Foreign direct investment in R&D

Foreign direct investment in industrial research in the pharmaceutical and electronics industries - results from a survey of multinational firms, Walter Kuemmerle, Research Policy 28, 1999.

One way of investigating the globalization of R&D is to analyze streams of foreign direct investment (FDI). Where and why firms do invest in R&D abroad? Kuemmerle's 1999 paper in Research Policy addresses these questions.


Kuemmerle researched 32 multinational companies (MNCs) from the United States, Japan, Germany, France, and the Netherlands. In 1965, these firms carried out 6.2% of their R&D abroad (as measured by employment numbers). In 1995, the corresponding figure was 25.8%, a huge increase.
U.S. firms led this wave of international expansion, investing first in Europe, then Japan, and later other countries around the world. Typically, they had set up multiple research centers within the U.S. before expanding abroad.

European firms followed with investments in other European countries, then in the U.S., and finally in Japan. At the time the study was conducted, they had few R&D activities in other parts of the world.

Japanese firms were the last firms studied to extend their R&D activities abroad. Unlike the others, they tended to invest in multiple locations simultaneously.

However, since this paper doesn't include Swedish or Swiss firms, and only 1 Dutch firm, the chronology may be somewhat skewed. Firms from small European countries often set up R&D activities abroad out of necessity, long before their counterparts from larger companies considered a similar move.

Type of R&D conducted abroad

Firms locate their R&D abroad for two reasons:
1. to exploit competitive advantages in new markets (type 1),
2. to augment their competitive advantage and gain new expertise (type 2).

Kuemmerle also discovered that a firm's first R&D venture abroad was often aimed at exploiting its comparative advantage in a new country. This would often involve adapting products and processes to local market conditions. Later, the second type of expansion would occur.

Perhaps it took time for managers to trust the quality of R&D produced abroad, but also to assess the scientific strengths of the labor pool and their potential fit with the firm's overall strategy. It's a bit of a stretch, but this could be considered an example of absorptive capacity at work. Kuemmerle points out that it is easier to set up and manage type 1 facilities, and that the experience gained by establishing a type 1 site is conducive to the better establishment and management of type 2 sites, later.

At the time the study was conducted, only 5 R&D labs were recorded for India and China for all of the 32 firms. Only one very small lab was engaged in augmenting it's parent firm's competitive advantage. Although, I have yet to compile the relevant numbers, it is obvious that the situation has dramatically changed. The number of R&D labs in India and China today is staggering, and many are located so as to exploit expertise that is unavailable (or not available in large enough quantities) at a firm's other locations.

As some of these locations develop reputations as centers of excellence, firms may become willing to engage in type 2 research faster. For example, large industrial and engineering firms locate R&D labs in Bangalore to augment their software capabilities. As one VP of R&D put it, Bangalore is the place to get the best software expertise, so the lab there is expected to make up for the company's current IT disadvantage.

NB: Even in 1999, Kuemmerle noted that the importance of type 2 sites was increasing.

Modes of entry

When firms set up a new R&D lab they can choose between establishing a "green-field" site, acquiring an existing lab or engaging in a joint-venture. Joint-ventures often entail IP problems for the firm. Acquiring an existing lab is difficult because its integration into the firm's culture is tricky: Researchers are often alienated and leave, especially in well-known centres of excellence where their skills are in high demand. Kuemmerle finds that 79% of all sites in his sample were indeed green-field sites.


The U.S. is the most attractive location for FDI in R&D. It attracted 30% of all sites. In 1999, very few sites were located outside of the U.S., Europe and Japan, and these were restricted to Canada, Australia, a few Asian countries (China, India, Singapore etc.) and Chile.

The study doesn't include R&D sites of MNCs located in emerging economies. I would guess that most would locate a foreign R&D site in the U.S., but am curious to see if there's more data on this.

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