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/

MPRA Paper No. 83367, posted 20 Dec 2017 16:42 UTC

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I nternat ionalisat ion of R& D: A Review of Drivers,

I m pacts, and new Lines of Research

Prelim inary version

Bernhard Dachs1

This paper reviews the growing literature on the internat ionalisat ion of R&D in the

business sector. By internat ionalisat ion of R&D, this paper m eans the fact that firm s

conduct research and developm ent at locat ions outside their hom e count ries. The survey

focuses on three issues: first , the drivers of the process at the count ry, the sectoral and

the firm level – why firm s go abroad with R&D act ivit ies. Second, evidence on the effects

of the internat ionalisat ion of R&D on the host and hom e count ries of m ult inat ional firm s.

So far, there is a consensus in the literature that R&D internat ionalisat ion benefit s the

host count r ies. Third, the paper discusses som e new lines of research on R&D

internat ionalisat ion related to the role of indirect funding for R&D, R&D

internat ionalisat ion in services and m ult inat ionals from em erging econom ies.

Key w ords: I nternat ionalisat ion, R&D, innovat ion, foreign-owned firm s, outsourcing

1 AI T Aust r ian Inst itute of Technology, Donau-City-St raße 1, 1220 Vienna, Aust r ia, Tel:

+ 43(0)50 550. e-m ail: bernhard.dachs@ait .ac.at

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1 . I nt roduct ion

Foreign-owned firm s are am ong the top perform ers of research and developm ent (R&D)

in m any count ries. I n 2013, foreign-owned firm s accounted for m ore than 20% of

business R&D in France, Germ any, the Netherlands, and I taly; between 30% and 50% in

Spain, Poland, and Sweden; and for m ore than 50% in the United Kingdom , Aust r ia,

Belgium , the Czech Republic, Hungary, Slovakia and I reland ( I versen et al. 2016) . Thus,

foreign-owned firm s have a considerable influence on the technological capabilit ies of

count r ies, which in turn determ ine com pet it iveness to a considerable degree. This m akes

the internat ionalisat ion of R&D a key dim ension of science, innovat ion and technology

policy.

This paper reviews the growing literature on R&D internat ionalisat ion in the business

sector. By internat ionalisat ion of R&D, this paper m eans the fact t hat firm s conduct

research and developm ent at locat ions outside their hom e count ries. The survey focuses

on three issues: first , the drivers of the process – why firm s go abroad with R&D

act ivit ies. Second, the effect s of the internat ionalisat ion of R&D on the host and hom e

count ries of m ult inat ional firm s. Third, I will discuss som e new lines of research on R&D

internat ionalisat ion.

The survey has three im portant lim itat ions. First , it does not present em pirical evidence

on R&D internat ionalisat ion; readers can refer to recent publicat ions such as I versen et

al. 2016, Dachs, et al. 2014, or OECD 2008a which present this inform at ion in detail.

Second, the survey will only include the literature on the internat ionalisat ion of R&D in

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

Third, the literature on foreign direct investm ent (FDI ) and m ult inat ional enterprises is

only included if it relates to R&D. Internat ionalisat ion refers t o the internat ionalisat ion of

business R&D through the rem ainder of this paper, unless otherwise stated.

The internat ionalisat ion of R&D is a relat ively young phenom enon, although scient ists,

knowledge and artefact s have always crossed borders easily in econom ic history. The

early literature regarded internat ionalisat ion of R&D as an unlikely phenom enon, because

of the st rong linkages of large firm s to universit ies and other research organisat ions in

their hom e count ries (Patel and Pavit t , 1991) . The oldest literature on the

internat ionalisat ion of R&D dates back to the end of the 1960s and the beginning of the

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

em erged in the 1970s (exam ples are Cream er 1976; Ronstadt 1977; Lall 1979) and in

the 1980s and early 1990s (Behrm an and Fischer 1980, Cantwell 1989, Pearce 1992) .

Since the year 2000, a growing body of literature provides evidence that the

internat ionalisat ion of R&D is gaining m om entum (OECD 2005; UNCTAD 2005;

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Hatzichronoglou 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 literature is accom panied by a num ber of internat ional com parisons of policies

towards R&D internat ionalisat ion (CREST Working Group 2007, OECD 2008a, TAFTI E

2009, Schwaag Serger and Wise 2010, OECD 2016a) .

2 . Search strategy

The paper em ploys a very sim ple search st rategy: we searched at Google Scholar for

three search term s: internat ionalisat ion of R&D, offshoring of R&D, and R&D by foreign-

owned firm s. Exist ing review art icles such as Narula and Zanfrei (2005) , Veugelers

(2005) , Cantwell (2009) , Hall (2010) , or Santos-Paulino et al. (2014) helped in the

select ion of these search term s and provided an addit ional source for ident ifying relevant

research. Google Scholar offers the advantage that it also provides working papers and

other art icles not yet published in academ ic journals. The survey m ainly considers papers

published after the year 2000. The select ion of papers is subject ive, because due to

space const raints not every paper can enter t he review. I found it m ost im portant to

consider papers that can help to ident ify variables and issues helpful for further em pirical

research.

3 . Dr ivers of R&D I nternat ionalisat ion

The benefit s and costs associated with the internat ionalisat ion of R&D vary between

firm s, indust ries, regions or count r ies. I t is therefore im portant to dist inguish between

these three levels. I start with a discussion of the drivers at the regional and count ry

level and then go to the sectoral and firm level.

3 .1 Drivers at the regional and country level

The potent ial host count ry or host region shapes the internat ionalisat ion decisions of

firm s by providing different incent ives, as well as different fram ework condit ions to invest

in R&D. Drivers at the regional or count ry level are also im portant from a policy

perspect ive, because they give room for policy intervent ion to increase the locat ional

advantages of regions or count r ies.

A first im portant driver at regional or count ry level is econom ic size, m easured by incom e

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

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

Athukorala and Kohpaiboon 2010; Hall, 2010) . The im portance of m arket size points to

the relat ionship between R&D and other MNE act ivit ies: R&D investm ents often follow

FDI , and overseas R&D act ivit ies are, in m ost cases, an extension of exist ing overseas

product ion and m arket ing act ivit ies (Birkinshaw and Hood 1998; Birkinshaw et al. 1998;

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Archibugi and Iam m arino 1999, De Backer et al. 2016) . Moreover, firm s m ay find it

easier to cover the cost of R&D in a count ry with a large m arket where they expect larger

absolute revenues than in a count ry with a sm all dom est ic m arket , even if wages are

considerably lower.

