R&D internationalisation during the Global Crisis

Bernhard Dachs, Georg Zahradnik

The Global Crisis brought a halt to three decades of R&D internationalisation, in which foreign firms’ share of total R&D expenditure had increased in almost all countries where data is available. However, this column argues that the crisis did not lead to a new global distribution of overseas R&D expenditure, despite the erosion of the EU’s share. The persistence of R&D expenditure is attributed to the costs of relocating R&D and to the autonomy of foreign subsidiaries.

Foreign firms’ share of total business R&D expenditure increased during the last three decades in almost all countries where data is available, but this trend stopped with the Global Crisis of 2008–2009. In most countries, R&D of foreign firms was more severely affected by the crisis than R&D of domestic firms. However, the crisis did not lead to a new global distribution of overseas R&D expenditure.

Multinational enterprises play a pivotal role in the global creation of knowledge. They are the driving force behind the ‘internationalisation of business R&D’ – the trend that firms increasingly perform research and development activities outside their home countries (OECD 2008, Dachs et al. 2014). The internationalisation of R&D is closely linked to the global fragmentation of value chains (Timmer et al. 2014) – supporting foreign production by adapting products to local markets is a main motive for locating R&D abroad (Kuemmerle 1999). A second important motive for overseas R&D is to create knowledge in foreign locations with superior conditions for R&D, including proximity to leading universities or R&D-intensive firms (Florida 1997).

This column investigates if – and how – the Global Crisis has affected the internationalisation of R&D. We employ data on R&D expenditure of foreign and domestic firms in current US$ PPP provided by the OECD (2014). Most countries collect this data only every second year, so the focus is on changes in the period 2007–2009 and 2009–2011, the period after the crisis. Twenty of the 34 OECD member states provide at least three observations between 2007 and 2011. We measure R&D internationalisation by inward intensity, which is the share of foreign firms in total business R&D expenditure at the country level.

R&D internationalisation in retreat

The data indicate that R&D internationalisation suffered considerably during the crisis, as can be seen from Figure 1. The figure reports mean and median inward intensity as well as the number of observations for each year. The period between 1999 and 2007 was characterised by a steady increase of R&D expenditures of foreign firms as well as rising inward intensity. The numbers, however, may overestimate the real increase because data for some small, highly internationalised countries is not available before 2007.

Between 2007 and 2009, in contrast, mean inward intensity of the sample dropped by 2.5 percentage points, while median inward intensity decreased by 3.7 percentage points – more than 10% below the 2007 value. At country level, particularly large slumps in inward intensity could be observed in Belgium (-9 percentage points), the Czech Republic (-9 percentage points), Spain (-8 percentage points), and Sweden (-8 percentage points). Inward intensity in Israel dropped by 13 percentage points, but this was mainly due to a rapid expansion of R&D in domestic firms between 2007 and 2008.

R&D expenditure of foreign firms decreased in around half of the countries in absolute terms, while inward intensities dropped in 12 out of 18 countries between 2007 and 2009, and in 7 out of 13 countries between 2008 and 2009. Countries where inward intensity increased during the crisis include France, the UK, and Poland. In France, R&D expenditure of foreign firms increased between 2007 and 2009 from 5.8 to 8.7 billion $US PPP. An explanation for the development in France is a new tax credit for R&D introduced in 2008.

Losses continued after 2009. In 2011, mean inward intensity was 0.7 percentage points lower than in 2009. Data from a small number of countries that report R&D expenditure each year suggest that inward intensity reached its nadir in 2010 and started to recover in 2011.

Figure 1. R&D expenditures of foreign firms as a percentage of total business R&D expenditure in OECD member countries, 1999–2011, unweighted median and mean

Source: OECD Main Science and Technology Indicators 1/2014, authors’ calculations.

Notes: Finland and Netherlands: 2006 instead of 2007; France: 1998 instead of 1999.

