Context and the role of policies to attract foreign R&D in Europe

ABSTRACT

This paper explores the effectiveness of policies ‘in’ attracting the foreign research and development (R&D) of multinational enterprises (MNEs) to specific countries in Europe. We develop a macroeconomic investigation covering 29 European countries during the period between 1990 and 2012 in order to address: (a) whether the provision of direct financial support for business R&D is effective for the attraction of foreign R&D; (b) whether direct support is more effective than indirect support for this purpose and (c) whether the link between direct financial support for business R&D and the foreign R&D of MNEs is conditioned by the context within which the support is provided. The results of the analysis show that, first, the provision of direct financial support is generally effective for the attraction of foreign R&D by MNEs. Second, direct support for business R&D is more effective for this purpose than indirect support. Third, the provision of direct financial support for business R&D yields greater returns in contexts that are more socio-economically suitable for knowledge-intensive, innovative activity.

KEYWORDS:

• Foreign R&D
• multinational enterprises (MNEs)
• direct and indirect support
• knowledge flows
• innovation
• Europe

JEL CLASSIFICATION:

• E61
• F23
• 038
• H25

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. A complete list of the countries included in the analysis is provided in the Appendix.

2. One of, if not the most, profound differences between direct and indirect financial support is the degree of control that governments may have over the use of the support (Carvalho, 2011). It is understood that much less control may be retained over the use of indirect support which represents an increasingly serious concern for policy-makers given the potential for ‘unintended effects’ and negative externalities, especially with regard to their use by MNEs (OECD, 2014, p. 22).

3. Falk’s (2006) conclusions regarding the effect of direct support are less definitive than those of Guellec and van Pottelsberghe de la Potterie (2000). The positive relationship between direct financial support and aggregate R&D intensity is statistically significant in only one of Falk’s (2006) empirical models.

4. Both domestic and foreign firms are often eligible to receive direct financial support for business R&D (OECD, 2011), as countries generally practice ‘non-discrimination vis-à-vis domestic firms [and foreign-owned companies]’ (OECD, 2011, p. 69).

5. This means that ‘the increased intensity of one [type of support] reduces the effect of the other’ (Guellec & van Pottelsberghe de la Potterie, 2000, p. 5).

6. Please see Warda (2001) for a comprehensive discussion of the B-index and Thomson (2009) for a detailed explanation of the calculation of the B-index values employed in this research.

7. All independent variables are centred on their means for the development of the interaction terms (Smith & Sasaki, 1979).

8. Aggregate R&D expenditure is negatively associated with BERD from abroad in Regression VII contrary to expectation. The coefficient is, however, highly insignificant.

Additional information

Funding

This work was supported by the European Research Council (FP7/2007-2013) ERC [grant number 269868].