Foreign Direct Investment in R&D

The EU is currently losing R&D investment to other countries. In 2001 the net outflow of R&D funding from the EU amounted to over six billion euro. The Commission thinks that the FP7 can provide the necessary framework conditions to attract more foreign R&D investment.

Foreign Direct Investment (FDI) is investment of foreign assets directly into a domestic company's structures, equipment, and organisations. It does not include foreign investment into the stock markets.

FDI in Research and Development (R&D) means investment in creative work undertaken systematically to increase the stock of knowledge and its application - including basic research, applied research, and experimental development. 

The 1980s saw a boost in international co-operation in R&D and large multinational entreprises increasingly started to spread R&D activities outside their home countries. Strategic alliances and co-opearation have helped enterprise to access foreign technologies and markets, to minimise risks and to overcome the (often high) costs of technological development. 

Today's increasingly global economy has lead to the internationalisation of research and development (R&D). Until now, crossborder flows of R&D have mainly been (currently 80 per cent) confined to the United States, Japan and Europe. This tendency now seems to be changing in favour of countries such as China, India and Brazil.


Drivers of foreign corporate R&D

Foreign Direct Investment (FDI) in R&D has two different motivations: doing 'adaptive' R&D and getting access to 'state-of-the-art' knowledge.  The 'adaptive' R&D modifies products, processes and technologies according to local needs and supports foreign production facilities. Getting access to 'state-of-the-art' knowledge means that companies invest in foreign countries with a view to benefiting from excellent, local research and researchers.

It seems that FDI positively affects the growth of recipient countries as it decreases the costs of R&D through stimulating innovation. Policies to attract FDI have accordingly increased in importance and become a source of competition among developed and developing countries. 


Factors attracting FDI

Traditional factors attracting foreign direct investment include access to natural resources, markets, and low-cost labour. 

Other, more recent determinants and methods used by policymakers to attract FDI include:

  • targeted financial incentives, such as tax concessions, cash grants and specific subsidies;
  • improvement of domestic infrastructure and local skills base to meet the demands and expectations of foreign investors;
  • improvement of the general business climate of a country by decreasing administrative barriers and cutting red tape;
  • creation of state agencies to help investors complete administrative paperwork and to promote FDI generally; 
  • international governing arrangements to increase a country's attractiveness as an investment location. 

According to a study conducted by the Dutch Ministry of Economic Affairs among company executives, the most 
critical location factors
for FDI in R&D are:

  • availability of qualified people (the most important factor);
  • international accessibility;
  • world-class character of knowledge institutions (centres of excellence);
  • co-operation between firms and knowledge institutions;
  • quality of ICT/telecom infrastructure.

The costs do not seem to be a principal determining factor in decisions to invest in foreign R&D facilities. Access to markets, skilled people, facilities and standards count more. 

The United States is often given as an example of an attractive location for foreign R&D investors because of:

  • a large homogeneous market;
  • close links to top US universities and research labs assuring scientific and technological expertise and potential R&D spillovers;   
  • innovative environment, where the commercialisation of inventions is easier;
  • quality of life attracting qualified expatriated workers;
  • dynamic and rather loosely regulated labour market.

The availability of a skilled workforce and the increasing number of consumers in the former eastern bloc, China and India is making these regions increasingly attractive for business R&D. Business sector increasingly perceives India as an R&D hub for a wide range of industries.


And Europe?

The Commission thinks that the Seventh Framework Programme for Research and Technological Development (FP7) can provide the necessary framework conditions to attract foreign R&D investment. Indeed, among other things, the current proposal for FP7 envisages:

  • strengthening, quantitatively and qualitatively, the human potential in research and technology in Europe and 
  • creation of European poles of excellence. 

The Science and Research Commissioner Janez Potocnik thinks that Europe must maximise its attractiveness as a location for private research investment. "This will require a broad policy mix encompassing various fiscal incentives, improved framework conditions, qualified human resources, effective intellectual property regimes and basic and applied research infrastructures", he said at a conference on the internationalisation of R&D in March 2005. 

Creating more favourable conditions for FDI is therefore a "better strategy than reacting with protectionism which chooses to underline only the dangers and threats", he added. 

