Collaborative Research: The Globalization of R&D: Evidence from U.S. Multinationals

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The location of Research and Development (R&D) activities carried out by U.S.-based multinational firms has changed substantially in recent years Between 1999 and 2009, the R&D expenditure of the foreign affiliates of U.S. firms nearly doubled. Between 2004 and 2010, U.S. affiliate R&D in China more than doubled, and it increased in India by a factor of ten. These sudden changes raise significant questions and concerns for economic theorists, policymakers, and corporate managers. This project addresses these concerns by carefully documenting and describing recent changes in the scale, geographic distribution, and sectoral composition of overseas R&D. In addition it examines the evolving relationship between home R&D operations and overseas R&D, with a special focus on the impact of rising R&D investment in key emerging markets on the scale and scope of R&D activity at home. In addition it will test the validity of recent concerns that international tax differences are driving innovative activity offshore. Finally, it will measure the impact these recent shifts have had on the measured productivity of total U.S. corporate R&D investment at home. The rapid growth of innovative activity in low-wage emerging markets like China and India is viewed by some as a challenge to current theories of comparative advantage and international trade, which suggest innovative activity will be concentrated in advanced industrial economies. But is it? Prior research, based on analysis of the international patents granted to inventors resident in China and India suggests that a substantial fraction of the "innovation" emerging from these economies draws on intellectual inputs from the advanced industrial world and is generated through an emerging international division of R&D labor managed by foreign multinationals. However, analysis of patent data alone is insufficient to determine the nature and extent of this international division of R&D labor. This project extends understanding of this important phenomenon by combining patent data with high-quality, subsidiary-level data on the R&D expenditures of U.S. multinationals in key emerging economies, at home, and elsewhere in the world. Together these data sources provide a much more definitive picture of the interaction between rapidly growing R&D in key emerging markets and the rest of the U.S. corporate R&D system. Broader ImpactsIs American technological leadership threatened by the growth of U.S. multinational R&D activities outside the U.S? What are the appropriate policy responses? Exploration of the changing distribution of R&D input and output within U.S. multinational firms may shed useful light on these questions, which have been the focus of recent National Academy reports, high-level commissions, and industry analysis. To the extent that growth in invention in emerging economies has been heavily reliant on research inputs from Western firms, it may pose less of a direct threat to the economic welfare of advanced industrial countries than has been supposed. In fact, by improving the efficiency of the R&D process and allowing firms to explore more technological opportunities with a given level of expenditure, the expanding globalization of U.S. multinational firms' R&D activities could generate net positive effects on economic growth in the U.S. and end up reinforcing American technological leadership rather than undermining it.