Home base-compensating R&D: Indicators, public policy, and ramifications for multinational firms

Journal of International Management 17 (2011) 42–53

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Journal of International Management

Home base-compensating R&D: Indicators, public policy, and ramifications for multinational firms Mark Lehrer a,⁎, Kazuhiro Asakawa b,1, Michael Behnam a,c,2 a b c

Sawyer School of Management, Suffolk University, 8 Ashburton Place, Boston, MA 02108, United States Graduate School of Business Administration, Keio University, 2-1-1 Hiyoshi-honcho, Kohoku-ku, Yokohama 223-8523, Japan Research Fellow, European Business School, Germany

a r t i c l e

i n f o

Article history: Received 30 July 2010 Accepted 9 August 2010 Available online 15 September 2010 Keywords: Home base-compensating R&D Multinational corporations National systems of innovation R&D reform Public policy Germany Biotechnology

a b s t r a c t The situation in which a multinational firm compensates for comparative weakness in homecountry R&D by locating vital R&D activities in foreign countries with a stronger R&D base has generally been considered a fairly marginal phenomenon. Yet home base-compensating R&D by MNCs is more prevalent and more important in its effects than generally assumed. Given intensifying competition among nations for R&D investment by MNCs, home basecompensating R&D may help stimulate R&D reform in the home country, as illustrated with the example of German biotechnology. The probability that home base-compensating R&D can stimulate R&D reform in the firm's home country is highest when practiced by “high-profile players” in sectors that are science-based and that are either strategic (inter-industry economic and knowledge spillovers), feature above-average growth, and/or are of high political importance. To the extent that home base-compensating R&D by MNCs can potentially encourage policy reforms in their home country, this adds a new level of complexity to discussions about the role of corporations in influencing public policy as a component of their corporate social responsibility. © 2010 Elsevier Inc. All rights reserved.

1. Introduction The transnational knowledge-based economy forms the backdrop of the increasingly symbiotic relationship between national systems of innovation on the one hand and cross-border innovation activities orchestrated by multinational corporations (MNCs) on the other (Cantwell and Harding, 1998; Cantwell and Janne, 1999). The growing prominence of national innovation systems as a differentiating factor of national competitiveness (Granstrand, 2000; Narula, 2003) goes hand in hand with the increasingly strategic role played by foreign R&D in MNCs (Niosi, 1999; Ambos, 2005). Foreign R&D conducted by international firms generates innovation and knowledge for worldwide deployment and not merely for adapting products and services to local markets (Zedtwitz and Gassmann, 2002; Krishnan, 2006). Yet even when MNCs endeavor to build global technological advantages by tapping into foreign national innovation systems, they usually do so in areas where their home base is strong (Pavitt and Patel, 1999). As Patel and Vega (1999: 154) conclude, there is “very little evidence to suggest that firms routinely go abroad to compensate for their weakness at home.” This paper explores the case in which MNCs do precisely this. Although less common statistically, the situation in which firms compensate for R&D weakness in their home country by building up R&D activities abroad merits investigation from the point of view of both MNCs and policy-makers. As companies rely increasingly on open innovation (Chesbrough and Appleyard, 2007) to tap increasingly differentiated markets for technology (Guth, 2009), many countries are nurturing their national innovation ⁎ Corresponding author. Tel.: + 1 617 573 8338. E-mail addresses: [email protected] (M. Lehrer), [email protected] (K. Asakawa), [email protected] (M. Behnam). 1 Tel.: + 81 45 564 2021; fax: +81 45 562 3502. 2 Tel.: + 1 617 573 8000. 1075-4253/$ – see front matter © 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.intman.2010.08.001

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systems with the explicit aim of encouraging MNCs to establish R&D operations. Competition among nations for R&D investment by MNCs has intensified due to efforts by policy-makers in many emerging economies (e.g. China, India, Brazil) to attract foreign R&D investment. Such changes in the global innovation landscape, which run somewhat contrary to traditional assumptions about the R&D investment patterns of MNCs (Li and Kozhikode, 2009), facilitate home base-compensating R&D by MNCs at the same time that they heighten the importance of national R&D and innovation policies. When firms engage in home base-compensating R&D, this can send a powerful signal to policy-makers in their home countries about the lagging competitiveness of national R&D. Against a background of increasingly globalized innovation activity designated by terms like “techno-globalism” (Ostry and Nelson, 1995) and “intellectual globalization” (Krishnan, 2006), home basecompensating R&D can provide a stimulus for reform of domestic R&D policies and institutions. We illustrate this with the example of German biotechnology. Three main objectives are pursued in this paper. The first is to reinterpret the phenomenon of “home base-compensating R&D.” This is the general situation in which firms conduct R&D activities in countries featuring stronger national innovation systems than the home country for the activities in question and for which the home country is comparatively weak. Adopting the framework developed by Patel and Vega (1999), we use Quadrant 1 of Fig. 1 as a parsimonious way of stylizing home base-compensating R&D and distinguishing it from other types of corporate R&D offshoring, in particular from cases in which the firm's home-country national innovation system in a given area is strong (Quadrants 2 and 3).3 The second objective is to develop a framework for understanding the policy choices raised by home base-compensating R&D for policy-makers in the home country. Home base-compensating R&D raises many of the policy concerns raised by the offshoring and outsourcing of other high value-added activities by MNCs (Javalgi et al., 2009). Obviously, R&D weakness in some sectors is of more concern to policy-makers than R&D weakness in others. It is especially high-technology sectors that inspire the greatest policy activism (Tzeng, 2008; Li and Kozhikode, 2009). Not only can home base-compensating R&D constitute a symptom of the need for domestic R&D reform, but home base-compensating R&D by MNCs can also provide a useful justification for policymakers to pursue activist policies. Third, the implications for the corporate social responsibility (CSR) of MNCs are explored. If MNCs can directly or indirectly encourage policy reforms in their home country by bolstering their R&D activities abroad as opposed to at home, this adds a new level of complexity to discussions about the proper role of corporations in influencing the formulation of public policy. Prior discussions of CSR underline the responsibility that firms have for enhancing the regulatory framework for business in their own country by engaging in dialogue with public officials (Ulrich, 1995; Göbel, 2006). However, in some instances MNCs may actually send more powerful signals through partial exit (such as home base-compensating R&D) than through voice (such as lobbying or information exchange with public officials). To the extent this is true, conventional prescriptions about the “co-responsibility of firms for the regulatory framework of business” (Ulrich, 2007) may be oversimplified.

