R&D by Multinational Corporations

The internationalization of R&D through foreign direct investment (FDI) by MNCs is one indicator of increasing globalization of innovation activities (Carlsson 2006; OECD 2006c). Related indicators include international trade and cross-country business alliances, which are discussed later in this chapter. International R&D links are particularly strong between U.S. and European companies, especially in pharmaceutical, computer, and transportation equipment manufacturing. More recently, certain developing or newly industrialized economies are emerging as hosts of U.S.-owned R&D, including China, Singapore, and India. For general information about R&D by MNCs, see sidebar, "Foreign Direct Investment in R&D."

U.S. Affiliates of Foreign Companies

Majority-owned affiliates of foreign companies located in the United States performed $29.9 billion in U.S. R&D expenditures in 2004, little changed from 2003.[29] However, between 1999 and 2004, R&D by these affiliates increased faster than overall industrial R&D in the United States (2.1% on an annual average rate basis after adjusting for inflation, compared with 0.2%). Currently, there are no data on the R&D character of work for MNCs separate from the national trends discussed earlier in this chapter. However, an interagency project involving NSF, the Census Bureau, and BEA is aimed, in part, at developing these data, not only for affiliates of foreign MNCs in the United States, but also for parents of U.S. MNCs discussed below. (See sidebar, "Linking MNC Data From International Investment and Industrial R&D Surveys.")

In 2004, manufacturing accounted for 70% of U.S. affiliates' R&D, including 34% in chemicals (of which 86% were in pharmaceuticals), 13% in transportation equipment, and 11% in computer and electronic products (table 4-17table.; appendix table 4-44Excel.). U.S. affiliates owned by European parent companies accounted for three-fourths ($22.6 of $29.9 billion) of U.S. affiliates' R&D (figure 4-29figure.), compared with their 66% share in value-added by U.S. affiliates.

Affiliates from some investing countries are particularly notable in some industries. German-owned affiliates classified in transportation equipment performed $2.6 billion of R&D, or 68% of all U.S. affiliates' R&D in this industry and 43% of total R&D performed by German-owned U.S. affiliates (table 4-17table.). On the other hand, affiliates owned by Swiss, British, and French parent companies performed about three-fourths of U.S. affiliates' R&D in chemicals (which includes pharmaceuticals). British-owned affiliates performed 38% of U.S. affiliates' R&D in computers and electronic products, whereas Japanese-owned affiliates accounted for just under half of R&D expenditures in professional, scientific, and technical services.

U.S. MNCs and Their Overseas R&D

Majority-owned foreign affiliates of U.S. MNCs (henceforth, foreign affiliates) performed $27.5 billion in R&D abroad in 2004 after adjusting for inflation, up $4.7 billion or 17.4% from 2003, which was the largest annual increase since a 22% rise in 1999.[30] In general, changes in FDI R&D reflect a combination of activities in existing facilities, the acquisition of R&D-performing companies, and the establishment of new industrial laboratories or other facilities engaged in technical activities. However, available data do not allow for distinguishing between these FDI alternatives.

U.S. MNCs comprise U.S. parent companies and their foreign affiliates.[31] Since 1994, at least 85% of the combined global R&D expenditures by U.S. MNCs were performed at home (table 4-18table.).

At the same time, however, foreign affiliates' R&D expenditures and value-added by foreign affiliates grew at a faster rate than U.S. parents' after adjusting for inflation. Consequently, the share of foreign affiliates' R&D expenditures within U.S. MNCs increased from 11.5% in 1994 to 15.3% in 2004, comparable with the increase in their value-added share from 23.5% to 27.1% over the same period.

Perhaps more revealing than aggregate figures are changes in the geographic distribution of these expenditures, reflecting the changing dynamics of international R&D (figure 4-30figure.). In 1994, major developed economies or regions (Canada, Europe, and Japan) accounted for 90% of overseas R&D expenditures by U.S. MNCs. By 2001, this combined share was down to 80%. However, Europe's share rebounded from an all-time low of 61% in 2001 to 66% in 2004, representing slightly more than two-thirds of the $4.7 billion increase in 2004, driven by affiliates in the United Kingdom, Germany, and Switzerland. At the same time, however, foreign affiliates of U.S. MNCs have increasingly engaged in R&D activities in Asian emerging markets (figure 4-30; appendix table 4-45Excel.).

Within the Asia-Pacific region (which also includes Australia and New Zealand), the share for Japan decreased from 64% in 1994 to 35% in 2004, even though this country remains the largest host of U.S.-owned R&D in the region. In contrast, the shares of foreign affiliates located in China and Singapore increased from 0.4% and 9.4%, respectively, to 12.6% and 14.4%. Other countries with sizable 2004 shares within this region include Australia (9.5%), Taiwan (7.4%), Malaysia (6.1%), and South Korea (5.0%). Notably, R&D by affiliates located in India doubled from $81 million in 2003 to $163 million in 2004, increasing the share within this region to 3.3%.

Brazil and Mexico have represented around 80% or more of R&D expenditures by U.S. MNCs in Latin America since 1994. Finally, Israel and South Africa represent virtually all of the R&D expenditures by U.S. MNCs in their respective regions over the same period (appendix table 4-45Excel.).

In 2004, three manufacturing industries accounted for most foreign-affiliate R&D: transportation equipment (28.1%), chemicals (including pharmaceuticals) (22.7%), and computer and electronic products (19.2%) (table 4-19table.; appendix table 4-46Excel.). Within the nonmanufacturing sector, the professional, technical, and scientific services industry (which includes R&D and computer services) accounted for 7.7%. The industry distribution in European locations is similar to the average across all host countries, whereas at least half of affiliates' R&D expenditures in Canada and Japan are performed by affiliates classified in transportation equipment and chemicals, respectively. Affiliates classified in computer and electronic products performed 63.1% of U.S.-owned R&D in Israel and 42.7% of U.S.-owned R&D in the Asia-Pacific region, excluding Japan.


[29] For these data, the United States includes the 50 states; Washington, DC; Puerto Rico; and all U.S. territories and possessions.

[30] For 1999 and 2004 data on U.S. MNCs R&D employment, see BEA (2007b); for 1994 and 1999 comparisons, see NSF (2004a).

[31] BEA defines a parent company of a U.S. MNC as an entity (individual, branch, partnership, or corporation), resident in the United States, that owns or controls at least 10% of the voting securities, or equivalent, of a foreign business enterprise. For selected NSF data on overseas R&D funded by companies with R&D activities in the 50 U.S. states and Washington, DC, see appendix tables 4-48 and 4-49.

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