J Technol Transfer (2008) 33:353–363 DOI 10.1007/s10961-007-9050-2
Foreign investment innovation: a review of selected policies Ruth Rama
Published online: 14 July 2007 Springer Science+Business Media, LLC 2007
Abstract Whereas foreign investment innovation (FII) has become increasingly common, after decades of debate it is still unclear whether it is desirable for the home country or for the company’s host country. This paper reviews articles from three complementary economic and business traditions which investigate this phenomenon and propose policies based on facts: the economics of technological change tradition, the international business (IB) tradition, and the line of research on international technology transfers. Articles in line with these strands of theory complement each other because they approach different aspects of complex events while explaining FII and its effects on host and home countries. Host countries obtain maximum benefits from FII when affiliates import foreign technology, purchase their inputs in the host country and enjoy product and technological autonomy vis-a`-vis the parent. Different types of MNEs, affiliates and foreign R&D units have different potentials for transferring technology to host countries and provide different scope for policies. The authors recommend that governments encourage direct vertical linkages between MNEs and domestic suppliers who could reap the benefits from foreign knowledge. However, some important success factors remain exogenous to governments. As for indigenous MNEs, it is a matter of controversy whether governments should always stimulate them to conduct research in foreign locations or, alternatively, incentive them to stay at home. The need for additional evidence is still considerable in many respects. Keywords Multinational enterprises Foreign direct investment Technology transfers Internationalisation of R&D JEL Classifications F23 033
R. Rama (&) Department of Economics, IEG-CSIC, National Research Council of Spain, Pinar, 25, Madrid 28006, Spain e-mail:
[email protected]
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1 Introduction This paper deals with policies that attempt to influence: 1) the innovative activities undertaken by foreign multinational enterprises.1 in the domestic market, and 2) the innovative activities performed by indigenous MNEs in foreign markets. In this review they will be called ‘‘foreign investment innovation’’(FII). Whereas FII has become increasingly common, it is still not clear whether it is desirable for the MNE’s home country or host country. There has been concern that foreign firms could siphon off a host country’s accumulated knowledge (Meyer-Krahmer and Reger 1999), liquidate its independent science and technology (S&T) base (Dyker 2001), access publicly-funded R&D (Mowery 2001) and, in the case of developing countries, bring in the wrong technology and foster a vicious circle of cumulative decline (Tolentino 1993). There has also been concern in the opposite direction that foreign companies would not conduct research in host countries and would bring to them only their low value-added activities (Dunning 1994). Some policies aimed at influencing FII have themselves been controversial (MeyerKrahmer and Reger 1999; Mowery 2001; Warner and Rugman 1994). By contrast, some governments of developing countries have been so keen to attract FDI at all costs (see for instance Oman 2000) that, according to Beausang (2003), they have not dared to encourage technology transfers (TTs)2from MNEs to domestic firms. One reason for controversy about FII could be that the available empirical evidence is still insufficient (Dunning and Narula 1996; Dunning 1994; Serapio et al. 2004). Policy makers often need informed answers to questions such as: How can foreign laboratories be attracted? Are the effects of FII positive? How can unwanted effects eventually be dealt with? Should indigenous companies be encouraged to innovate at foreign locations? Which policies are the most effective for promoting international TTs from MNEs to domestic firms? A dual approach will be adopted in this connection. First, a review will be undertaken of a selection of papers in the economic and business literature that have provided some answers based on facts (i.e. study cases, econometric analyses, etc.). Second, aspects of FII requiring more empirical research will be identified. Before these questions are addressed, some policies aiming at influencing FII are enumerated in Sect. 1. In Sects. 2–4 I survey some papers analysing, respectively, the business, the home and the host-countries perspectives on FII. In Sect. 5, I identify some bottlenecks that put a brake on the formulation of policies based on facts. Section 6 contains some conclusions.
2 Some policy objectives As stated, FII includes: 1) the innovative activities undertaken by foreign multinational enterprises in the domestic market, and 2) the innovative activities performed by indigenous MNEs in foreign markets.
1
A multinational enterprise is a company that operates direct business activities in at least two countries. A characteristic of the multinational is its ownership and control of assets abroad. See Ietto-Gillies (2005).
2
A TT is the movement of know-how, technical knowledge or technology from one organisation (e.g. a MNE) to another (e.g. a domestic firm in a host-country). See Bozeman (2000).
