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Indicators 2002
Introduction Overview Chapter 1: Elementary and Secondary Education Chapter 2: Higher Education in Science and Engineering Chapter 3: Science and Engineering Workforce Chapter 4: U.S. and International Research and Development: Funds and Alliances Chapter 5: Academic Research and Development Chapter 6: Industry, Technology, and the Global Marketplace Chapter 7: Science and Technology: Public Attitudes and Public Understanding Chapter 8: Significance of Information Technology Appendix Tables
Chapter Contents:
Highlights
Introduction
R&D Support in the United States
R&D Performance in the United States
Research Alliances: Trends in Industry, Government, and University Collaboration
International Comparisons of National R&D Trends
International Industrial R&D Investments
Conclusion
Selected Bibliography
 
Sidebars
Appendix Tables
List of Figures
Presentation Slides

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Figure 4-35


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Figure 4-36


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Figure 4-37


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Figure 4-38


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Figure 4-39


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Figure 4-40


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

International Industrial R&D Investments

Foreign Direct Investments and R&D Facilities
Foreign R&D and R&D Expenditure Balance
Overseas R&D Spending
Industrial Structure of International R&D Spending and the IGRD Index

International R&D investments refer to R&D and related long-term activities by private companies outside of the home country. Broadly speaking, these activities include the acquisition or establishment of R&D facilities abroad, R&D spending in foreign subsidiaries (in manufacturing, services, or research facilities), international R&D alliances, licensing agreements, and contract research overseas. These activities fulfill different objectives in corporate R&D strategies and exhibit various degrees of managerial and financial commitment from the parties involved. Although public data on these international business activities are key for S&T policy analysis and design, their availability varies considerably, even within advanced economies.

In this section, the focus is on R&D spending trends to and from the United States, with a brief overview of overseas and foreign-owned domestic R&D facilities.[71] In principle, trends in R&D facilities are tied to overall foreign direct investment (FDI) trends, especially in high-technology industries. However, comprehensive FDI data on acquired and established facilities by type of major activity (i.e., manufacturing versus research) are not available in most countries.[72] On the other hand, R&D spending by multinational corporations are readily available from financial and operating data collected in FDI statistics.

By definition, R&D spending in subsidiaries abroad is preceded by the acquisition or establishment of foreign facilities. More fundamentally, however, the economics of these two activities have become increasingly intertwined in advanced economies. For one, FDI flows are becoming a key element in understanding the overall corporate R&D strategy of global companies. Conversely, knowledge-based assets are becoming an increasingly important factor in FDI decisions by multinational companies. However, empirical links are elusive with the available data. For example, mere changes in ownership can affect R&D spending statistics without representing changes in the actual performance of R&D domestically.

Foreign Direct Investments and R&D Facilities top of page

Total foreign direct investments have increased steadily in recent years in the United States and elsewhere, according to data from the Bureau of Economic Analysis (BEA). Recent increases worldwide have been fueled by motives ranging from market liberalization efforts leading to privatization drives in some emerging markets, proximity to existing or potential large consumer markets, and regional technological advantages. Foreign direct investment flows into the United States are dominated by the lure of a large domestic market and by the technological sophistication of many of its firms. Technology-related factors driving FDI include an educated and skilled workforce, a favorable regulatory environment, and the need for complementary technologies in an increasingly complex and rapid innovation process.

According to an OECD study, as much as 85 percent of FDI activity worldwide consists of mergers and acquisitions (M&As), compared to the establishment of new industrial facilities or so-called greenfield investments (Kang and Johansson 2000). M&As involving high-technology facilities supply not only vital research infrastructure (such as specialized facilities and equipment) but also an existing base of intangible assets key in the development and marketing of new technologies including technical know-how and skilled workers, organizational knowledge, marketing networks, and trademarks.

