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Chapter 4. Research and Development: National Trends and International Linkages

R&D by Multinational Companies

Foreign direct investment (FDI) refers to the ownership of productive assets outside the home country by MNCs. (See sidebar "Foreign Direct Investment in R&D.") FDI and international trade are key channels for international knowledge and technology diffusion, which in turn contribute to productivity growth (Keller 2004; OECD 2008a). Globalization of R&D through FDI activities by MNCs reflects a decentralized model of innovation that takes advantage of location-specific skills while seeking to retain the benefits of common ownership and control.[35] Overseas locations may also facilitate networking opportunities with foreign companies, research centers, and universities. Thus, R&D by MNCs complements activities with external parties, such as R&D contracting, technology alliances, and international exchanges of R&D services, discussed later in this chapter. As a whole, these activities reflect a collaborative and global framework for creating and exploiting new knowledge by leveraging internal and external capabilities (OECD 2008a).

As described below, according to Bureau of Economic Analysis (BEA) data, the majority of R&D by U.S. MNCs continues to be performed in the United States. Western Europe has attracted the majority of U.S.-owned overseas R&D, followed by the Asia-Pacific region.[36] Likewise, foreign-owned companies continue to invest in R&D in the United States.

U.S. Affiliates of Foreign Companies

R&D performed by majority-owned affiliates of foreign companies located in the United States (U.S. affiliates) reached $34.3 billion in 2006, compared with $31.1 billion in 2005 (appendix table 4-32 ).[37] R&D expenditures by these companies grew at an annual average rate of 11.3% (8.6% after adjusting for inflation) from 1987 to 2006, more than double the 5.3% (2.8%) rate for total business R&D performed in the United States. This faster growth rate increased their share in total business R&D from the single digits in the early 1990s to 14.8% in 2003; their share has hovered near 14% since then. Details on the R&D character of work for MNCs are under development. (See sidebar "Linking MNC Data From International Investment and Industrial R&D Surveys.")

Since the late 1980s, European subsidiaries have performed about three-fourths of all U.S. affiliates' R&D ($25.8 billion in 2006) (figure 4-20 ). The share of Japanese-owned companies grew from the single digits in the late 1980s to between 10% and 12% since 1996. European and Japanese subsidiaries combined have accounted for more than 85% of these expenditures since 2001.

In 2006, manufacturing accounted for about three-quarters of U.S. affiliates' R&D, including 37% in chemicals (of which pharmaceuticals was 90%), 12% in transportation equipment, and 9% in computer and electronic products (table 4-18 ; appendix table 4-33 ). These three industries also topped overall U.S. business R&D.

Statistics from 2006 indicate that affiliates from different countries emphasized R&D in different industries. German-owned affiliates located in the United States spent more than 40% of their $6.7 billion R&D in transportation equipment (table 4-18 ). British-owned companies accounted for more than half of affiliates' R&D in computers and electronic products. Japanese-owned firms accounted for 44% of affiliates' R&D expenditures in professional, scientific, and technical services. Swiss-owned firms performed a third of affiliates' R&D in pharmaceuticals.

U.S. MNCs and Their Overseas R&D

U.S. MNCs (parent companies and their foreign affiliates) performed $216.3 billion in R&D worldwide in 2006 (table 4-19 ). Parents of U.S. MNCs performed $187.8 billion in R&D, compared with $177.6 billion in 2005, a 2.5% increase on an inflation-adjusted basis.[38] The 2006 R&D by MNC parents represented 87% of global R&D by U.S. MNCs and about 76% of U.S. business R&D. Both shares have changed little since 2004.[39]

Overseas R&D performed by majority-owned foreign affiliates (henceforth, foreign affiliates) reached $28.5 billion in 2006, compared with $27.7 billion in 2005 (essentially unchanged on an inflation-adjusted basis). However, since 1999 foreign affiliates' R&D expenditures increased at a 4.0% annual average rate after adjusting for inflation, and have increased at a 5.0% annual average rate since 1994.

In 2006, affiliates located in Europe accounted for 65% ($18.6 billion of $28.5 billion) of overseas affiliates' R&D, of which the United Kingdom and Germany combined represented more than half ($10.3 billion) (appendix table 4-34 ).[40] Europe's share, however, is down from 73% in 1994 (figure 4-21 ).