Another im portant at t ractor of R&D of MNEs is a skilled workforce and the qualit y of the

educat ion system . In a survey of m ult inat ional firm s, Thursby and Thursby (2006) find

that highly qualified R&D personnel is the m ost im portant driver for locat ion decisions in

R&D. Tübke et al. (2016) com e to a sim ilar conclusion in a recent survey. Ernst (2006)

relates the success of I ndia and other Asian count ries in at t ract ing R&D of foreign MNEs

to their expanding pool of graduates in science and technology. Hedge and Hicks (2008)

dem onst rate that the innovat ion act ivit ies of overseas US subsidiaries are st rongly

related to the scient ific and engineering capabilit ies of the host count r ies.

I n turn, skills shortage and a growing dem and for engineers and scient ists in the hom e

count ry is oft en a m ot ive for firm s to go abroad with R&D. Kinkel and Maloca (2008) find

that capacity bot t lenecks are the m ost frequent reason why Germ an firm s m ove R&D to

locat ions abroad. I n the research of Lewin et al. (2009) , an em erging shortage of high

skilled science and engineering talent part ially explains the relocat ion of product

developm ent from the United States to other parts of the world, m ost notably to Asian

count ries.

Potent ial knowledge spillovers between foreign-owned firm s and host count ry

organisat ions are another driver for R&D internat ionalisat ion. A discussion of spillovers as

an effect of R&D internat ionalisat ion is found in the next chapter . Spillovers as a

determ inant for R&D locat ion decisions point to the im portance of the qualit y of

university research as a driver of R&D internat ionalisat ion at the count ry level (Belderbos

et al. 2009; Thom son 2013; Siedschlag et al. 2013) . Knowledge spillovers m ay be even

m ore relevant at the regional than at the count ry level, because spillovers dim inish with

distance between sender and receiver (Jaffe et al. 1993; Breschi and Lissoni 2001) . As a

consequence, firm s which want to ut ilize such localised knowledge spillovers have to be

present where they occur, and innovat ive act ivity tends to cluster locally in indust r ies

with a high level of spillovers (Audretsch and Feldm an 1996) . This effect is related to

inst itut ional or technological condit ions, such as tacitness of the knowledge base, but

also to the existence of specialised local or regional labour m arkets ( see the survey of

Breschi and Lissoni 2001) .

An exam ple of the im portance of spillovers give Siedschlag et al. (2013) . They show that

agglom erat ion econom ies from foreign R&D act ivit ies, hum an capital, proxim ity to

cent res of research excellence and the research and innovat ion capacity of the region are

crucial for the R&D locat ion decisions of m ult inat ional firm s in the European Union. Other

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evidence for regional knowledge spillovers by R&D of foreign-owned firm s present

Castellani and Pieri (2013) .

Differences in labour cost between the hom e count ry and locat ions abroad are one of the

m ost im portant m ot ives for the internat ionalisat ion of product ion (Barba Navaret t i and

Venables 2004; Brennan et al. 2015) . Em pirical evidence that differences in the cost of

R&D personnel are a m ajor driver for the internat ionalisat ion of R&D, however, is weak.

Survey results as well as econom et ric studies see only a m odest influence of wage

differences in R&D locat ion decisions com pared to other factors (Booz Allen Ham ilton and

INSEAD 2006; Thursby and Thursby 2006; Kinkel and Maloca 2008; Belderbos et al.

2009; Tübke et al. 2017) . However, cost differences m ay becom e im portant when firm s

can choose between two locat ions that are sim ilar in m any other locat ional factors (Booz

Allen Ham ilton and INSEAD 2006; Thursby and Thursby 2006; Cincera et al. 2010;

Athukorala and Kohpaiboon 2010) .

Previous research has also pointed out that geographical proxim ity between host and

hom e count ry leads to higher levels of cross-border R&D investm ents (Guellec and van

Pot telsberghe de la Pot terie 2001) . However, there is also evidence that geographic

distance m ay play sm aller role for R&D than for other types of internat ional act ivit y

(Dachs and Pyka 2010, Castellani et al. 2013) . The distance effect is often explained by

addit ional co-ordinat ion cost , the cost of t ransferr ing knowledge over distance, and a loss

of econom ies of scale and scope when R&D becom es m ore decent ralised (von Zedtwitz

and Gassm ann 2002; Sanna-Randaccio and Veugelers 2007; Gersbach and Schm utzler

2011) . I n addit ion, the distance effect m ay also be explained by cultural, social and

inst itut ional factors. The internat ional business literature st resses that foreign-owned

firm s have to m aster addit ional inst itut ional and cultural barriers in their host count r ies.

This disadvantage is known as the ‘liabilit y of foreignness’ (Zaheer 1995; Eden and Miller

2004) or the ‘liabilit y of outsidership’ ( Johanson and Vahlne 2009) . Foreign-owned firm s

m ay suffer from a lack of m arket knowledge and understanding of custom er dem ands,

but also a lower degree of em beddedness in inform al networks in the host count ry (Lööf

2009) . Disadvantages from the liabilit y of foreignness tend to decrease over t im e, but

m ay even exist in long-established affiliates with a local m anagem ent and staff, because

the affiliate is em bedded in int ra- firm networks and have to st ick to the rules, norm s and

standards of the m ult inat ional group.

The role of policy for R&D locat ion decisions of MNEs has been invest igated by a num ber

of em pir ical studies (Cantwell and Mudam bi 2000; Kum ar 2001; Cantwell and Piscitello

2002; Thursby and Thursby 2006; Kinkel and Maloca 2008; De Backer and Hatem 2010;

Athukorala and Kohpaiboon 2010) . Policy inst rum ents include subsidies for investm ents

or R&D act ivit ies, or non-m onetary m easures such as investm ent services, m atch-

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m aking, provision of infrast ructure, legal support etc. (OECD 2016a) . Fostering

intellectual property r ights – although not a typical inward investm ent prom ot ion act ivit y

– can also be regarded as an im portant policy inst rum ent (Branstet ter et al. 2006;

Thursby and Thursby 2006; Holm es et al. 2016 on China; Schmiele 2013 is m ore

scept ical) . Moreover, with the expansion of European and US MNEs into Asia, local

content requirem ents in R&D (m andatory technology t ransfer, m andatory joint ventures,

requirem ents to perform R&D in the host count ry) gained som e prom inence as a policy

tool (Walsh 2007, Weiss 2016) .

