Chapter 2:

U.S. and International Research and Development: Funds and Alliances

International Industrial R&D Investment Growth

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).[58] 

U.S. and Foreign Industrial R&D Expenditure Balance top

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.[59]  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.[60]  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.



[58]  The terms "home-base exploiting" and "home-base augmenting" are taken directly from Kuemmerle (1997). Others, however (e.g., Mowery 1998b and Dalton, Serapio, and Yoshida 1999), have made similar observations on the reasons for expanding global R&D arrangements. Furthermore, Mowery notes that the use of international R&D strategies to establish networks for the creation and strengthening of firm-specific technological capabilities (i.e., home-base augmenting) is likely to become more important than market exploitation-driven activities in the future.

[59]  These overseas R&D data are from the BEA survey on U.S. Direct Investment Abroad. The definition used by BEA for R&D expenditures is from the Financial Accounting Standards Board Statement No. 2; these expenditures include all charges for R&D performed for the benefit of the affiliate by the affiliate itself and by others on contract. BEA detail is available for 1982 and annually since 1989. Data on foreign sources of industrial R&D performed in the United States come from an annual survey of Foreign Direct Investment in the United States, also conducted by BEA. BEA reports that foreign R&D totals are comparable with U.S. R&D business data published by NSF. Industry-specific comparisons, however, are limited because of differences in the industry classifications used by the two surveys (Quijano 1990).

[60]  Analyses of the BEA data on overseas R&D activities of U.S. affiliates have become complicated as a result of a change in survey collection. Prior to the 1994 survey, BEA collected expenditure data on R&D funding by U.S. overseas affiliates regardless of whether the R&D was performed by the affiliate of by others. It excluded R&D conducted by the affiliate under contract for others. Beginning with the 1995 survey, U.S. affiliates were asked to report their R&D performance irrespective of the funding sources (i.e., they report R&D conducted in their own labs, including R&D funded by the affiliate itself and by others under contracts). R&D funded by the U.S. affiliate but conducted by other organizations are excluded. Consequently, the more recent BEA figures represent R&D performance of U.S. firms’ foreign affiliates and not the foreign R&D funding made by U.S. firms.

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