However, Poto?nik cautions that the EU must take into account and mitigate the risks associated with overseas R&D investments - such as the 'brain drain' of skilled European researchers and Europe losing out in certain sectors (pharmaceuticals, biotechnology) as European firms invest in R&D elsewhere. 

Table 1: The percentage of the total gross domestic expenditure on R&D (GERD) by foreign funds for years 1994, 2002 and 2003.


Country


2002

1994
Latvia                   2003:  20.4  35.6                             22.8 (1995)             
Greece                  2003:  18.1  21.4 (2001) 18.6 (1995)
Austria                  2003:  21.0  21.7  4.2 
United Kingdom    2003:  19.4 20.5 12.4
Cyprus                  2003:  13.9 15.1 8.0 (1998)
Estonia                 2003:  15.2  14.4 6.2 (1998)
Belgium                2003:  12.9  11.8 (2001) 7.9
The Netherlands  2003:  11.3 11.0 (2001) 8.8
Hungary               2003:  10.7 10.4 3.7
Ireland                  2003:  8.5 8.9 (2000) 8.5
France                  2003:  8.4 8.0 8.3
Denmark               2003:  10.3 7.8 (2001) 11.0 (1995)

EU-15                    

8.3

6.5

EU-25                   

8.2

6.7 (1995)
Lithuania              2003:  13.8 7.1 6.7 (2000)
Spain                    2003:  5.7 6.8 6.4
Italy                      6.2 (1996) 6.1
Portugal               2003:  5.0 5.1 11.9 (1995)
Poland                 2003:  4.6 4.8 1.4
Slovenia              2003:  9.9 3.7 2.6
Sweden                2003:  7.3 3.4 (2001) 3.4 (1995)
Finland                2003:  3.1 3.1 4.5 (1995)
Czech Republic    2003:  4.6 2.7 3.3 (1995)
Germany             2003:  2.3 2.4 1.7
Slovakia              2003:  3.3 2.1 1.3
Luxembourg        2003:  8.3 1.6 no data
Malta                    21.7 no data
Romania 7.0 0.6
Bulgaria 5.0 0.04 (1995)
Croatia 1.5 no data
Turkey 1.3 1.7
The United States no data no data

Source: Eurostat (Statistics and Technology: Statistics in focus 7/2005 and 15/2006)

While FDI in R&D has generally positive impacts, many governments remain concerned over the globalisation of R&D. The underlying issue is whether they are net recipients or net sources of FDI - making all the difference in the share of benefits.


The benefits and beneficiaries 

For an FDI recipient country the benefits include:

  • increase in local technical capacity;
  • potential knowledge and economic spill-overs;
  • job creation;
  • better tailored products.  

However, receiving FDI also means accepting foreign control over domestic R&D resources and loss of economic benefits if the results of R&D are exploited elsewhere. 

For the source of FDI the benefits include:

  • access to other sources of expertise;
  • enhanced access to foreign markets;
  • economic benefits if the results of R&D are exploited at home. 

But, being the source of FDI also means facing the loss of jobs, technical capability and of economic benefits if the results are exploited locally.

  • October 2006 Eurostat statistics on R&D and internationalisation show that in small EU countries a large proportion of R&D is financed from abroad.
  • The United Nations' World Investment Report 2005 focusing on trends in FDI was launched on 29 September 2005. It states that the drivers of FDI in R&D are changing and that the cost and availability of research manpower has become increasingly important.
  • OECD's International Investment Perspectives 2005 was published in September 2005. It includes chapters on indicators relating to FDI, internationalisation of industrial R&D and cross-border ownership of inventions. 
  • The 'Key figures 2005 for science, technology and innovation' show that the share of foreign affiliates in total R&D expenditure by enterprises has risen the most in the new member states Slovakia, the Czech Republic and Hungary, and in the UK, Sweden and Portugal. In Germany, France and Finland the increase was also substantial. In other countries, the FDI in R&D has increased roughly as fast as domestic R&D.
  • A high-level conference on the 'Internationalisation of R&D' took place in March 2005 (organised by OECD and the Belgian government).

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