#2011-049
TheinternationalizationofR&D
ByBronwynH.Hall
MaastrichtEconomicandsocialResearchinstituteonInnovationandTechnology(UNU‐MERIT)
email:info@merit.unu.edu
|website:http://www.merit.unu.edu
MaastrichtGraduateSchoolofGovernance(MGSoG)
email:info‐governance@maastrichtuniversity.nl
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KeizerKarelplein19,6211TCMaastricht,TheNetherlands
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WorkingPaperSeries
UNU-MERIT Working Papers
ISSN 1871-9872
Maastricht Economic and social Research Institute on Innovation and Technology,
UNU-MERIT
Maastricht Graduate School of Governance
MGSoG
UNU-MERIT Working Papers intend to disseminate preliminary results of research
carried out at UNU-MERIT and MGSoG to stimulate discussion on the issues raised.
International R&D B. H. Hall 2010
1
The Internationalization of R&D
Bronwyn H. Hall
UC Berkeley and University of Maastricht
March 2010 (revised August 2010)
Abstract
This paper surveys what we know about the internationalization of business
R&D spending. I examine three specific questions about the global changes in
R&D activity: First, what is the evidence that R&D is becoming more
internationalized (more footloose)? Second, what are the factors that
influence the choice of location for R&D? The third question asks how this is
changing over time. The paper concludes with a discussion of the implications
of this research and the trends in business R&D location for Canada.
International R&D B. H. Hall 2010
2
The Internationalization of R&D
Bronwyn H. Hall
January 2010
1. Introduction
In the past decade, policymakers and others in a number of developed countries have
expressed concern that firms in their countries appear to be increasingly locating their R&D
facilities outside the home country. For example, in Foray and van Ark (2007), we read
“There are concerns expressed at different levels in Europe about the
increasing numbers of European companies which are basing their R&D
operations outside Europe, at the same time as the number of overseas
companies carrying out their R&D in Europe is falling.”
1
The introduction of a recent study from the United States National Academies had this to say:
“….the committee is deeply concerned that the scientific and technological
building blocks critical to our economic leadership are eroding at a time when
many other nations are gathering strength.”
2
There is no doubt about the facts: in just ten years between 1995 and 2004, the share of R&D
spent outside the home country by Western European multinationals increased from 26 per
cent to 44 per cent, by Japanese multinationals from 5 per cent to 11 percent, and in North
American multinationals from 23 per cent to 32 per cent (OECD, 2005). Since then has come
the growth of investments by these same multinationals in developing economies, especially
Brazil, India, and China. We lack very precise data on the extent of this trend, but recent
anecdotal evidence is quite persuasive. The Economist reports that companies in the Fortune
500 have 98 R&D facilities in China and 63 in India (Economist 2010). A recent report by
Goldman Sachs identifies new and planned R&D facilities in China, India, and Brazil by such
companies as Pfizer, Ford, Microsoft, IBM, Boeing, Intel, and Cisco (Goldman Sachs Group
2010).
Are the concerns voiced above justified? There are good reasons to think they may be. The
existence of cross-national spillovers does suggest that countries can benefit from R&D done
elsewhere and therefore should freeride on that R&D to some extent (Keller 2010). However,
the need for development of some absorptive capacity, and the localization of some spillovers
would suggest that it is useful to have at least some R&D done within a country (Feldman and
Kogler 2010). Also to the extent that successful R&D creates short term rents, both for firms
and for their employees, it is viewed as desirable to keep it at home. That is, firms introducing
innovative products and services are likely to earn supranormal profits at least for short
periods and such profits are usually shared with employees (Blanchflower et al. 1996).
1
Foray and van Ark (2007), p. 1.
2
National Research Council (2006), p. 2.
International R&D B. H. Hall 2010
3
There are also demand issues related to R&D location – consumers that are close to the
location of the R&D may be better served by that R&D. The most obvious example of this is
linguistic – English-speaking internet users, especially those in the United States, have found
that new products are more often introduced first in their market and only later translated
and diffused to other markets after first achieving a level of success in the home market.
However, the experience with pharmaceuticals suggests that R&D is also attracted to
environments where prices are expected to be higher due to less regulation, allowing the high
fixed cost in this sector to be covered by the home market. This suggests that in some cases
consumers may not necessarily benefit more than foreign consumers from R&D located in
their market.
The downside of countries competing to attract R&D investment is that it can lead to wasteful
tax competition, where countries and locations compete to attract this kind of investment,
dissipating taxpayer funds without ahieving much movement. The spread of the R&D tax
credit around the world is viewed by some as an example of this phenomenon. Currently, the
UK is introducing a “patent box” whereby income attributed to patents is taxed at 10 per cent
rather than the usual corporate rate of 28 per cent, partly in competition with the
Netherlands and Belgium, who have such a scheme. Most innovation economists view this
kind of highly targeted policy as likely to cost more than the benefits that might accrue to the
UK (Griffith and Miller, 2010). In general, however, tax credits seem to have led to an increase
in R&D everywhere they have been used (Hall and Van Reenen, 2000).
The remainder of this paper looks at the evidence on three specific questions about the
internationalization of R&D activities: First, is there evidence that R&D is becoming more
internationalized (more footloose)? The short answer to this question is yes, in spite of the
fact that the data on internationalization is often not ideal and can be somewhat spotty.
Second, what are the factors that influence the choice of location for R&D? There are a large
number of studies on this question from which it is possible to draw a few fairly strong
conclusions, in spite of the fact that the studies are often not completely comparable.
The third question asks how this is changing over time. Obviously it is fairly straightforward
to look at the trends in location, but somewhat more difficult to determine whether the
influence of the underlying factors has been changing. The paper concludes with a discussion
of the implications for Canada.
2. Facts about the internationalization of R&D
Figure 1 shows the Gini distribution of GDP and business R&D during two different recent
time periods, 1999 and 2005, for approximately 40 large OECD and non-OECD countries. Two
basic facts about the distribution of GDP and R&D performance are apparent in this figure.
First, R&D performance is slightly more concentrated than GDP (Gini coefficients of 0.78 in
1999 and 0.75 in 2005 as opposed to 0.69 in both years for GDP).
3
Second, R&D has been
becoming less concentrated over time, even during this brief six year period, in contrast to
the GDP concentration, which has remain essentially unchanged. This change, although it
appears small, reflects the internationalization of R&D that has taken place during the same
period.
3
The Gini coefficient is defined as one minus the area under the curve divided by the area under the 45
degree line. Therefore a Gini of zero implies a completely equal distribution and a Gini of one means
that on country has all the income.
