Strategic R&D Location in European Manufacturing Industries

We empirically test a model of foreign research and development (R&D) investments that takes into account strategic interaction in R&D location decisions by multinational firms in the context of R&D cross-investments, R&D spillovers and foreign technology sourcing strategies. We find support for most of the predictions of the model in an empirical analysis of the location of patented innovations by the largest European manufacturing firms in 22 ISIC industries during 1996–1997. For technology leaders in Europe, foreign R&D ratios respond positively to host country product market competition, while technology laggards avoid these locations. Foreign R&D by technology laggards increases more strongly with the efficiency of (reverse) international technology transfer while leaders are attracted more strongly to countries with better intellectual property rights (IPRs) protection. Foreign R&D of both technology leaders and technology laggards increases with the size of the local knowledge pool and the size of manufacturing operations in the host country. JEL no.  D21, F23, L16     

Measuring Multinationals' R&D Activities in China on the Basis of a Patent Database: Comparing European,Japanese and US Firms

Using an internationally linked patent database, this paper compares the types of R&D activities undertaken by multinationals in China by home country and industry. In China, multinationals recently began investing in R&D, mainly in the areas of product and manufacturing process development. However, US firms, which are the most actively invested in R&D, are involved in some technology‐driven R&D activities; European firms are inclined toward market‐driven R&D, while Japanese firms, which lag behind the other two, focus on production‐driven R&D. This pattern may be related to the relative competitiveness of each country: Japanese firms are strong in electronics and automobiles, where production process improvement is important, while US firms flourish in science‐based industries, such as pharmaceuticals and software, where interacting with the local science base is a critical factor.     

R&D spillovers and the case for industrial policy in an open economy

In this paper we consider the case for subsidies towards firmswhich generate R&D spillovers in open economies. We showthat in the presence of strategic behaviour by firms many expectedresults are overturned. Local R&D spillovers to other domesticfirms may justify an R&D tax rather than a subsidy; R&Dcooperation by local firms over-internalises the externalityand also justifies an R&D tax; and international spilloverswhich benefit foreign firms may justify a subsidy, even thoughthe government cares only about the profits of home firms.     

Self-selection and performance of R&D input of heterogeneous firms: Evidence from China's manufacturing industries

Applying the theories of heterogeneous firms and the propensity score matching difference-in-differences (PSM-DID) method to a rich dataset of Chinese manufacturing firms, this paper examines the self-selection of firm-level R&D input and estimates the net effect of R&D on productivity. The analysis shows that (1) for Chinese manufacturing firms as a whole, R&D input is influenced by firm productivity: more productive firms are more likely to invest in R&D; (2) controlling for the self-selection effect, the net output elasticities of R&D input in one year and two years after R&D input are 3.92% and 5.25%, respectively; (3) although state-owned enterprises (SOEs) are more likely than all other ownership groups to invest in R&D, the R&D input is not productive; (4) although enterprises owned by investors outside of Mainland China are the least likely to invest in R&D, the output elasticity of R&D is more significant and larger in this group than in SOEs and privately owned Chinese firms; and (5) surprisingly, the net effect of R&D is not significant in high-tech industries. Policy implications are derived from the findings.     

R&D Investments and Tax Incentives: The Role of Intra-Firm Cross-Border Collaboration*

U.S. multinational corporations increasingly use intra-firm, cross-border research collaboration to disperse R&D across different countries. This paper investigates the implications of such collaboration on the abilities of firms to garner benefits from R&D tax incentives. We find that the association between R&D intensity and tax incentives is three to five times larger when firms have extensive cross-border collaboration connected to a country. We also find that the effect is stronger when local intellectual property protection is weaker and when local innovation resources are higher. Our results suggest that cross-border collaboration helps firms achieve more tax-efficient R&D investments both by reducing the nontax frictions posed by weak intellectual property protection and by increasing the nontax benefits of foreign R&D.     

Local country attributes and the emergence of high tech clusters

The aim of this study is to explore the effect of a country’s attributes on the decision of firms to be active globally. We first built a theoretical model, which shows that an initial difference in the business environment may dampen the desire of firms located in countries with a relatively weak business environment to seek a higher level of R&D. The decision not to pursue higher levels of R&D leads, in turn, to lower output and lower scope of activity of global firms in these countries. Moreover, firms with relatively high level of management skills will choose to migrate from a relatively weak country to one with a stronger business environment, creating a brain drain that will further impoverish the weak country.     

Global knowledge flow and Japanese multinational firms’ offshore R&D allocation and innovation

This paper examines whether allocating more research and development (R&D) activities to a country-industry pair with a higher intensity of knowledge flows improves the innovation performance of multinational enterprises (MNEs). We use firm-patent-matched data for Japanese manufacturing MNEs, including data on MNEs’ offshore R&D expenditure and information on patents filed by both parent firms and overseas affiliates. Moreover, as a proxy for the intensity of knowledge flows, we use the eigenvector centrality of each country-industry pair in the global knowledge flow network, utilizing patent citation information.We find that the quality-adjusted number of patent applications tends to be higher for MNEs that allocate more R&D activities to country-industry pairs that are more central in the network of global knowledge flows. However, we did not find any significant relationship between the country and industry distribution of offshore R&D and the number of patent applications.     