In the United States, data on foreign-owned research facilities are available only to 1998 from a DOC survey (Dalton, Serapio, and Yoshida 1999). In 1998, 715 U.S. R&D facilities were operated by 375 foreign-owned companies, including 251 facilities (35 percent) owned by Japanese parent companies. Other countries with a major presence were Germany 107 (15 percent) and the United Kingdom 103 (14 percent). One-third of the facilities were chemicals/rubber, drugs, and biotechnology centers, most with German, Japanese, or British parent companies. Another 10 percent (74) were computer and semiconductor R&D facilities, and 7 percent (53) conducted software research. Almost two-thirds of these computer and software research centers were Japanese owned, with a good share located in California. On the other hand, by 1997 U.S. companies had established at least 186 R&D facilities overseas. Two-thirds of these facilities were located in five countries: Japan (43), United Kingdom (27), Canada (26), France (16), and Germany (15).[73]

Foreign R&D and R&D Expenditure Balance top of page

R&D spending by U.S. affiliates of foreign companies in the United States (or foreign R&D spending) increased 28 percent in 1997–98, from $17 billion to $22 billion, the largest single-year increase since 1990, as compiled by BEA (2000a).[74] (See appendix table 4-50.) This pushed foreign R&D as a proportion of company-funded industrial R&D in the United States to a record 15 percent in 1998, after fluctuating around 13 percent since 1994. (See figure 4-35 figure.)

When combined with the $15 billion of R&D spent abroad by U.S.-based companies, this yields a "net inflow" of R&D expenditures of more than $7 billion in 1998 compared with $3 billion a year earlier.[75] (See figure 4-36 figure.) However, this record increase in net U.S. inflows needs to be put in perspective. In particular, data on foreign R&D spending in the United States are affected by changes in ownership involving domestic and foreign companies, as in cross-country M&As. In 1998, two of the largest M&As included the Daimler-Benz (Germany) merger with Chrysler and the British Petroleum (United Kingdom) merger with Amoco. Acquisition of American R&D-performing companies increases reported R&D funded by foreign affiliates that may or may not represent actual changes in research activities beyond a change in ownership. Difficulties in the valuation of purchased in-process R&D, the cumulative (and more difficult to track) effect of smaller acquisitions, and the offsetting effects of divestitures also make it difficult to assess the effect of cross-border M&A activity in international R&D spending flows.

Chemical manufacturing and the new NAICS sector of computer and electronic product manufacturing had the largest single-industry shares of foreign R&D in 1998 (33 and 20 percent, respectively). They include the largest subsectors attracting foreign R&D funding: pharmaceuticals and communications equipment (see appendix table 4-51). As detailed below, more than one-half of foreign-owned chemicals and pharmaceuticals R&D in the United States is performed by Swiss and German subsidiaries. Transportation equipment (mostly motor vehicles and bodies) had a 12 percent share in 1998, up sharply from the 1997 share, in part due to cross-border M&A activity. The most notable nonmanufacturing sectors are professional, scientific, and technical services (NAICS sector 54), which include R&D services, with a 3 percent share, and information services (NAICS sector 51), with 2 percent share. The latter includes such R&D-intensive industries as telecommunications and data processing services.

Comparable to statistics on high-technology trade and FDI flows, European, Japanese, and Canadian companies make the largest R&D investments in the United States. (See figure 4-37 figure.) In 1998, American affiliates of European parent companies represented 72 percent of the $22 billion R&D spending in the United States, down slightly from 75 percent in 1996, Asia-Pacific (14.4 percent, including Japan at 11.7 percent), and Canada (10.7 percent). Among the European countries, the largest shares correspond to Germany (22.1 percent), the United Kingdom (16.7 percent), and Switzerland (14.0 percent).

Furthermore, specific countries dominate foreign majority-owned R&D expenditures in certain U.S. industries. Swiss subsidiaries performed 34 percent of foreign-owned R&D in chemicals as well as 26 percent of foreign-owned industrial machinery R&D in 1998. German subsidiaries performed 20 percent of foreign-owned chemical R&D. At the same time, more than 90 percent of R&D spending by foreign-owned transportation equipment affiliates is performed by European subsidiaries.[78] On the other hand, 25 percent of the Japanese-owned $2.6 billion R&D spending in the United States is performed in the area of computers and other electronic products. (See text table 4-18 text table.)

Overseas R&D Spending top of page

According to data from the NSF Industrial R&D survey (NSF 2001e), R&D performed abroad by foreign affiliates of U.S. parent companies (or overseas R&D spending) reached $17 billion in 1999. (See appendix table 4-47.)[79] In the three-year period for which NAICS-based data are available from this survey (1997 to 1999) this spending grew 28 percent (25 percent after adjusting for inflation).[80] Although the manufacturing share in R&D spending by American subsidiaries abroad declined from 90 percent in 1997 to 74 percent in 1999,[81] the largest single-industry shares in 1999 are all in this sector: transportation equipment (24 percent), chemicals (19 percent), pharmaceuticals, (17 percent), and computer and electronic products (11 percent). The nonmanufacturing information sector represented 8 percent of spending by foreign affiliates of American companies in 1999, up from a 5 percent share in 1997. Professional, scientific, and technical services had a 3 percent share in 1999 compared to 2 percent in 1998 and 1 percent in 1997.