Two findings on the role of policy in R&D internat ionalisat ion find a wide consensus in the

literature: first , special financial incent ives and a posit ive discrim inat ion of foreign-owned

firm s in general are not regarded as an appropriate inst rum ent to at t ract foreign R&D.

Athukorala and Kohpaiboon (2010) conclude in their analysis of overseas R&D act ivit ies

of US firm s that ‘there is no evidence to suggest that R&D specific incent ives have a

significant im pact on inter-count ry differences in R&D intensity (of US firm s) when

cont rolled for other relevant variables’. This does not m ean, however, that science,

technology and innovat ion policy has no role in at t ract ing foreign R&D. Measures to

im prove university educat ion or t o foster co-operat ion between firm s and universit ies can

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

nat ional innovat ion system s and leveraging R&D efforts of firm s. These m easures,

however, should be open to every firm , dom est ically or foreign-owned. Siedschlag et al.

(2013) , for exam ple, show that high public R&D expenditures increase the probabilit y of

locat ion of R&D act ivit ies by European m ult inat ional firm s in a part icular region.

Second, governm ents that want to at t ract R&D of foreign m ult inat ional firm s should

instead focus on the econom ic fundam entals and provide polit ical stabilit y, good public

infrast ructure, reasonable tax rates, a stable legal system , and increase the

em beddedness of foreign-owned firm s in the dom est ic innovat ion system (Cantwell and

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

reflects the finding discussed above that the locat ion of R&D often depends on the

locat ion of product ion, sales or other business funct ions of the firm .

3 .2 Drivers at the sectoral level

A second im portant level for the analysis of drivers is the sector where the firm operates.

Em pirical studies found huge differences between sectors in term s of R&D

internat ionalisat ion (OECD 2008; Dachs et al. 2014) : R&D internat ionalisat ion tends to

concent rate in high- technology sectors, such as pharm aceut icals, com puters, elect ronics,

m achinery, or the autom ot ive indust ry. However, there is not m uch literature that would

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explain these differences. I will therefore present som e thoughts based on the innovat ion

econom ics literature.

Sectors m at ter for R&D internat ionalisat ion in two ways: on the one hand, R&D intensive

sectors have a disproport ionate share on global foreign direct investm ent (Markusen

1995, p. 172; Bellak 2004) . Hence, there is already a bias towards R&D- intensive sectors

in underlying FDI decisions. On the other hand, sectors m at ter because R&D intensity

and R&D processes differ considerably between sectors (Marsili 2001; Malerba 2005;

Castellacci 2007; Peneder 2010) . These intersectoral differences shape the R&D

behaviour of firm s to a considerable degree, including decisions to locate R&D abroad,

leading to different degrees of internat ionalisat ion at the sectoral level.

A first im portant determ inant at the indust ry level is the degree of tacitness of the

knowledge base of a sector. Tacitness results from the fact that cognit ive capabilit ies and

abst ract concepts are not easy to art iculate explicit ly and to t ransfer between people

(Cowan et al. 2000) . A knowledge base which is highly tacit and bound to individuals

m ay be an obstacle to internat ionalisat ion, because it m akes knowledge exchange over

distance cost ly. Tacitness, however, m ay also be a driver for internat ionalisat ion,

because firm s have to m ove to the place where this knowledge is available when it

cannot be t ransferred over distance.

Second, sectoral knowledge bases also differ in their degree of cum ulat iveness, or, in

other words, in the degree future innovat ion success depends on the knowledge which

has been built up in the past (Marsili 2001) . Cum ulat iveness is high in chem icals,

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

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

degree of cum ulat iveness m ay require a high degree of specialisat ion in R&D, which gives

advantages to cent ralised R&D. Cum ulat iveness m ay also prom ote R&D cent ralisat ion

when st rong learning effect s lead to increasing returns to scale in R&D, or when the R&D

process includes econom ies of scope and effects from cross- fert ilisat ion. Moreover,

cum ulat iveness of the knowledge base m ay also im ply that R&D act ivit ies require a

certain m inim um scale in order to be successful.

Third, sectors also differ in term s of appropriabilit y, the degree to which an innovat ion

can be protected from im itat ion (Cohen et al. 2000; Cohen 2010) . Firm s in sectors with a

low degree of appropriabilit y, like m any service sectors, m ay be reluctant to

internat ionalise R&D because they have only weak m eans to prevent involuntary

knowledge spillovers.

Fourth, another source for inter-sectoral differences is the firm ’s network of external

relat ions with suppliers, clients, universit ies, public adm inist rat ion, etc. (Marsili 2001;

Malerba 2002) . Som e indust r ies, such as biotechnology or pharm aceut icals, have st rong

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linkages to basic science, and firm s in these indust r ies m ay find it useful to locate R&D

close to excellent research universit ies. Belderbos et al. (2009) show that firm s with a

st rong science orientat ion prefer to locate R&D in host count r ies with st rengths in

academ ic research. Another very im portant locat ional factor for high R&D intensive

sectors is the fram ework for R&D, including intellectual propert y r ights (Tübke et al.

2017) . Firm s in other sectors, such as the autom ot ive of the elect ronics indust ry, are

closely connected to suppliers and custom ers through internat ional product ion networks.

Enterprises in these sectors m ay be forced to internat ionalise their R&D to gain m arket

access, in part icular have developm ent capabilit ies in proxim ity to key clients. Tübke et

al. (2017) show that for m edium - and low- tech sectors, m arket access is m ore im portant

than a reliable fram ework for R&D. The existence of lead users or other potent ial co-

operat ion partners m ay also pose a st rong incent ive to locate R&D in a part icular

count ry.

3 .3 Drivers at the firm level

The third relevant level for the explanat ion of overall pat terns of R&D internat ionalisat ion

is the firm level. I nternat ionalisat ion paths of two firm s can be com pletely different –

even if they operate in the sam e region and operate in the sam e indust ry – when they

differ in their firm characterist ics ( for exam ple, size, internat ionalisat ion experience) , the

costs and benefit s that arise for them from internat ionalisat ion, and result ing m ot ives

and st rategies. The interplay of these three factors, together with fram ework condit ions

from the count ry, regional and sectoral level, determ ines the degree of R&D

internat ionalisat ion of firm s.

