R&D, globalisation and governments

Directorate for Science, Technology and Industry

The organisation of industrial R&D in OECD countries is transforming.

Evidence of this can be seen in the growth in the relative importance of inward and outward research-related foreign direct investment (FDI); the explosion of international strategic alliances and the increasing trade in technology-intensive goods. Foreign subsidiaries are now responsible for 12% of total manufacturing R&D investments in OECD countries, and for most of these countries, this contribution is expected to grow. However, the contributions of foreign affiliates range widely by country, between a low of 5% for Japan and a high of over 60% for Ireland.

Foreign affiliates are responsible for a larger share of industrial R&D investments in countries where their contribution to local production is important or where foreign affiliates are concentrated in industries, like pharmaceuticals, with high R&D intensities. With the exception of Japan, the seven largest R&D performing countries have all seen a marked rise in the percentage of R&D expenditures financed from foreign sources since 1981.

The number of foreign laboratories is another indicator of how much research has become global. A study of 32 international pharmaceutical and electronic companies shows that the number of new foreign affiliate laboratories almost tripled in 1985-95 compared with the previous decade. The experience of the pharmaceutical industry is not typical of all industries, however, because strict regulation favours direct investment over trade as an entry strategy. Moreover, though the establishment of new R&D sites abroad accelerated in the 1980s, some firms have had foreign laboratories since well before World War II. Nevertheless, in the United States there are at least 635 foreign-owned and free-standing R&D facilities, more than half of which were established after 1986. In Europe, in 1995 there were over 300 Japanese R&D facilities, twice as many as in 1989.

The explosion of international strategic alliances in R&D in the 1980s has been favourable to science and technology firms. It has helped firms to access foreign technologies and markets, as well as to minimise risks and rapidly recover the high costs of technological development. From 1980 to 1994, the total number of science and technology alliances grew by 10.8% per year, and about 65%of those alliances involved two partners from different countries. Technology-based alliances are especially common in information technology, biotechnology and advanced material industries. They all testify to the shared belief that key know-how is increasingly scattered internationally, albeit predominantly in the so-called Triad countries of Europe, Japan, and North America.

Government concern

These trends all seem positive on the whole, yet many governments remain concerned about the globalisation of R&D – whether they are net recipients or net sources of FDI. Source countries are wary of a hollowing-out of the research base as domestic cor-porations perform a larger share of their R&D abroad. They are worried that their

industrial strength and independence will be eroded if innovation becomes as mobile as production. Meanwhile, recipient countries are sometimes sceptical that foreign-affiliate laboratories are anything more than listening posts whose contribution to the

domestic research base could be improved. The research intensity of foreign affiliates is, indeed, generally lower than that of national firms, with the exception of a few countries like Ireland, Australia, and the United Kingdom, so it is understandable that host country governments should want to maximise the spillovers for the domestic economy of foreign R&D investments.

Another worry which all countries appear to share concerns the effects of international mergers and acquisitions on R&D. One of the hallmarks of cross-border M&A, as witnessed in pharmaceuticals and telecommunications, has been a rationalisation of redundant activities world-wide. The question of which laboratories will be kept and which will be downsized is inevitably a cause of some anxiety.

Good for growth

The nature of the policy reaction to R&D globalisation varies. Policies have run the gamut from enthusiastic support for R&D foreign direct investment to strict stipulations about foreign participation in the national research base. Whatever the policy type, national and regional governments seem to agree that, despite the concerns, a strong presence in at least a subsection of high-technology industries is important, not so much as an end in itself, but because of the contribution of those industries to the economy.

Within the advanced countries, technology-based industries frequently have higher growth rates than other sectors. In part, this is because changes in technology are one of the major factors influencing productivity growth. However, while investments in R&D are important for an economy, increases in productivity are often attributable to the use of technology developed outside the firm. And given that the stock of knowledge is increasingly transnational, a country’s growth depends on its ability to adopt technological innovations, no matter where they emerge.

So, what of employment? Well, the evidence is encouraging. While manufacturing jobs in the OECD declined by 10% between 1980 and 1995, high-technology manufacturing jobs have not suffered as much. In Europe, employment grew faster for science and technology personnel than for all other occupational categories in manufacturing and market services during the 1980s. Over that period, the OECD countries experienced a shift in manufacturing employment from low-technology jobs to medium and higher-technology ones. Moreover, new technology-based firms appear to be good sources of job creation. They certainly create high-paying jobs that require skilled work. Little surprise therefore that, despite their concerns and some of the mixed results from promoting new technology industries, governments remain interested.

• This article is based on Globalisation of Industrial R&D: Policy Issues.

©OECD Observer No 219, December 1999

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