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. 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
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
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. 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.
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
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 (
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%) (
 For these data, the United States includes the 50 states; Washington, DC; Puerto Rico; and all U.S. territories and possessions.
 For 1999 and 2004 data on U.S. MNCs R&D employment, see BEA (2007b); for 1994 and 1999 comparisons, see NSF (2004a).
 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.