I nternat ionalisat ion decisions in R&D are closely connected with internat ionalisat ion

decisions in product ion and the em ergence of global value chains ( these are discussed in

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

two reasons. First , internat ionalisat ion in product ion can be a result of superior , firm -

specific assets. Firm s internat ionalise, because they want to exploit these assets at

foreign m arkets via their subsidiaries (Dunning 1973; Markusen 1995; Caves 1996

(1974) ; Markusen 2002) . Dunning (1973; 1981) suggests that firm s exploit these assets

via FDI and not via export s or licensing because of ownership, locat ion and

internalisat ion advantages associated with this m ode of exploitat ion. Thus, firm

heterogeneity leads to self- select ion in the internat ionalisat ion st rategies of firm s (Head

and Ries 2003; Helpm an et al. 2004; Helpm an 2006) . Only the m ost product ive (and

thus innovat ion intensive) firm s expand their operat ions via FDI , while less product ive

firm s choose to export or serve only dom est ic m arkets. However, the relat ionship also

exists in the other direct ion: globally engaged firm s use m ore innovat ive inputs and

generate m ore innovat ive outputs, leading to a higher product ivit y (Criscuolo et al.

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2010) . I n addit ion, there is also evidence for a posit ive relat ionship between innovat ion

and exports at the firm level (Greenhalgh and Taylor 1990; Lachenm aier and Wößm ann

2006; Harris and Li 2009) .

Second, there is a m utual relat ionship between R&D and internat ional expansion because

they are both driven by the sam e determ inants. Som e firm characterist ics that are

posit ively related to R&D intensity also drive internat ionalisat ion (Arvanit is and

Hollenstein 2006, Cerrato 2009) . Dogson and Rothwell (1994) , Cohen (1995, 2010) ,

Kleinknecht and Mohnen (2002) or the OECD (2009) have exam ined the determ inants of

R&D and innovat ion in detail. R&D and R&D intensity is, at first , associated with firm size.

There are different advantages and disadvantages of sm all and large firm s in the

innovat ion process, leading to a U-shaped relat ionship between size and R&D

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

associat ion between firm size and the internat ionalisat ion of R&D (Arvanit is and

Hollenstein 2006; Kinkel and Maloca 2008; Schm iele 2012) . R&D is also posit ively related

to the internal knowledge and capabilit ies of t he firm (Cohen and Levinthal 1989 and

1990; Teece et al. 1997) . These capabilit ies enable the firm to create new knowledge,

but also absorb knowledge from external sources.

Besides firm characterist ics, another source of firm heterogeneity in the

internat ionalisat ion of R&D are the costs of a decent ralised organisat ion of R&D (Sanna-

Randaccio and Veugelers 2007; Gersbach and Schm utzler 2011, Belderbos et al. 2013) .

These costs first com prise the foregone benefit s of R&D cent ralisat ion, including

econom ies of scale and scope from specialisat ion and a t ighter cont rol over core

technologies of the firm . Second, addit ional costs also arise from higher co-ordinat ion

effort s and the cost of t ransferr ing knowledge within the MNE. Proxim ity also facilitates

co-ordinat ion of R&D act ivit ies with other parts of the firm , such as product ion and

m arket ing, and m utual learning between these parts. A growing literature discusses the

need of firm s to co- locate product ion and R&D to enable m utual learning effects (Ketokivi

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

advantages would be a ham pering factor for R&D internat ionalisat ion. Third, a

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

between the firm and the hom e count ry innovat ion system . Patel and Pavit t (1999) ,

Narula (2002) , or Belderbos et al. 2013 point out that firm s are st rongly em bedded in

and dependent on their hom e count ry innovat ion system . The t ies that bind firm s to their

hom e count ry include form al R&D co-operat ions with dom est ic universit ies, but also

inform al networks that grew from doing business together in the past . I nform al networks

between firm s m ay also evolve from recruit ing staff from the sam e universit ies and

labour m obilit y. Rem oving these linkages by m oving R&D abroad would incur

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considerable costs on the firm s, because they would need to re- install sim ilar linkages

with host count ry organisat ions.

Finally, firm characterist ics and the costs of R&D internat ionalisat ion have to be seen

alongside the benefit s of R&D internat ionalisat ion and the result ing st rategies of the

firm s. A first benefit is that R&D can support overseas product ion. Products and

technologies often have to be adapted to consum er preferences, regulat ion, or

environm ental condit ions of foreign m arkets in order t o facilitate their exploitat ion in

these m arkets. These adaptat ions can be done m ore easily in proxim ity to potent ial

clients in the host count r ies. MNEs therefore locate design, engineering and R&D units in

m ain foreign m arkets t o support m arket ing and product ion facilit ies abroad. There are

various nam es for this m ot ive in the literature, including asset -exploit ing behaviour

(Dunning and Narula 1995) , com petence-exploit ing subsidiary m andates (Cantwell and

Mudam bi 2005) , hom e-base exploit ing st rategies (Kuem m erle 1999) , or m arket -driven

internat ionalisat ion of R&D (von Zedtwitz and Gassm ann 2002) .

A second benefit and im portant driver of R&D internat ionalisat ion at the firm level is

access to knowledge and the creat ion of new knowledge abroad. This m ot ive is known as

the asset -seeking m ot ive (Dunning and Narula 1995) , com petence-creat ing subsidiary

m andate (Cantwell and Mudam bi 2005) , hom e-base augm ent ing st rategy (Kuem m erle

1999) , or global R&D st rategy (von Zedtwitz and Gassm ann 2002) in the literature.

Asset - seeking st rategies are driven, on the one hand, by the existence of superior local

knowledge and favourable fram ework condit ions for R&D in various host count r ies. Som e

types of knowledge are tacit , bound to their local context , and t ransferable over distance

only at high costs (Cowan et al. 2000; Breschi and Lissoni 2001) . This knowledge m ay be

found at universit ies and other research organisat ions, in clusters, or be available from

clients, suppliers or com pet itors. Various authors describe foreign-owned subsidiaries as

‘surveillance outposts’ or ‘antennas’ (Florida 1997; Alm eida 1999) that extensively

m onitor and assim ilate knowledge from local sources. On the other hand, asset -seeking

st rategies m ay also be driven by factors related to the nature of various technologies and

changing firm st rategies. Narula and Zanfei (2005) for exam ple, suggest that the

increasing com plexity of products is a driver of the internat ionalisat ion of R&D. Rising

technological com plexity increases the knowledge requirem ents of firm s and forces them

to search for new knowledge abroad. A sim ilar argum ent is brought forward by

Chesbrough (2003) . He points out that m any innovat ive firm s have m oved to an ‘open

innovat ion’ m odel where they exploit ideas and knowledge not only provided by internal

R&D, but also from a broad range of external sources and actors. I n this respect , asset -

seeking can be seen as a variant of ‘open innovat ion’ st rategies with a focus on their

geographical dim ension.