How can we explain these losses? One reason why foreign firms reduced their R&D activities more than domestic firms is their international exposure. Foreign firms are more export-intensive than domestic firms (Bellak 2004), and exports and FDI dropped more sharply than domestic economic activity during the crisis. Negative market growth expectations in turn are a disincentive for R&D expenditure (Cohen 1995). This may lead to larger reductions of R&D expenditure in foreign firms compared to their domestic counterparts, and to a decrease in the levels of R&D internationalisation. Moreover, multinationals may have reduced their R&D expenditure abroad more than at home to lower coordination costs of dispersed R&D, or because of their political commitments to their home countries.

Who are the winners and losers?

Did multinationals move their overseas R&D activities out of Europe and into China, India, and other Asian countries during the crisis? Such a reallocation might be desirable because Asian countries were much less affected than Europe. To test this hypothesis, we look at the share of different host countries in total overseas R&D expenditure of US multinational firms. US multinationals are the largest investors in overseas R&D worldwide, so the trends in US data should also provide insights into global developments.

R&D expenditure of US firms abroad dropped between 2008 and 2009 from $41.7 billion to $39.2 billion, but rebounded to $45.7 billion in 2010. Losses were greatest in the EU, where R&D of US firms decreased by more than 10% from $25 billion to $22 billion between 2008 and 2010. In contrast, US overseas R&D expenditure increased slightly in Asia (excluding OECD member states Japan and South Korea) and in Latin America. Compared to the total volume of US overseas R&D activities, however, these gains were small, and we see no real winner during the crisis.

Figure 2. R&D expenditures of US firms abroad in various host regions, 1998–2011, $ billions and share of total

Source: US Department of Commerce, authors’ calculations.

In relative terms, the EU lost five percentage points of total US outward R&D expenditure between 2008 and 2010 to Asia and Latin America, but also to high-income OECD countries such as Canada, Israel, and Switzerland. It is, however, too early to speak of the end of Europe as the most important host region. Despite the erosion of the EU share, more than half of all US overseas R&D expenditures are still located in the EU. Moreover, we find no evidence for reallocations of multinational R&D activity from Europe to Asia, because US R&D expenditure grew only slightly in this region. The development during the crisis – geographical concentration at the expense of the EU – is rather a continuation of trends we can observe since the turn of the millennium, and not a fundamental shift in the global allocation of US overseas R&D.

Concluding remarks

The Global Crisis led to noticeable decreases in the levels of R&D internationalisation in many countries, which still persist in 2011. This is clearly negative for host countries, since less R&D activity by foreign firms means smaller inflows of R&D funding, less knowledge diffusion from foreign to domestic firms, and fewer employment opportunities for domestic R&D personnel.

However, the crisis did not lead to a new global distribution of overseas R&D expenditure, despite the relative losses suffered by the EU. We explain the relatively stable country mix by two factors:

First, the fact that R&D activities of foreign firms – just like those of domestic firms – are strongly embedded in the innovation systems of host countries via various formal and informal ties (Zanfei 2000, Phene and Almeida 2008).

Subsidiary embeddedness helps to increase R&D productivity and access local knowledge, but poses high costs for the mobility of foreign firms’ R&D activities. Moreover, a further defragmentation may lead to a loss of agglomeration and colocation benefits in the creation of knowledge at the subsidiary level.

Second, the inertia of the country mix may also be a sign that subsidiaries are highly autonomous (Birkinshaw et al. 1998, Mudambi and Navarra 2004).

More than two thirds of German affiliates abroad, for example, enjoy medium, high, or very high degrees of autonomy in their innovation decisions (ISI and ZEW 2013: 151). We assume that this autonomy has helped the management of foreign subsidiaries to maintain their R&D activities despite adverse economic conditions in their host countries. Microeconomic evidence on how subsidiary autonomy relates to R&D persistence of foreign subsidiaries would be an interesting subject for future research.

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