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Policies for the purpose of influencing FII are those aimed, among other objectives, at: attracting FII to a host country or region; maximising the benefits from spillovers of knowledge obtained from FII; guaranteeing inward technology transfers from foreign firms to the host country; negotiating reciprocity agreements with foreign governments concerning the access of companies to foreign sources of science and technology; limiting the access of foreign firms to national (supranational) sources of knowledge; etc. For instance, in the 1990s, the US limited foreign access to US technology initiatives (Warner and Rugman 1994); the EU adopted similar measures concerning high-tech research programmes. Although not exhaustive, this list illustrates the many possible objectives of policies aimed at influencing FII.
3 The business perspective and the technological strategies of MNEs The globalisation of R&D is a Triad phenomenon, although emerging markets have recently also attracted some FII predominantly (Meyer-Krahmer and Reger 1999; OECD 2005). Some authors interpret FII mainly as a regional process chiefly involving European MNEs that innovate in other EU countries (Archibugi and Michie 1995). The literature shows that MNEs innovate abroad for motives such as: adapting products to host-country tastes, absorbing new knowledge in world centres of excellence or benefiting from local low-cost, good-quality R&D (Blanc and Sierra 1999; Cantwell and Iammarino 2000; Cantwell and Janne 1999; Cantwell and Kosmopoulou 2001; Cantwell and Piscitello 1999; Cantwell and Santangelo 1999; Meyer-Krahmer and Reger 1999; Pearce 1999; Pearce and Papanastassiou 1999; Reddy 1993). Some authors, defined by Archibugi and Iammarino (1999) as the ‘‘sceptics of globalisation’’, maintain, however, that many MNEs are barely interested in FII because they prefer to innovate in the home-country (Patel and Pavitt 1991; Patel and Vega 1999; Patel and Pavitt 1995; Patel and Pavitt 1997). In view of their characteristics, some potential host-countries have few possibilities of attracting foreign laboratories (OECD 2005; UNCTAD 2005). Different types of MNEs, affiliates and foreign R&D units have different potentials for TTs to host countries and provide different scope for policies. A selection of papers identify some success factors regarding the transfer agent, i.e. the MNE: 1) the parent is willing to transfer technology to its foreign affiliates (Dunning 1994); 2) the MNE is willing to transfer technology and knowledge to domestic firms (Dyker 2001; Maskus 2003; Molero 2000; Veugelers and Cassiman 2004); 3) the foreign R&D unit is autonomous (Meyer-Krahmer and Reger, 1999); 4) the foreign R&D unit performs high tech, global innovation (as opposed to adaptive innovation) in the host-country (Reddy 1993); 5) the MNE sources in the host-country (Javorcik et al. 2004); 6) the subsidiary is large and purchases high-tech products in the host country (Giroud 2000). Academic research on these topics is policy relevant for several reasons: • It contributes some general ideas on countries’ realistic possibilities of attracting FII; • identifies, by home-country and sector, the types of MNEs that are more likely to develop foreign R&D; • points to the types of foreign labs that develop more creative research and to the world centres of excellence by sector; and
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• evaluates the contribution of MNEs versus that of domestic firms in national innovation systems (hereafter, NIS).
4 The home-country perspective The literature also provides some lessons for home countries. Patel (1995) argues that the situation in a home country contributes to the creation of global technological advantages for indigenous firms. Based on patent analysis, other authors advise policy makers to strengthen the built-in advantages of specific national sectors as an effective policy for promoting the internationalisation of indigenous competitive enterprises (Le Bas and Sierra 2002) and that of their labs, which will facilitate access of companies to some skills unavailable in the home country (Cantwell and Janne 1999). The relocation of the indigenous firms’ labs might restrict, however, technological opportunities in the domestic market (Archibugi and Iammarino 1999). Thus, the insufficient attractiveness of home countries is sometimes a matter of concern (Erken and Gilsing 2005; Sachwald 2005). The question is whether R&D performed in foreign locations by indigenous MNEs substitutes, rather than complements, the work of such companies at home (Doz 2005). In this respect, evidence is mixed (Andersson 2005; Cantwell et al. 2004; Cantwell and Kosmopoulou 2001; Iawata and Methe´ 2004; Patel and Vega 1999). An example of complementary home and host-country R&D is found by Patel and Vega (1999). After analyzing the patenting activities of 220 highly internationalised firms, they conclude that ‘‘adapting products and processes and materials to suit foreign markets and providing technical support to off-shore manufacturing plants remain major factors underlying the internationalisation of technology’’. Few authors have investigated how to prevent the negative effects, if any, of the international innovative activities of indigenous companies—a matter of concern in countries such as The Netherlands where a large part of the R&D of indigenous firms is conducted in foreign locations (Bijman et al. 1997; Erken and Gilsing 2005). It remains unclear whether governments should systematically encourage indigenous companies to conduct R&D in foreign locations. Better co-ordination between domestic institutions and such firms could increase the attractiveness of a home country for innovators. The papers reviewed in this section are policy relevant because they provide some indications on the attractiveness of home-countries for their own indigenous firms and alert on the possible risks involved in the dislocation of such companies’ labs to foreign countries.