The Impact of Industry Characteristics and IPR Policy on Foreign Direct Investment

This paper investigates the interaction of industry characteristics and intellectual property rights (IPRs) on multinational firm behavior. The results suggest that firms in industries with high capital costs are more likely to maintain control over production knowledge in countries with less intellectual property protection by engaging in foreign direct investment (FDI). Moreover, when IPRs are strong, firms in industries with high investment in research and development (R&D) are more likely to enter a market by licensing to an unaffiliated host firm. JEL no. F23, C25, O34     

Do R&D tax incentives work? Firm-level evidence from China

Tax incentives have been used worldwide to encourage firm R&D, but there is little evidence on their effectiveness as a policy tool in developing countries. We use a panel dataset of Chinese listed companies covering 2007 to 2013 to assess the effects of tax incentives on firm R&D expenditures and analyze how institutional conditions shape these effects. Our results show that tax incentives motivate R&D expenditures for our sample firms. A 10% reduction in R&D user costs leads firms to increase R&D expenditures by 3.97% in the short run. We also find considerable effect heterogeneity: Tax incentives significantly stimulate R&D in private firms but have little influence on state-owned enterprises' R&D expenditures. Moreover, the effects of tax incentives are more pronounced for private firms without political connections. Hence, reducing political intervention complements tax incentives' capacity to foster firm R&D in developing countries.     

Impact of Outward Foreign Direct Investment on Domestic R&D Activity: Evidence from Taiwan's Multinational Enterprises in Low‐wage Countries

This paper theoretically and empirically investigates the home‐country effects of a firm's outward foreign direct investment (OFDI) activity, specifically OFDI motivated by lower labor costs in the host country. A two‐country imperfect competition model is developed, and the interaction between a firm's R&D spending and its OFDI is examined. It is found that the relationship between a firm's OFDI and its domestic R&D is indeterminate because there is a complementary effect as well as a substitution effect induced by OFDI activity. Panel data on Taiwanese manufacturing firms from 1992–2005 are applied to test the validity of the theoretical results. The propensity score matching method is used to construct a comparison group without selection bias. Our empirical evidence reveals that a Taiwanese firm's OFDI is positively related to its domestic R&D spending, particularly in R&D‐intensive industries.     

Advertising, in-house R&D, and growth

This paper develops a quality-ladder model of endogenous growthto study the interplay between in-house R&D and combativeadvertising expenditure, and its implications for economic growth,firm size, and welfare. The analysis shows that, somewhat surprisingly,higher incentives to engage in advertising, although combative,unambiguously foster innovation activity of firms. This, possibly,leads to faster growth and even higher welfare. These resultsrest on two features of the model which are well-supported byempirical evidence. First, if firms incur higher sunk costsfor marketing, concentration and firm size rise. Second, firmsize and R&D expenditure are positively related as largerfirms are able to spread R&D costs over higher sales. Theanalysis also suggests that R&D subsidies are conduciveto R&D and growth without inducing firms to raise advertisingoutlays.     

R&D and patenting activities of foreign firms in China: The case of Japan

This study investigates the research and development (R&D) and patenting activities of foreign firms in China. Utilizing a panel dataset of Japanese affiliates during the period 2001–2007, we first examine the determinants of R&D activity and find that local market-oriented firms place more emphasis on R&D, whereas process export-oriented firms are less likely to conduct R&D. Affiliates within a large business group that has more affiliates have a higher propensity to undertake R&D. Using only firms with positive R&D expenditures, we next estimate the patent production function. Results indicate that the patent elasticity of R&D for Japanese affiliates is high, suggesting that they are more productive on patent production than other firms. Moreover, local market-oriented firms do need more patents to protect their products, whereas scientific firms demonstrate a lower willingness to register patents in China.     

Global outsourcing or foreign direct investment: Why apple chose outsourcing for the iPod

A simple model is presented, where a firm's productivity is endogenized by its R&D investment. It shows that the most productive firms may prefer international outsourcing to foreign direct investment (FDI) in industries with a high innovation share. The high innovation share motivates the firms to economize on organizational cost in order to save resources for R&D investment, making outsourcing preferable to FDI because the former incurs a smaller organizational cost. This model helps explain why Apple Inc., belonging to the electronics industry, which has a particularly high innovation share, launched its innovative iPod through international outsourcing instead of FDI.     

Debt,R&D investment and technological progress: A panel study of Japanese manufacturing firms' behavior during the 1990s

Based on a panel data set of Japanese manufacturing firms in research-intensive industries, we investigate quantitatively the extent to which outstanding debt affected firms' R&D activities during the 1990s. We find that massive amounts of outstanding debt had a significant, negative effect on R&D investment during that time. We also find that R&D expenditures were closely linked to firm-level total factor productivity growth over the same period. In fact, a ten-percentage-point increase in the debt–asset ratio lowered the rate of firm-level total factor productivity growth by 0.26 percentage points between 1999 and 2001, because it reduced R&D activities. J. Japanese Int. Economies 21 (4) (2007) 403–423.     

