=labour mobility
• The significant positive indirect effect for foreign
  subsidiaries through their higher international sourcing is
  not strong enough to compensate for this direct negative
  effect in the sample, leaving a total negative effect for
  foreign subsidiaries on local technology transfers.
• Cooperation with local partners is an important channel for
  the host country to benefit from technology transfers but
  this involves simultaneous receiving and transferring
  know-how
 3.1 (ii) The effects of MNEs on local firms’ productivity
Mixed evidence on MNEs generating
  positive spillovers on the local economy;
  Importance of
• correction for selection bias (panel data
  techniques)
• indigeneous technological capability
• motive for FDI: asset exploiting more
  positive
• correcting for horizontal vs vertical
  spillovers: competition effect
  3.1. Main findings on host effects
• Technology spillovers from the MNE to the local
  economy not always materializes, depending on the
  MNEs willingness and capacity to prevent know-
  how leakage; the host country’s firms’ technology
  gap relative to foreign subsidiaries and the host
  country’s indigeneous capacity to absorb foreign
  technologies.
• Reciprocal two-way flow of know-how within
  MNEs and between MNEs and the local economy
  (‘dual embeddedness’).
3.2. Home economy effects



           Less researched
 Main findings on impact on home economy
• The knowledge accumulated abroad is not always transferred within
  the multinational organization from the subsidiary back to the parent
   – The type of activity carried out by foreign subsidiaries matters
      significantly for the incidence of spillovers. Positive findings on
      intra-firm reverse technology transfers are only found for R&D-
      FDI motivated by technology sourcing (Griffith, Harrison & van
      Reenen (2004)

• The knowledge transferred back to the parent does not always leak
  outside the MNE’s boundaries to other home country firms and
  institutions.
   – Firm level studies show mixed evidence on MNEs generating
      positive spillovers on the home economy (Globerman, Kokko
      &Sjöholm (2000))
    – These effects require that MNEs are locally embedded in their home
      market, and that home country firms have the necessary absorptive
      capacity.
4. Policies vis-à-vis R&D Internationalisation
       Key Principles for Policy
• R&D investment by MNEs is to a high degree driven by
  fundamental economic factors (market size, labour market
  conditions, etc.), the scientific and technological
  specialisation and capabilities of the country, the
  environment (stability and endowment with an appropriate
  public infrastructure).
• Policy and legislation do not drive the internationalisation
  of R&D decisions of MNEs but can facilitate or hinder it.
  Policy should provide and secure a “healthy business
  environment” (OECD 2005)
• Measures to build an innovation-friendly environment and
  increase the scientific and technological capacities of a
  country will (i) help to attract foreign R&D; (ii) improve
  the absorptive capacity and (iii) stimulate own firms to
  internationalize
          Policies used towards
       internationalisation of R&D
• On average, direct support and incentives specific for
  foreign R&D less important
   – Direct support mechanisms have lost in importance relative to
     indirect
   – Non-discrimination of foreign-owned firms
• Linking domestic economy to foreign sources of
  knowledge most popular
   – Support/fund international networking, open clustering..
• Policies towards foreign talent are on the rise

Typically lacking: an integrated policy approach towards
  internationalisation of R&D
       The EU policy dimension
• Coordination among MS policies
• Enable policy learning among MS
• EU instruments
   – Single Market and Competition Policy
   – Funds (FP, Structural…
   – Trade negotiations (eg IPR regimes, standards..

   “In sum, there is an urgent need to mobilize all existing elements of
     the future Eruoepan research and teachnology area…as mutually
     and reciprocally interdependent forces, so that they may exhibit
     cross-catalytic reinforcement toward consistent technology
     objectives…(Foray (2006))

				
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