Indeed, the geographic distribution of R&D by overseas affiliates of U.S. MNCs is gradually reflecting the role of emerging markets in global R&D (figure 4-21 ).[41] In particular, major developed economies or regions (Canada, Europe, and Japan) account for a decreasing share of the overseas R&D investments of U.S. MNCs, declining from 90% in 1994 to 80% in 2006. Over the same period, the share of the region termed Asia except Japan more than doubled, from 5.4% to 13.5%, driven by the R&D spending of U.S.-owned affiliates in China, Singapore, and South Korea.

On an individual country basis, changes proved more modest in terms of global shares, although funding levels in some lower-cost locations may still be significant from the perspective of purchasing power. R&D performed by U.S.-owned affiliates in China and India increased from less than $10 million in each country in 1994 to $804 million in China and $310 million in India in 2006, but these levels represented only about 3% and 1%, respectively, of total overseas R&D by U.S. MNCs. In the Middle East, Israel accounted for virtually all R&D by affiliates of U.S. MNCs, with about 3% of the global share. Brazil represented two-thirds of Latin America's U.S.-owned affiliates' R&D and a 2% global share.

In 2006, manufacturing affiliates accounted for 83% of overseas affiliates' R&D, including 68% by three manufacturing industries: transportation equipment (29%), chemicals (including pharmaceuticals) (22%), and computer and electronic products (17%) (table 4-20 ). More than half of R&D by U.S.-owned affiliates in Europe was performed by affiliates classified in transportation equipment (35%) and chemicals (21%). Affiliates classified in transportation equipment also performed half of U.S.-owned R&D in Brazil. Affiliates classified in chemicals performed half of R&D by U.S.-owned companies in Japan.

Reflecting the increasing global linkages in information technology production and development, affiliates classified in computer and electronic product manufacturing performed the majority of U.S.-owned R&D in some emerging markets: Malaysia (97%), China (67%), Singapore (66%), and Israel (60%) (table 4-20 ). In terms of service industries, affiliates classified in the information industry (which includes software and Internet publishers and telecommunications) performed about one-fourth of U.S.-owned R&D in Ireland. Finally, 35% of R&D by U.S.-owned affiliates in India was performed by those classified in professional, scientific, and technical services (which includes computer and scientific R&D services).[42] Nevertheless, European-located affiliates performed two-thirds of the $2.7 billion in overseas, U.S.-owned R&D in this industry.


[35] For international intra-MNC transactions in R&D services, see "Technology and Innovation Linkages." See chapter 3 for MNC R&D employment and chapter 6 for FDI financial flows.
[36] Western Europe and Asia have also attracted the majority of FDI financial flows by U.S. MNCs (Sethi et al. 2003).
[37] For these data, the United States includes the 50 states; Washington, DC; Puerto Rico; and all U.S. territories and possessions.
[38] 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. Data are for nonbank U.S. MNC parent companies. Affiliate data cover majority-owned, nonbank foreign affiliates of nonbank U.S. parents. For selected NSF data on overseas R&D funded by companies with R&D activities in the 50 states and Washington, DC, see appendix tables 4-37 and 4-38.
[39] Data on parents' R&D for 2004 and later are not fully comparable with earlier data because of improvements in statistical coverage. The improvements resulted from comprehensive information on parent R&D activities obtained from the Bureau of Economic Analysis 2004 Benchmark Survey of U.S. Direct Investment Abroad and from new information obtained through an ongoing interagency statistical project (see NSF/SRS [2007b]).
[40] In comparison, the share of value-added (gross product) by affiliates located in Europe was 54.3% in 2006. Affiliates in the United Kingdom and Germany also reported the largest value-added figures over this period (BEA 2009).
[41] See "International R&D Comparisons."
[42] See Branstetter and Foley (2007, pp 15–21), NSF/SRS (2004), OECD (2008d), and von Zedtwitz, (2004) for FDI R&D and technology alliances in China. For information on India and other emerging markets, see Arora and Gambardella (2004) and NRC (2007a).

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