5 The host-country perspective This section reviews some papers dealing with the host-country perspective on FII. They tackle three major issues.
5.1 How to attract FII to the host-country? The possibility of attracting innovative affiliates depends not only on an MNE’s strategy, but also on the attractiveness of the host country. According to a survey (UNCTAD 2005),
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many developing countries (e.g. Tunisia, Turkey and Viet-Nam) have few possibilities of attracting FII; this is also the case of some developed countries (e.g. Norway and the Czech Republic). Some authors advise to strengthen the National System of Innovation (NSI) in order to attracting FII both to developed and developing countries (Casson 1991; Erken and Gilsing 2005; Reddy 1993; Sachwald 2005). According to Lundvall (1992, p.12), a broad definition of the NSI ‘‘includes all parts and aspects of the economic structure and the institutional set-up affecting learning as well as searching and exploring—the production system, the marketing system and the system of finance present themselves as sub-systems in which learning takes place’’. He points to important aspects of the NSI, such as the internal organisation of private firms, interfirm relationships (e.g. between users and producers of goods), the R&D system, the national education and training system, and the role of government—as a user of innovations produced by the private sector, regulator and supporter of the scientific system. Some national policies aimed at strengthening the NSI and, hence, at attracting FII consist of: fostering human resources, supporting R&D capabilities or adopting a clear and enforceable system of intellectual property rights (UNCTAD 2005). Econometric work confirms that strengthening the NSI could be a useful way to attract FII, although some specific policies (e.g. patent rights) might not be very effective (Kumar 2001). Other studies suggest that MNEs can choose different mechanisms for TTs, depending on the policies on patent rights adopted by host countries (Maskus 2003; Smith 2001). Also, some policies (e.g. tax policies) can encourage or curtail the evolution of already established foreign labs (Papanastassiou 1995). However, specific government incentives seem to be rarely effective to attracting FII when other conditions (e.g. skills and R&D capabilities) are not also in place in the host-country (UNCTAD 2005). Regional policy makers might also wish to attract FII, although there is a risk that foreign laboratories would want to settle only in well-endowed regions, thereby accentuating regional unbalances within countries (Archibugi and Iammarino 1999). Indirect intervention through the strengthening of weak regional innovation systems could mitigate these unwanted effects of FII (Cantwell and Iammarino 2000). The papers are policy relevant because they provide indications on the most effective measures, either direct or indirect, to attracting FII. They also show the interplay between host-country’s policies and MNE’s technological strategies.
5.2 Risks and benefits of FII for the host-country Most of the literature points to MNEs as important sources for new technology at the global level (Alfranca et al. 2002; Patel and Pavitt 1991; UNCTAD 2005), and the prospect of obtaining access to updated technology is one of the main reasons why governments wish to attract FDI. According to the literature, however, FII could involve both risks and benefits for a host-country. In some countries the weight of the innovations generated by MNEs is substantial compared with total innovation, and authors point to the eventual risks involved in the concentration of technology in the hands of a few companies. (Archibugi and Petrobelli 2003; Doz 2005; OECD 2005). Other studies consider a more sectoral angle of the question. Cantwell (1989) notes that smaller developed countries may not trouble themselves too much about their dependence on MNE for technology used in declining industries, provided that this helps them to restructure their industry towards their own areas of technological strength.