Data on overseas R&D spending are available with country detail from a separate BEA survey but only through 1998. BEA data show that R&D expenditures overseas by majority-owned foreign affiliates (MOFAs) of U.S. multinationals increased from $12 billion in 1994 to $15 billion in 1998, for an annual growth rate of 4.8 percent.[82] The 1998 figure represents an increase of 2.7 percent over 1997 (1.4 percent after adjusting for inflation). However, this increase in R&D overseas did not keep pace with domestic industrial R&D, as shown in figure 4-35 figure, where overseas R&D spending is presented relative to domestic company-funded industrial R&D.

More than two-thirds ($10.3 billion) of R&D performed overseas in 1998 took place in five countries: the United Kingdom, Germany, Canada, France, and Japan. (See appendix table 4-48.) This concentration of R&D spending abroad corresponds with other overseas activities by U.S. multinational companies. In particular, Mataloni (2000) notes an increase in new or acquired MOFAs by U.S. multinationals in large markets with high wages, especially to the United Kingdom, as opposed to low-wage countries. Not surprisingly, R&D expenditures by majority-owned foreign affiliates of U.S. parent companies were also the highest in the United Kingdom ($3 billion, or 21 percent of overseas R&D). Cultural and economic similarities with the United States, such as the low level of market regulation, as well as the duty-free access to customers in other European Union members, makes the United Kingdom a prime target for new MOFA operations.[83] In addition, advanced economies offer U.S. affiliates either large or high-income markets, and technological know-how that complements or expands the parents’ capabilities.

As a region, majority-owned European subsidiaries of American companies performed $10.6 billion (71 percent) of overseas R&D in 1998, the highest regional share. (See first data column in text table 4-19 text table.) Canadian subsidiaries had a 12 percent share in 1998 but more than doubled R&D spending over 1994–98. On the other hand, Japanese subsidiaries performed 7 percent of U.S.-owned R&D abroad in 1998, down from a 10 percent share in 1994, reflecting the impact of the decade-long recession in that Asian economy. In fact, Canadian subsidiaries have been spending more than the Japanese units on R&D activities since 1996, something that had not happened since 1982. (See appendix table 4-48.)

According to the BEA data, about three-fourths of all R&D performed overseas by majority-owned affiliates in 1998 was undertaken in four manufacturing sectors: transportation equipment (30 percent), chemicals (27 percent), industrial machinery, including computers (7 percent), and electronic equipment and components, except computers (8 percent). (See text table 4-19 text table.) Almost one-fourth of the $4 billion spent by majority-owned U.S. affiliates overseas in chemicals research (which includes pharmaceuticals and some biotechnology research) was performed in the United Kingdom; another 16 percent was performed in France.

On the other hand, of the $4.5 billion in automotive and other transportation equipment research overseas in 1998, 42 percent was performed in Germany and another 21 percent in Canada. This is not surprising, given the strong presence of American automobile factories and related technical centers in both countries. For industrial machinery, 31 percent of research abroad was performed in the United Kingdom and 22 percent in Germany. For electronic equipment, the countries with the largest shares were Germany (16 percent) and Japan (11 percent).

Industrial Structure of International R&D Spending and the IGRD Index top of page

Manufacturing activity still dominates trends in total domestic, foreign, and overseas R&D spending, but such dominance has declined in recent years. Of these indicators, overseas R&D continue to have the heaviest concentration of manufacturing activity, followed by foreign R&D and total domestic industrial R&D. (See figure 4-38 figure.)