R&;D and Exporting: A Comparison of British and Irish Firms

This paper investigates the two-way relationship between R&D and export activity. In particular, we concern ourselves with the question whether R&D stimulates exports and, perhaps more importantly, whether export activity leads to increasing innovative activity in terms of R&D (learning-by-exporting). We use two unique firm level databases for Great Britain and the Republic of Ireland and compare the results for these two countries. We find that previous exporting experience enhances the innovative capability of Irish firms. Conversely, no strong learning-by-exporting effects are found for British firms. Arguably part of the differences between Ireland and Britain are attributable to different, cross-country exporting patterns where Irish firms have a greater interface with OECD markets. JEL no.  F14, F23     

Knowledge spillovers from foreign direct investment in R&D: Evidence from Japanese firm-level data

This study uses firm-level panel data from the Japanese manufacturing industries and examines whether foreign direct investment generates intra-industry knowledge spillovers to domestic firms. The analysis found positive effects of R&D stocks of foreign firms on the productivity of domestic firms, while effects of capital stocks of foreign firms were absent, suggesting that knowledge of foreign firms spills over through their R&D activities, but not through their production activities. In addition, we found that the extent of spillovers from R&D stock of foreign firms is substantially larger than spillovers from R&D stock of domestic firms.     

'Successes' and 'Failures' in the Markets for Technology

Market-mediated contracts for technology trade are bound byseveral transaction costs. This paper argues that as these transactioncosts become less severe, markets for technology can help improvethree market failures: (i) R&D duplications; (ii) externalitiesin potentially public R&D outcomes; and (iii) deviationsfrom marginal cost pricing in the downstream product markets.In addition, with larger markets of potential users, the technologysuppliers will have incentives to produce more ‘general’technologies which span a wider number of firms or industries.Markets for technology also produce new failures. In particular,they induce deviation from marginal cost pricing in the saleof the technology, and they generate externalities associatedwith complementary R&D and other investments made by theindependent buyers and suppliers that operate in them. The paperconcludes by discussing policy implications.     

The impact of energy regulation on energy intensity and energy structure: Firm-level evidence from China

In this paper, we empirically investigate the impact of energy regulation on manufacturing firms' energy intensity and energy structure during 2003–2009. The identification uses the energy regulation of the 11th Five-Year Plan implemented in 2006. We show that tighter energy regulation leads to a significant energy intensity decrease and that firms switch their energy structure from using dirty fossil energy to a cleaner one. We also examine the mechanisms behind this phenomenon and find that the rising R&D inputs and increasing energy consumption ratio of high energy efficient firms are the mainly two reasons.     

Does an R&D tax credit affect R&D expenditure? The Japanese R&D tax credit reform in 2003

To what extent does a tax credit affect firms’ R&D activity? What are the mechanisms? This paper examines the effect of R&D tax credits on firms’ R&D expenditure by exploiting the variation across firms in the changes in the eligible tax credit rate between 2000 and 2003. Estimating the first-difference equation of the linear R&D model by panel GMM, we find the estimated coefficient of an interaction term between the eligible tax credit rate and the debt-to-asset ratio is positive and significant, indicating that the effect of tax credit is significantly larger for firms with relatively large outstanding debts. Conducting counterfactual experiments, we found that the aggregate R&D expenditure in 2003 would have been lower by 3.0–3.4 percent if there had been no tax credit reform in 2003, where 0.3–0.6 percent is attributable to the effect of financial constraint, and that the aggregate R&D expenditure would have been larger by 3.1–3.9 percent if there had been no cap on the amount of tax credits, where 0.3–0.8 percent is attributable to relaxing the financial constraint of firms with outstanding debts.     

R & D decisions under alternative regulatory constraints

IV. Summary and Conclusions The purpose of this paper has been to extend the range of consequences implied by government regulation of privately owned firms. The analytical framework of Section II concentrated on deriving the implications of alternative degrees of regulation on the firm's research and development (R&D) decisions. The analysis implies that managers of stringently regulated firms have greater incentive to neglect such activities related to the search for and production of valuable market information which increases owners' wealth. Among other things, this implies that firms subject to more restrictive regulatory climates are more likely to commit fewer expenditures to R&D activities.Empirical evidence from the electric power industry was presented in Section III. The results indicate that the interfirm differences in R&D expenditures in this industry can be explained to a large extent by the variability of governmentally imposed regulatory constraints. After controlling for other determinants of R&D behavior, the evidence reveals that electric power firms subject to the most restrictive regulatory constraints do significantly (at the 5 percent level and better) less R&D than firms operating under the weakest regulatory constraints.This paper is based on the author's master's thesis, submitted to George Washington University in May 1976. I gratefully acknowledge the helpful comments and suggestions of Louis DeAlessi and Robert Goldfarb.