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At the microeconomic or industry level, some authors find positive effects, i.e. TTs to the host-country through FDI (see, for instance Eaton and Kortum (1996); other authors find some evidence of a limited, though encouraging influence (Giroud 2000). Finally, other find no evidence at all of TT through FDI (Braconier et al. 2001; UN-ECE 2000; Veugelers and Cassiman 2004). The first study is especially useful since it considers as variables the affiliates’ employment and expenditure on R&D, not just the presence of MNEs in the host-country. The authors find no evidence of inward or outward FDI being important for productivity improvements in Swedish manufacturing industries. By contrast, Giroud (2000) detects some evidence of TTs from Japanese foreign investors to their Malaysian electric and electronics suppliers, though transfers are infrequent and only 37% of the MNEs transmit some knowledge. The technological impact of MNEs on a host country cannot be disentangled from the effects of FDI in general (OECD 2005). In some cases, FII could displace innovative domestic firms (Cassiolato et al. 2002; UNCTAD 2005); this effect could explain the absence of spillovers of knowledge from MNEs (Cantwell 1989). When the MNE acquires a domestic competitor and closes its lab, the final result of the acquisition could be an impoverishment of the technological basis of a country (Archibugi and Iammarino 1999). The above papers are useful for policy formulation since they measure at country and, often, sector level the concentration of foreign R&D. In doing so, they provide some indications of technological dependence or interdependence of countries. Also, they contribute a realistic account of the effects of FDI and, more rarely, of FII on the technological development of host-countries.
5.3 Factors of success in technology transfers The following paragraphs review some studies that indicate when TTs are most likely to be successful. The characteristics of the transfer agent, of the transfer receiver (the domestic firm), and of the linkages between both could influence the effectiveness of the TT from MNEs to domestic firms and industries. As stated in Sect. 2, some of the features of the MNEs could be important to ensure successful TTs. In addition, authors advise to implement policies aimed at creating a competitive climate in the host country to encourage the parent to transfer technology to its affiliate (Blomstro¨m et al. 1994). They also propose that the links between MNEs and the NSI should be strengthened (for instance, by stimulating the relationship between foreign investors and local universities), and to include some foreign companies with specific R&D characteristics in national science and technology programmes (MeyerKrahmer and Reger 1999; Molero 2000). However, according to the studies some success factors appear to be exogenous to governments and depend exclusively on the parent global strategies. Also, the traits of the domestic firms are relevant to promote successful TTs. The literature shows that when domestic firms (industries) have a good absorptive capacity, TTs from FDI are likely to be more effective. Thus, most authors advise policy makers to strengthen the NSIs of MNEs’ host countries, including developing host countries (Archibugi and Petrobelli 2003). Some studies recommend that policy makers target specific sectoral innovation systems where host countries already have some experience and, therefore the technology gap is smaller (Molero 2000). This could enhance the absorptive capacity of domestic firms.
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As will be seen next, direct linkages between the MNEs and domestic firms tend to foster TTs to host countries. Technology spillovers take place when MNEs improve the technology of their affiliates and knowledge disseminates, in turn, to domestic companies in a host country (UN-ECE, 2000). There is a substantial literature attempting to determine whether or not host-countries enjoy spillovers from FDI (Saggi 2000). According to Saggi’s review (p.23), the studies ‘‘cast doubt on the view that FDI generates spillovers for local firms’’. However, most of this literature analyses, in my view, the technological and productivity effects of FDI, not specifically of FII. As noted by Javorcik (2004), perspectives on vertical or inter-industry linkages are somewhat optimistic as various studies observe that new knowledge tends to spill over from MNEs to their local suppliers. By contrast, MNEs usually prevent innovation leakages that could reach competitors, i.e. horizontal spillovers (Veugelers and Cassiman 2004). Some authors have identified specific situations which seem particularly propitious to TTs, such as direct linkages between the MNE and its suppliers, and the presence of local suppliers (Dyker 2001; Hoeckman et al. 2004; Maskus 2003). Governments could reduce entry barriers (by considering loan guarantees for these companies, for instance) for local firms that could effectively supply MNEs (Maskus 2003). Other authors propose direct intervention to ensure that local suppliers receive an equitable transfer of management best practices and technology from affiliates; an example is the government’s monitoring of the TT process in supplier network programmes implemented by host-countries (Beausang 2003). To summarise: a competitive local environment, direct linkages of MNEs with domestic firms and good absorptive capabilities in domestic firms seem important conditions for successful TTs. This literature is policy-relevant because it addresses the issue of the efficacy of technology transfers to host countries and identifies main factors of success.