Different industries dominate these three categories of R&D spending, revealing diverse technological and financial opportunities across U.S. borders. For example, 27 percent of R&D spending by foreign affiliates of U.S. companies was performed in transportation equipment, the highest proportion among all major R&D performing industries in 1998. (See figure 4-39 figure and appendix table 4-52.) However, this proportion is more than twice its 12 percent share of foreign R&D spending in the United States. On the other hand, chemicals research, which includes pharmaceuticals and some biotechnology, represented 33 percent of foreign R&D in the United States, twice its 17 percent overseas R&D share. Furthermore, the proportion of chemicals R&D in either foreign or overseas R&D spending is higher than its domestic company-funded R&D share of 13 percent, reflecting a high degree of globalization of R&D activity in this industry.

Another interesting pair of industries is computer manufacturing and information services (software publishing and data processing services). They represent the manufacturing and services sides, respectively, of information technology activity. Remarkably, the share of information services in R&D spending abroad (8.3 percent) is five times larger than that industry’s foreign R&D share (1.5 percent) in 1998. The opposite is true for computer and electronic products. The computer industry accounts for 20 percent of total foreign R&D in the United States, twice as large as its 10 percent share in R&D funds spent abroad. However, more data based on the newly established NAICS classification system would be needed over time to form a more accurate picture of the R&D flows in these two components of IT R&D.

Another measure of the degree of globalization of R&D activity is obtained by combining these R&D spending shares. Specifically, the Industrial Globalization R&D (IGRD) index is defined as the average of foreign and overseas R&D spending shares for a given industry.[84] This average indicates how open an industrial innovation system is to R&D flows, not unlike the sum of exports and imports, which quantifies the openness of national economies to the flow of goods. By this measure, chemical manufacturing in the U.S. exhibit the highest degree of internationalization with an IGRD index of 25, followed by transportation equipment (19), and computer manufacturing (15). (See figure 4-40 figure.)

Several implications may be drawn from this indicator. An industry with a high IGRD index may be less constrained by national R&D expenditure trends. Furthermore, such an industry is more likely to have the institutional setup required to take advantage of technological opportunities elsewhere. The index could be used in conjunction with other international S&T indicators discussed in this volume, including bibliometric indicators, foreign-origin patents, international alliances and R&D facilities, and high-technology trade.[85]



Footnotes

[71]  Data limitations preclude the inclusion of contract R&D with (or grants to) foreign organizations, whereas international technology alliances are discussed earlier in this chapter.

[72]  As discussed below, a DOC survey with 1997 and 1998 data provides the latest available indicators of overseas and foreign-owned domestic R&D facilities.

[73]    For a detailed discussion of the results of the DOC survey, see NSB (2000), pages 2-65/66.

[74]  Data are for R&D performed in the United States by majority-owned (more than 50 percent) nonbank U.S. affiliates of foreign parent companies. See appendix tables 4-50 and 4-51. Appendix table 4-49 has R&D spending data based on 10 percent foreign ownership. Data are based on the concept of an ultimate beneficial owner, which is the person "proceeding up the U.S. affiliates ownership chain beginning with and including the foreign parent, that is not owned more than 50 percent by another person." For more details and definitions, see Quijano (1990).

[75]  Note that the BEA data used here are based on R&D performance, not funding source (domestic or foreign). Still, these R&D spending trends do provide an indication of the industrial and R&D strategies of multinational companies based in, or with activities in, the United States.

[78]  Disclosure limitations preclude further country-specific analysis.

[79]  The 1998 NSF figure for R&D abroad is $16 billion, higher than the BEA tally of $15 billion in 1998 discussed below. At the time this report was written, 1999 BEA data were not available.

[80]  For historical data, see appendix table 4-46.

[81]  Note that manufacturing shares for 1997-99 are not completely comparable with previous years based on the SIC system. For example, some of the new nonmanufacturing sectors in NAICS contain activities previously classified in manufacturing.

[82]  In constant 1996 dollars, the annual growth rate was 3.3 percent, reaching $14.5 billion in 1998.

[83]  U.S. MNCs acquired or established 84 of 477 foreign affiliates in the United Kingdom in 1998, the largest single-country figure. These new MOFAs in the United Kingdom accounted for the largest share (44 percent) of the gross product of all new MOFAs in 1998, the latest figure available from BEA. Other key locations for new U.S. affiliates in 1998 were Canada (38), Germany (36), the Netherlands (36), and France (27).

[84]  In principle, the IGRD index has a range of [0, 100]. However, reasonable index values for R&D-intensive industries in advanced economies are not likely to exceed or even be close to 50.

[85]  See earlier sections in this chapter, as well as chapters 5 and 6 in this volume.

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