11

There is evidence that asset - seeking st rategies have becom e m ore frequent in the recent

years, although asset -exploit ing st rategies st ill prevail (Narula and Zanfei 2005;

Sachwald 2008) . Moreover, som e authors ( for exam ple Criscuolo et al. 2005) st ress the

fact that the two m ot ives cannot be separated in a num ber of cases. Firm s – intent ionally

or unintent ionally – often follow both st rategies sim ultaneously. Microsoft ’s effort s to

adapt their products to the Chinese language resulted in new knowledge that could also

be used in other contexts (Gassm ann and Han 2004) .

Finally, an im portant aspect of firm st rategy towards R&D internat ionalisat ion is the

degree of decent ralisat ion. I n order to m ake internat ionalisat ion of R&D possible, the

head office of the MNE has to allow a higher degree of decent ralisat ion by changing firm

organisat ion and giving a higher degree of autonom y to the subsidiaries (Birkinshaw and

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

4 . I m pacts of MNE R& D Act ivit ies on Host and Hom e

Countr ies

The technological and econom ic characterist ics of count r ies provide different locat ional

advantages and disadvantages for foreign-owned firm s to set up R&D and innovat ion

act ivit ies. However, R&D act ivit ies of MNE affiliates m ay also influence the innovat ion

system s of their host and hom e count ries to a considerable degree. The literature has

ident ified various potent ial opportunit ies and challenges for host and hom e count ries

from the internat ionalisat ion of R&D and innovat ion (see Table 1) .

Table 1 Potent ial opportunit ies and challenges for nat ional innovat ion system s from the

internat ionalisat ion of R&D and innovat ion

Opportunit ies Challenges

Ho

st

co

un

try

I ncreases in aggregate R&D and

innovat ion expenditure

Knowledge diffusion to the host

econom y

Dem and for skilled personnel

St ructural change and agglom erat ion

effects

Com pet it ion with domest ically owned

firm s for resources; crowding-out

Loss of cont rol over dom est ic

innovat ion capacity

Separat ion of R&D and product ion

Less st rategic research, less radical

innovat ions, m ore adapt ing

12

Ho

me

Co

un

try

Im proved overall R&D efficiency

Reverse technology t ransfer

Market expansion effects

Exploitat ion of foreign knowledge at

hom e

Loss of j obs due to relocat ion

‘Hollowing out ’ of dom est ic R&D and

innovat ion act ivit ies

Technology leakage and involuntary

knowledge diffusion

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

4 .1 I m pacts of MNE R&D and innovat ion act ivit ies on host countr ies

I first discuss the perspect ive of the host count ry ( the two upper cells in Table 1) . The

presence of MNE affiliates in a count ry can considerably raise aggregate R&D expenditure

of this count ry over the short and m edium term . Mult inat ional firm s spend huge am ounts

on R&D, even com pared with aggregate R&D expenditure of count r ies (OECD 2010, p.

121) . A new R&D act ivit y of an MNE m ay therefore considerably affect aggregate R&D

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

evidence suggests that sm all count r ies benefit m ost in relat ive term s, also because they

usually exhibit higher degrees of internat ionalisat ion in FDI than large count ries (Lonm o

and Anderson 2003; Costa and Filippov 2008) . MNE affiliates – in cont rast to

dom est ically owned firm s – can access financial m eans of their parent enterprise abroad;

expansion of R&D act ivit y is therefore not lim ited by a lack of internal resources or

incom plete credit m arkets in the host count ry. There is also evidence that affiliates of

foreign-owned firm s perform bet ter in m any aspects of innovat ion behaviour than

dom est ically owned firm s (Frenz and Iet t o Gillies 2007, Dachs et al. 2008, Sadowski and

Sadowski-Rasters 2008, Cozza and Zanfei 2016) . This includes, for exam ple, higher

levels of innovat ion output and higher labour product ivit y, and a higher propensity to co-

operate than dom est ically owned enterprises after cont rolling for size, sector and

innovat ion input .

A second benefit for the host count ry is the diffusion of inform at ion and knowledge

(knowledge spillovers1) to host count ry organisat ions. Potent ial receivers of this

knowledge are dom est ic firm s, universit ies, or research cent res. The literature gives

considerable at tent ion to knowledge diffusion and spillovers by foreign-owned firm s (see

the surveys by Keller 2004, 2010, Mayer and Sinani 2009, or Hayakawa et al 2010) .

More recent ly, the literature also discusses spillovers from R&D between foreign-owned

firm s and the innovat ion system s of em erging econom ies (Qu et al. 2013, Feng 2017) .

13

According to Blom st röm and Kokko (2003) , spillovers are the st rongest argum ent as to

why count ries should t ry to at t ract inward investm ent . Em pirical evidence on the size and

the effects of spillovers, however, is m ixed. Meta-studies (Görg and St robl 2001, Görg

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

relat ionship between foreign presence and the perform ance of dom est ically owned firm s.

Görg and St robl (2001) for exam ple indicate that the num ber of studies that ident ify

posit ive spillovers roughly equals those ident ifying no effects or even negat ive

consequences from the presence of foreign-owned firm s. I n the m ajorit y of cases

considered by Görg and Greenaway (2004) , no significant effect of MNE presence on

dom est ic firm product ivit y is observed. Veugelers (2005, p 37) finds that it is ‘fair to

conclude that the results on posit ive spillovers on host econom ies are not st rong and

robust ’. Em pirical evidence is clearer below the aggregate level. Cont ribut ions by Singh

(2007) , Keller and Yeaple (2009) and by Coe et al. (2009) reveal substant ial spillover

effect s from foreign R&D stocks and the presence of foreign-owned firm s at the sectoral

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

A m ain reason for this vagueness of the results, besides m easurem ent issues, is the fact

that spillovers from foreign-owned firm s to t he local econom y are bound to specific

indust ry and econom y-wide condit ions to occur. These factors include a certain level of

absorpt ive capacity (Cohen and Levinthal 1989, 1990; Cantner and Pyka 1998) of

dom est ic organisat ions; weak inst rum ents of foreign-owned firm s to protect proprietary

knowledge, which is m ost ly sector-specific; and the propensity of the t ransfer channel or

type of interact ion between foreign-owned firm s and dom est ic organisat ions (Veugelers

and Cassim an 2004) .

