Stiff international competition in research-intensive, high-technology products and market opportunities have compelled firms throughout the world to expand their overseas research activities. Foreign sources account for a growing share of domestic R&D investment totals in many countries. (See figure 2-32.) Many firms have R&D sites in countries outside their home base. Although the data are somewhat scant, the share of R&D performed by foreign affiliates appears to have risen perceptibly throughout the OECD during the past two decades (OECD 1998a). Currently, the share of R&D performed by foreign affiliates accounts on average for 14 percent of the industrial R&D performed in OECD countries. This share varies considerably among hosting countries, however—from a low of 1 percent in Japan to a high of 68 percent in Ireland (OECD 1999d).
Although many factors contribute to a business decision to locate R&D capabilities outside a firm’s home country, the basic drivers fall into demand-side and supply-side considerations.
Multinational firms seek a foreign R&D presence to support their overseas manufacturing facilities or to adapt standard products to the demand there. R&D facilities are established to customize existing products or to develop new products for the local market. Additionally, such facilities may provide technical service support to local manufacturing activities as their primary purpose. In some situations, however, the location of R&D facilities is the price of entry to the local market. These arrangements constitute a home-base exploiting site, where information tends to flow to the foreign laboratory from the central home laboratory.
Conversely—and more commonly of late—the foreign site is established to tap knowledge and skilled labor from competitors and universities around the globe, including the direct employment of local talents; to participate in joint research ventures and cooperative agreements; and to passively monitor technological development abroad. These facilities have the characteristics of a home-base augmenting site, where information tends to flow from the foreign laboratory to the central home laboratory. Generally, however, there is little evidence to suggest that firms go abroad to compensate for their R&D weaknesses at home. Rather, they locate in foreign centers of excellence to supplement their existing core strengths (Patel and Vega 1999).
According to a study of 238 foreign R&D sites, 45 percent of the labs were home-base augmenting and 55 percent were home-base exploiting (Kuemmerle 1997).
U.S. companies’ R&D investments abroad are roughly equivalent to R&D expenditures in the United States by majority-owned U.S. affiliates of foreign companies. In 1996 (the latest year for which complete data from the Bureau of Economic Analysis [BEA] are available at this writing), industrial R&D flows into the United States totaled $15.0 billion, compared with $14.2 billion in R&D expenditures by U.S. multinational firms in other countries. (See figure 2-37.) This approximate balance in R&D investment flows has persisted since (at least) 1989, when the majority-owned data first became available on an annual basis. In 1989, however, U.S. companies conducted a greater amount of R&D abroad than was invested in the United States by foreign firms. The reverse now appears to be true: More industrial R&D money is flowing into the United States than U.S. firms are performing abroad. Whatever the exact "balance" in any given year, however, higher levels of U.S. R&D investment in foreign economies and non-U.S. R&D investment within the U.S. domestic economy clearly are becoming the norm (Mowery 1998a).
Europe is the primary source and the main location of performance of these U.S.-foreign industrial R&D flows. (See figure 2-38.) European firms invested $11.2 billion of R&D money in the United States in 1996; the Asian (excluding the Middle East) and Pacific region provided the second largest source of foreign R&D funds ($1.9 billion). Similarly, foreign affiliates of U.S. companies performed $9.7 billion of R&D in Europe and $2.1 billion in Asia and the Pacific region. Industrial R&D investments between Canada and the United States are in the $1.5 billion range. U.S. industry’s R&D flows remain relatively small (less than $1 billion) into and out of Latin America and the Middle East and are negligible with Africa.