6 Current limits to the analysis of FII A review of the literature suggests that insufficient empirical analysis could put brakes on the formulation of policies based on facts. In what follows, some aspects are indicated that may need more attention from researchers and statistical offices: • Data on inflows and outflows of R&D investment are currently available only for a few developed countries. With the available information, it is difficult to tell whether the national R&D intensity is downsized by foreign R&D. • How should the degree of openness of a NSI and the ease with which foreign firms get access to publicly-financed R&D be measured? (Mowery 2001) • How should reciprocity between countries (i.e. the degree of openness of one country’s innovation system versus another country’s) be measured? • There is insufficient empirical support to ascertain whether researching abroad is more efficient for an MNE than researching in the home country. Understanding this aspect is important for managers; moreover, it is also important for governments of homecountries owing to the macro-economic effects of the large indigenous companies. • There is also insufficient empirical support to ascertain whether foreign R&D is more beneficial to host countries than their indigenous R&D (on the Dutch case, see Erken and Gilsing 2005).
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• More analyses on spillovers of MNEs’ innovative activities in different types of countries and sectors are needed so that we can understand better the potential effects of foreign laboratories on host countries. • We need to better understand whether the links of foreign MNEs and local research institutions are adequate to promote the absorption of knowledge in host-countries (Erken and Gilsing 2005). In addition to limits imposed by insufficient data, other problems of a more conceptual and methodological nature remain: • The most important is that we still do not know how to interpret results. According to Patel and Pavitt (1991, p. 5): ‘‘For some, a high proportion from foreign-controlled multinationals is likely to augment national activities; for others, it is either the consequence or the cause of deficiencies in nationally-controlled activities. Similarly, a high proportion of technological activities undertaken by large firms outside their home countries is for some a sign of strength and for others a sign of weakness.’’ Although this statement was formulated in the early 1990s, it is still true in some respects. • The long-term effects of globalisation of R&D on location sites (and on enterprises) are difficult to foresee (Edler 2004). • Data are not fully comparable and research methods vary from one paper to the next (OECD 2005). This limits the possibility of comparing different authors’ results.
7 Conclusions Here I have reviewed some papers that investigate FII and propose policies based on facts. My first conclusion from the review is that governments have probably overestimated the possibility of attracting FII. MNEs are undertaking abroad a growing share of their R&D (UNCTAD 2005); however, many MNEs are barely interested in researching in foreign locations and many of the world’s countries lack the features that appeal to foreign laboratories. Second, governments have often assumed that the presence of foreign laboratories and even that of just FDI, in a host country would always encourage international TTs to domestic firms and industries. In fact, host countries obtain the maximum benefits from FII only when some conditions are met: 1) affiliates import foreign technology, 2) purchase their inputs in the host country, 3) relate directly to domestic suppliers and 4) enjoy product and technological autonomy vis-a`-vis the parent. The papers reviewed suggest that governments of host-countries could influence FII and reinforce its positive effects on a host-country by: stimulating a competitive climate; encouraging the emergence and growth of regional centres of competence around autonomous foreign R&D units; and including units of such characteristics in national and supra-national R&D programmes. Also, authors recommend governments to encourage direct vertical linkages between MNEs and domestic suppliers who could obtain all the benefits from foreign knowledge. Governments can remove barriers to entry for domestic firms and eventually discourage the entry of foreign suppliers, provided that competition in the domestic market for inputs and parts is already acceptable. Governments of host countries can influence other success factors notably by strengthening the national or regional system of innovation. However, policy makers should be aware that some important factors of success remain exogenous to governments. For instance, it is not within the power of governments to
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modify the most important reasons why FII is drawn to certain countries (e.g. a large market). Also, governments should be conscious of the interplay between FDI and FII. Attracting FDI with the expectation that it will transfer technology to all kinds of firms in a host country seems, in general, quite an ineffective policy. In my view, it is particularly unrealistic when governments expect that new knowledge and technology will spill over from MNEs to domestic firms operating in the same business—i.e. to potential rivals of the foreign firm, since MNEs are particularly skilled in avoiding leakages. As for indigenous MNEs, it is controversial whether governments should always encourage them to research in foreign locations. Investigation has also been carried out in this review on some lacunae in the empirical analysis of FII which could put brakes on the formulation of informed policies. In some cases, information is non-existent or confined only to developed countries or high-tech sectors. Data and methods used by the authors who research FII are often different, which makes it difficult to compare results. Perhaps more importantly, in some cases we do not yet know how to interpret results. Acknowledgements The author is grateful to Jacob Edler for useful comments on an early draft. The paper was prepared in the framework of the PRIME Network of Excellence and the GLOBPOL project of the European Union.
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