R&D act ivit ies of foreign-owned firm s in a part icular count ry m ay also help to enhance

the level and qualit y of hum an resources. New R&D labs by MNEs m ay create addit ional

dem and for researchers and give incent ives to governm ents to im prove higher educat ion

system s. MNEs are at t ract ive em ployers, because they can offer internat ional career

perspect ives and pay higher wages than dom est ically owned enterpr ises (Lipsey 2002;

Bailey and Driffield 2007; Hijzen et al. 2013; Nilsson Hakkala et al. 2014) . Moreover,

j obs created by foreign-owned firm s appear t o be m ore persistent than jobs generated in

dom est ically owned plants (Görg and St robl 2003) .

Finally, foreign-owned firm s can also cont r ibute to st ructural change towards a higher

share of technology- intensive firm s and to the em ergence of clusters in the host count ry.

St ructural change is related in two ways to the presence of foreign-owned firm s. On the

one hand, foreign-owned firm s operate predom inant ly in technology- intensive indust ries.

Market ent rance and subsequent growth of the foreign-owned firm will therefore shift the

indust r ial st ructure of a count ry towards a higher technology intensity (Blonigen and

14

Slaughter 2001; Driffield et al. 2009) . On the other hand, MNE subsidiaries t r igger

st ructural change because their dem and for inputs favours the growth of t echnology-

intensive suppliers in the host count ry. This dem and m ay lead to t he em ergence of

clusters and other agglom erat ions at the regional level in the host count ry (Young et al.

1994; Bellandi 2001; Pavlínek 2004) . Foreign-owned subsidiaries in clusters often

st rongly em bedded locally, but have also a lot of t ies with internat ional partners inside

and outside their com pany group, and can therefore act as bridges for knowledge

t ransfer between dom est ic organisat ions and abroad (Birkinshaw and Hood 2000;

Lorenzen and Mahnke 2002) .

I now turn to potent ial challenges for host count r ies that em erge from the presence of

foreign-owned firm s. One st r iking aspect in the literature on FDI spillovers is the num ber

of studies that report negat ive effects (see, for exam ple, Aitken and Harrison 1999;

Konings 2001; Castellani and Zanfei 2002; Dam ijan et al. 2003; Marin and Sasidharan

2010; Dam ijan et al. 2013, Rojec and Knell, 2015) . These negat ive spillovers are often

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

invest igates the determ inants of R&D investm ent at the nat ional level for 26 OECD

count ries from 1996-2006 and finds that foreign technology inflows through t rade and

FDI had a robust and negat ive im pact on dom est ic R&D. One explanat ion for these

negat ive im pacts is increased com pet it ion in product and factor m arkets due to foreign

presence (Aitken and Harrison 1999; Konings 2001) . I n the context of R&D, com pet it ion

for staff (Figini and Görg 1999; Driffield and Taylor 2000) seem s to be relevant in

part icular. Addit ional dem and by MNEs for skilled personnel is beneficial for the host

count ry in the short run when there are unem ployed scient ists, engineers and technicians

and alternat ive em ploym ent opportunit ies – for exam ple at dom est ic universit ies – are

scarce. However, it m ay have negat ive consequences for the host count ry when the

supply for research personnel is inelast ic and foreign-owned firm s and dom est ic

organisat ions com pete for qualified staff. I n the long run, the effects of the dem and by

foreign-owned firm s on the labour m arket for R&D staff look m ore posit ive. St ronger

dem and for high-skilled labour due to m arket ent ry of foreign-owned firm s and st ructural

change m ay foster academ ic t raining and increase the num ber of graduates in science

and technology in the long run. A higher skill intensity in the econom y, in turn, m ay

foster locat ional advantages and further increase the at t ract iveness of the count ry for

inward investm ent . Barry (2004) illust rates such a ‘virtuous circle’ for t he case of I reland.

Fears that a high share of foreign-owned firm s on aggregate R&D expenditure m ay lead

to negat ive effect s are also nurtured by m ore general concerns against MNE presence

(see Barba Navaret t i and Venables 2004; Jensen 2006; Forsgren 2008 for a sum m ary of

this discussion) . This is less an academ ic and m ore a general policy discussion, so there

are only very few academ ic papers that invest igate these issues. These concerns include:

15

the assum pt ion that the internat ionalisat ion of R&D leads to a loss of cont rol over

dom est ic innovat ion capacity, because decisions on R&D of foreign-owned firm s m ay not

be taken by the subsidiaries them selves, but by corporate headquarters abroad; the

assum pt ion that R&D act ivit ies of MNEs are m ore ‘foot loose’ than those of dom est ically

owned firm s, because they can be easily t ransferred between count ries; the assum pt ion

that foreign-owned enterprises act in ways that are not in accordance with the nat ional

interest ; the assum pt ion that an im portant m ot ive for R&D internat ionalisat ion is rent -

seeking in select ing locat ions. Another concern against foreign ownership is that R&D of

foreign-owned firm s is associated with a higher degree of adaptat ion and less basic,

st rategic research, because MNEs often concent rate st rategic, long- term R&D in the

hom e count ry; r ising shares of foreign ownership on aggregate innovat ion act ivit y m ay

therefore lead to fewer radical innovat ions than in the case of dom est ic ownership.

Em pirical evidence that support s these concerns is thin. I nternat ionalisat ion certainly

leads to a shift of cont rol from dom est ic head offices to MNE headquarters abroad.

However, dom est ic policy does not necessarily have a higher abilit y to influence R&D

decisions when enterprises are dom est ically owned (Dunning and Lundan 2008, p. 249

ff) . I n addit ion, it seem s that autonom y of MNE subsidiaries over their R&D act ivit ies has

been rising over t im e (Dunning and Lundan 2009, chapter 8) . The quest ion if foreign

ownership is associated with a downsizing of R&D act ivit y has been evaluated both for

take-overs as well as for all foreign-owned and dom est ically owned firm s. I n the case of

take-overs, there are both, exam ples of downsizing as well as exam ples of expansion,

depending on the com plem entarit y between acquiring and acquired firm s and other

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

2011) . Studies that com pare innovat ion input and output of dom est ically owned and

foreign-owned firm s find no negat ive effect of foreign ownership after cont rolling for firm

characterist ics such as size, sector, or export intensity (Sadowski and Sadowski-Rasters

2006, Dachs et al. 2010) .

