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The globalisation of R&D by TNCs and implications for developing countries

Presentation by Anne Miroux, UNCTAD, 2005

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What: The presentation outlines the main actors of the process of R&D outsourcing. TNCs play a key role but public sector research institutions, universities and domestic enterprises should not be neglected. It provides the rationale for the increase in R&D-related FDI activities in developing countries. The impact as well as the benefits, costs and risks and the enabling policies are reviewed. Finally, it offers a few issues for discussion. Who: Can be used by a lecturer on a course on R&D outsourcing to developing countries. How: For a course on R&D and the role of TNCs.

Expert Meeting on Impact of FDI on Development
“The globalisation of R&D by TNCs and implications for developing countries”


Geneva, 24-26 January 2005


Presented by Anne Miroux, UNCTAD




1. Introduction


2. FDI in R&D: an emerging trend


3. Development impact


4. Policy Implications




The importance of innovation and R&D for
development


• Technological progress, driven by innovation, is
one of the main drivers of economic growth.


• The ability to use technology efficiently requires
formal R&D after a certain stage of development.




Globalization of R&D


• TNCs play a dominant role in R&D.
• R&D is one of the TNCs’ activities that are less


prone to internationalization.


However…


• There are signs that TNCs are globalizing their
R&D operations and locating even advanced R&D


activities (not just adaptative R&D) in developing
countries.




Putting global R&D by TNCs in perspective


• TNCs play a dominant role in many industries but
there are other key actors:


– public sector research institutions
– universities
– domestic private enterprises.


• Currently, only a handful of developing countries
are significant recipients of R&D-related FDI.




Emerging patterns of global R&D by TNCs
• The phenomenon is not completely new; the trend


towards the internationalization of R&D became
apparent as early as in the 1970s.


• What is new: developing countries have emerged
as destinations of R&D-related FDI:


– Between 1989 and 1999, R&D performed by foreign
affiliates of United States TNCs in developing countries
increased nine times;


– R&D expenditures by Japanese foreign affiliates in
developing countries rose ten times;


– In 2004, more than 10% of 2,500 foreign affiliates
engaged in R&D activities are located in developing
countries.




Emerging patterns of global R&D by TNCs
(continued).


• The emergence of FDI in R&D is part of the
broader phenomenon of offshoring services.


• A growing number of TNCs from developing
countries are establishing R&D facilities abroad.




Drivers of R&D globalization


• Global economic environment: a combination of
factors


– Increased technology intensity of products and services
– Intensified competition and shorter product cycles
– Increased R&D costs


• Technological change
– Advent of “modular” technology → specialization and


fragmentation of R&D
– Emergence of new technologies




Drivers of R&D globalisation (continued)


• Improved host country environment
– Improved skill base, infrastructure
– Linkages between the academic institutions in


the North and the South
– Liberalization of trade and investment regimes




Issues for discussion


• What is the potential size of offshoring R&D to
developing countries?


• Is offshoring of R&D likely to spread to new
developing locations?


• In what industries/activities do developing
countries have opportunities to attract R&D-


related FDI?




Impact
• Controversy on the impact on TNCs’ R&D


activities on local technological capacity
– Views on positive impact on economic growth,


technological efficiency and technological
change


– Opposed views on limited or negative impact
on host economy


• Debate on to what degree the scope for host
countries to access technology through contractual
forms is reduced




Direct and indirect benefits of FDI in R&D
• Direct benefits:


– Improving technological efficiency and inducing
technological change


– Direct benefits depend on the mandate and role of the
given R&D unit


– Benefits from linkages: through subcontracting and
licensing


– Employment creation for trained people
• Indirect benefits (spillover effects):


– Encouragement of commercial culture among scientists
and engineers


– Implantation of an R&D and innovation culture among
local companies


– Employee spin-offs of R&D companies




Costs and risks of FDI in R&D


• Risks and costs in countries attracting FDI in
R&D:


– Too few or no local linkages
– Fragmentation of R&D reduces the scope for


technology transfer
– Ending up in the lower end of value added within


R&D
– If FDI takes the form of an M&A, it may result in a


scaling down of R&D activities acquired
– Diversion of scarce local R&D resources from


local firms and research institutions
• Concerns about marginalization of many


developing countries not receiving corporate R&D




Issues for discussion


• To what extent can developing countries rely on imported
technologies to develop their own capacity to innovate?


• What types of R&D units are most desirable for
developing countries


• To what extent can FDI in R&D help reduce the
innovation gap?


• Do increased specialization and fragmentation of R&D
activities lead to reduced technology transfer to developing
countries?




Policies
• Double aim of policies:


– promote R&D-related FDI; and
– maximize its benefits.


• Levels of policies affecting FDI in R&D:
– Host country
– Home country
– International


• Focus on host-country policies




Host-country Policies affecting the pre-
conditions


• Macroeconomic and political stability
• Consistent and transparent investment, trade and


industrial policies
• Infrastructure
• Effective national system of innovation


– strengthening of academic sector
– encouraging university-industry collaboration
– establishing science parks and business


incubators




Host-country Policy measures affecting FDI
in R&D


• Performance requirements:
– mandatory R&D requirements (rare)
– Linked to the receipt of of incentives (frequent)


• Incentives
– fiscal incentives
– Financial incentives (directed credits)


• Protection of intellectual property rights:
controversial area




Issues for discussion


• What are the policies that would facilitate local
diffusion of technologies from TNCs’ R&D
activities?


• Do performance requirement and incentives play a
role in promoting R&D-related FDI?


• How do IPR regimes help attract R&D-related
FDI?




Issues for discussion (continued)


• What role can investment promotion agencies play
in attracting R&D related FDI?


• What is the impact of IIAs on the ability of
developing countries to create their domestic R&D
capabilities?


• What measures can home countries adopt to
promote R&D-related FDI to developing
countries?




Thank you for your attention
World Investment Report


http://www.worldinvestmentreport.net/




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