R&D internat ionalisat ion m ay also be associated with a separat ion of R&D and product ion

(Pearce 2004; Pearce and Papanastassiou 2009) . MNEs have m uch m ore choices in the

locat ion and organisat ion of R&D and product ion than m ono-nat ional firm s. R&D and

product ion is not necessarily located in the sam e count ry, because MNEs m ay find it

useful to develop products in one count ry and m anufacture in another count ry where

condit ions for product ion seem m ore favourable. As a consequence, policy m easures to

prom ote R&D and product developm ent m ay yield only few jobs and give only a weak

st im ulus to growth when foreign-owned firm s decide to produce abroad. To m y

knowledge, no em pirical study has thoroughly exam ined the effect s from the separat ion

of R&D and product ion so far . I t is, however, plausible that such a leaking-out is st ronger

in sm all count r ies and in count r ies with a high share of foreign-cont rolled R&D, and

16

weaker when foreign-owned firm s have a high degree of autonom y and st rong m andates

in their enterprise groups, because these firm s m ay t ry to concent rate not only R&D, but

also product ion at their locat ion to m axim ise influence in their enterprise group.

4 .2 I m pacts of R& D and innovat ion act ivit ies abroad on the hom e countr ies

The internat ionalisat ion of R&D has also im plicat ions for the hom e count ry of the

m ult inat ional firm . D’Agost ino (2015) provides a recent survey of these effect s, so this

sect ion will be short .

As discussed above, a m ain reason for firm s to go abroad with R&D act ivit ies is to get

access to knowledge not available in the hom e count ry. Hence, a first m ain benefit for

the hom e count ries is the t ransfer of results from overseas R&D act ivit ies which brings

new knowledge into the hom e count ry. Various studies provide evidence for such reverse

knowledge t ransfers (Fors 1997; Feinberg and Gupta 2004; Todo and Shim izutani 2005;

Am bos and Schlegelm ilch 2006; Piscitello and Rabbiosi 2006; Narula and Michel 2009;

Rabbiosi 2009; AlAzzawi 2011) . Reverse knowledge t ransfers can increase overall

technological capacit ies, help to develop new products and foster growth and

em ploym ent in the hom e count ry. R&D act ivit ies abroad can therefore st rengthen the

growth of the parent com pany in the hom e count ry (Ram m er and Schm iele 2008) . The

size of these benefit s depends on the absorpt ive capacit ies and other firm characterist ics

of the parent com pany (Schm iele 2012) , on the degree of com plem entarit y between

act ivit ies abroad and at hom e (Arvanit is and Hollenstein 2011) , and on the m ot ives for

R&D act ivit ies abroad. Todo and Shim izutani (2005) dem onst rate for Japan that effect s of

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

when foreign-owned affiliates undertake R&D to tap into advanced knowledge abroad.

Adapt ive R&D however was found to im prove product ivit y in the host count ry, but did not

cont r ibute to enhanced product ivity in the hom e count ry. Griffith et al. (2004) find that

R&D by UK firm s in the US have resulted in benefit s from reverse technology with the

effect s being larger in the case of R&D units set up to source technology. Results for

Sweden, however (Fors 1997; Braconier et al. 2002) indicate that there have not been

significant spillovers to the hom e count ry, possibly because m uch R&D has been of the

adapt ive type. AlAzzawi (2011) finds that R&D abroad had a posit ive im pact on the hom e

count ry ’s level of innovat ion act ivit y in both developed and newly indust r ialised count ries,

but finds product ivit y benefit s for newly indust r ialised count ries only. Moreover, there

seem s to be a posit ive relat ionship between internat ionalisat ion and the returns from

R&D at hom e (Criscuolo and Mart in 2009; Añón Higón et al. 2011) which m ay further

increase the benefit s for the hom e count ry.

Potent ial challenges or costs from the internat ionalisat ion of R&D for the hom e count ry

m ay arise when firm s replace dom est ic R&D and innovat ion act ivit ies with sim ilar

17

act ivit ies abroad. This type of subst itut ion has becom e an im portant topic in internat ional

econom ics (see the survey of Crinò 2009) . I t m ay lead to a ‘hollowing out ’ (Criscuolo and

Patel 2003) of dom est ic innovat ion capacity, a loss of j obs in R&D, and a downward

pressure on wages of R&D personnel in the hom e count ry. Despite public discussions on

the offshoring of R&D and possible consequences for hom e count ry innovat ion system s,2

em pir ical results that confirm such ‘hollowing out ’-effects are rare. The reason for this

are com plem entarit ies between overseas adaptat ions and R&D at the hom e base

(D’Agost ino and Santangelo 2012) . Studies based on patent data give no indicat ion for a

subst itut ive relat ionship between R&D abroad and hom e-based R&D act ivit ies

(D’Agost ino et al. 2013) . However, data on R&D expenditure of dom est ic firm s abroad is

available only for a very sm all num ber of count r ies, which m akes a test of the

assum pt ion difficult .

5 . New direct ions for research on R& D

internat ionalisat ion

R&D internat ionalisat ion today is a well-established research field within internat ional

econom ics literature, the internat ional business literature and within the econom ics of

innovat ion and technological change. There is a consensus on the m ain drivers as well on

the im pacts of the process. However, som e quest ions rem ain open, and new quest ions

arise. This is why the final chapter – instead of a sum m ary - points to three fields where

m ore research in needed in the future.

5 .1 Tax credits for R&D as policy incent ives

There is a consensus in the literature that the best count r ies can do to at t ract R&D of

foreign-owned firm s is to create favourable condit ions for doing business and R&D that

benefit both, dom est ic and foreign-owned count ries (see Sect ion 3.1) . Financial

incent ives for foreign-owned are not regarded as a suitable inst rum ent to at t ract these

act ivit ies.

This consensus has been challenged in recent years by the em ergence of tax incent ives

for R&D. In 2015, this type of incent ive is offered by 28 of the 34 OECD count ries and a

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

Leibrecht (2016) discuss tax incent ives for R&D and their welfare effects in the context of

general investm ent incent ives for foreign direct investm ent .

The effect of R&D tax incent ives on locat ion choices of MNEs is st ill an unexplored topic

(Appelt et al. 2016, 19) . From the argum ents brought forward in the literature, however,

it seem s that tax credits for R&D are a very appealing inst rum ent for MNEs (Mohnen

2013, Appelt et al. 2016, Bellak and Leibrecht 2016) :

18

• MNEs operate m ore often in R&D intensive sectors and m ore perform R&D

frequent ly than single-nat ional firm s. Thus, a subsidy that focusses on R&D seem s

m ore appealing to MNEs than other non-R&D investm ent incent ives.

• Tax credits for R&D favour large R&D spenders (Mohnen 2013) MNEs m ay in

part icular favour fiscal incent ives because they offer them opportunit ies to

m inim ize corporate incom e taxes single-nat ional firm s or sm aller firm s do not

have, for exam ple by shift ing R&D costs between count ries.

• Large firm s have considerably lower applicat ion costs in R&D tax credit schem es

than in the case of direct R&D funding which usually involves various eligibilit y

checks. This m ay again favour large R&D spenders, which do not have to

adm inister a large num ber of single funding applicat ions. Moreover, A num ber of

count r ies have no upper ceiling for R&D tax credits.

• I ncom e-based tax incent ives for R&D ( tax breaks for incom e from t radem arks,

patents and other form s of intellectual capital) in the form of patent boxes et c.

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

m ay also provide them with incent ives for shift ing profit s via licence incom e.

As a consequence, R&D tax incent ives m ay be m uch m ore effect ive than other form s of

policy incent ives to at t ract foreign-owned firm s. There is som e em pirical support for

these argum ents; Dachs (2016) report that foreign-owned firm s in Aust r ia – in cont rast

to dom est ically owned firm s – receive the bulk of their public support for R&D via tax

credits. Results by Pot i and Spallone (2016) indicate a significant and posit ive correlat ion

between R&D tax credits and R&D of foreign-owned firm s.

5 .2 R& D internat ionalisat ion in service industr ies

Services are the ‘dark m at ter’ of R&D internat ionalisat ion – we know there should be a

lot of it , but so far, we cannot see it . Only a lim ited num ber of count r ies (m ost prom inent

the USA) provide data on R&D by foreign-owned firm s in the services sectors. This data

indicates that services account for around a third of total R&D by foreign-owned firm s. I f

we generalize these observat ions there should be m uch m ore R&D by foreign-owned

firm s than we current ly observe in official stat ist ics.

The expansion of services in R&D internat ionalisat ion cannot be explained by a single

reason. On the one hand, the use of new technologies m akes service firm s increasingly

R&D intensive, like in the case of inform at ion and com m unicat ion services. On the other

hand, R&D intensity in services increases because services and part s of the service value

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

outsource R&D to specialized suppliers of R&D services. The m ost prom inent exam ple of

this developm ent is the pharm aceut ical indust ry (Ram irez 2013) which m oves clinical

t r ials and other stages of the R&D process to specialized firm s. Moreover, the em ergence

19

of sm all biotechnology firm s has created a new type of divisions of labour between sm all

and large firm s in the pharm aceut ical indust ry.

Both developm ents lead to a higher internat ionalisat ion in services, and to m ore overseas

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

asset -exploit ing m ot ive discussed above. Quest ions, however, rem ain about the service-

specific drivers and obstacles of service firm s, as well as the co-ordinat ion costs and

condit ions for knowledge- t ransfer within service firm s which m ay be shaped by different

degrees of taciteness com pared to m anufacturing.

5 .3 Mult inat ional f irm s from em erging econom ies

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

im portant players in foreign direct investm ent in recent years. According to the 2014

World I nvestm ent Report , the share of developing and t ransit ion econom ies on total FDI

out flows has clim bed from 7% in 1999 to 39% in 2013 (UNCTAD 2014, p. 7) . The r ise of

is not surprising; the internat ional business as well as internat ional econom ics literature

predicts that firm s with superior knowledge capital and assets will increasingly turn

invest abroad to exploit these assets at internat ional m arkets. I n recent years,

expenditures for R&D have increased considerably in em erging econom ies – m ost notably

in China (OECD 2014) , a st rong indicator for the build-up of knowledge and superior

assets.

Moreover, we can expect that EMNEs – once they have established internat ional

product ion – increasingly m ove from asset -exploit ing to asset -creat ing st rategies in their

foreign act ivit ies. This m eans that EMNEs increasingly create and collect knowledge

outside their hom e count ries by locat ing R&D and innovat ion act ivit ies in various host

count r ies. Various authors (Di Minin and Zhang 2010; Di Minin et al. 2012; Giuliani et al.

2014, Crescenzi et al. 206) are observing the first R&D act ive EMNE subsidiaries in

Europe and the US.

The r ise of EMNEs creates new quest ions for research on the internat ionalisat ion of R&D.

I t challanges old views on the global diffusion of knowledge from the m ost t o least

developed count ries, and raises new quest ions on the nature of superior assets of

EMNEs, given that these firm s evolve in m ore rest rained environm ents than firm s in

advanced econom ies (Narula 2012) . Moreover, it br ings back fam ily and state ownership,

two m odels of governance which have becom e quite unfamiliar am ong US and European

m ult inat ional firm s. Fam ily- and state-owned firm s m ay have different cultures of

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

the r ise of EMNEs has created fears of ‘predatory behaviour’ - that state-owned EMNEs

will acquire dom est ic com panies, exploit their knowledge and leave. Such concerns,

20

however, are not new, and have also been raised against MNEs from other count r ies as

well.

Acknow ledgem ents

The author wants to thank the European Com m ission, DG Research and Innovat ion, for

it s financial support of the project " I nternat ionalisat ion of business investm ents in R&D

and analysis of their econom ic im pact " , cont ract num ber 30-CE-0677869/ 00-

21/ A4/ 2014, specific cont ract under the fram ework cont ract for the provision of services

to the Com m ission in the fields of research evaluat ion and research policy analysis, Ref.

OJ 2010/ S 172-262618.

Notes

1. The concept of spillovers found in the internat ional econom ics literature differs in

som e respect from the concept of knowledge flows in the innovat ion econom ics

literature where knowledge flows are also frequent ly labelled as spillovers. Spillovers

in the context of the internat ional econom ics literature do not exclusively focus on

the t ransfer of inform at ion or knowledge, but also include other non-com pensated

effect s like com pet it ion, labour m arket or agglom erat ion effect s (see Harris and

Robinson 2004 for a typology of spillovers) . One exam ple is a lower price level in a

certain m arket due to increased com pet it ion after m arket ent ry of a foreign-owned

firm . Another form of spillover not related to knowledge is the threat of m arket ent ry

by R&D intensive MNEs that m ay spur R&D act ivit ies of dom est ically owned firm s

(Aghion et al. 2009) .

2. An exam ple is the June 2010 issue of the Journal of Technology Transfer which

discusses product ion offshoring and its effects on US m anufacturing R&D in detail.

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