2. Home Base-Compensating R&D: Concept, Indicators and Reinterpretation of the Evidence It is now well-established that R&D conducted abroad by MNCs aims at new knowledge development for global application and not just the transfer and leveraging abroad of R&D knowledge developed at home. Kuemmerle (1999) found that foreign R&D facilities by MNCs divide fairly evenly into those of merely a “home base-exploiting” (HBE) nature, involving mainly the local adaptation of products, and those of a “home base-augmenting” (HBA) nature in which the firm seeks to augment the MNC's knowledge base by tapping into foreign R&D resources. Using this terminology, Quadrant 2 of Fig. 1 (weak host-country R&D) can be stylized as home base-exploiting (HBE) R&D and Quadrant 3 (strong host-country R&D) as home base-augmenting (HBA) R&D. Analogous distinctions have been made between “market-seeking” and “knowledge-seeking” R&D facilities or alternatively as between “market-serving” and “technology-enhancing” foreign R&D units (Cantwell and Janne, 1999; Chung and Alcacer, 2002). Studies by Kuemmerle (1999) and by Ambos (2005) reveal that these two categories are empirically distinct: firms’ foreign R&D facilities tend to specialize either in activities related to serving local markets or in the development of new technological competences of global importance to the firm. A firm's foreign R&D can be considered “home base-compensating” in nature when the firm not only establishes R&D efforts in a foreign country that specializes in a given technological area but does so when the home country is relatively weak in this area.4 Though usually applicable only to selected R&D areas of the firm, home base-compensating R&D occasionally characterizes the firm's R&D as a whole. Doz et al. (2001) documented several examples of so-called metanational firms that were “born in the wrong place” from the standpoint of conducting R&D yet were able to tap into foreign R&D resources to compensate for limitations of the home country's R&D and innovation system. They identified several firms (e.g. STMicroelectronics, Nokia) for which the home country was not the principal R&D base. Indicators of home base-compensating R&D by MNCs divide into two basic kinds: 1) R&D inputs and 2) R&D outputs. R&D inputs include research facilities, R&D personnel, and investment funds allocated to activities in foreign countries that are 3 A more extensive discussion of how these four different quadrants can be interpreted and labeled is provided by Le Bas and Sierra (2002). For the sake of simplicity, Quadrant 4 is not discussed here. Patel and Vega (1999) conjecture that most R&D in this quadrant is driven by mergers and acquisitions, while Le Bas and Sierra (2002) qualify R&D in this quadrant as a type of market-seeking FDI. 4 The distinction between home base-augmenting R&D (Quadrant 3) and home base-compensating R&D (Quadrant 1) is mainly meaningful from a scientific or policy-making point of view. The distinction might make less sense to MNC managers who, in casual language, would see “home base-compensating R&D” as just a type of “home base-augmenting R&D.”

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A Typology of Foreign R&D Localization by Multinational Corporations

Weak Home Country R&D Strong Home Country R&D

Strong Host Country R&D

Weak Host Country R&D

1

4

Home BaseCompensating R&D

3 Home BaseAugmenting R&D

2 Home BaseExploiting R&D

Fig. 1. A Typology of Foreign R&D Localization by Multinational Corporations.

significantly stronger in a given technological area than the home country. For example, Kuemmerle (1999) and Ambos (2005) assess the R&D activities of MNCs by counting the number of scientists at foreign installations. R&D outputs include patents and new products emanating from MNC activities in foreign countries with greater relative strength in some R&D area than the home country. Patel and Vega (1999) and Patel (1995; 1996) use patent counts to characterize different R&D profiles of MNCs. While studies like these rely on aggregate counts of R&D inputs and outputs, policy-makers are also likely to be influenced by highly visible or symbolic discrete actions of firms. To take one particularly well-documented instance, the German firm Hoechst decided in 1981 to locate its main biotechnology research center in Boston via a $70 million collaboration with Massachusetts General Hospital, spurning funding programs of Germany's research ministry for biotechnology. In this case, R&D weakness in the home country happens to be easy to document. The ministry's programs were still predicated on second-generation biotechnology techniques of bioprocessing rather than third-generation methods for development of new organisms through genetic engineering; the Hoechst defection served as a wake-up call to R&D policy-makers of the need for reform (Jasanoff, 1985; Adelberger, 1999). For larger firms like Hoechst in the 1980s, home base-compensating R&D does not involve moving the firm's entire R&D offshore, but merely a particular R&D area such as biotechnology. Hoechst maintained its chemical-based drug development in Germany but moved the locus of its biotechnology-based drug development to the US. The continuation of the German biotechnology story suggests that policy-makers are apt to take account of both input and output indicators. German ministry officials cited both kinds of statistics to demonstrate that home base-compensating R&D was occurring in biotechnology and that significant R&D reform was required. The federal research ministry (BMBF) noted alarmingly in its own official technology reports that German pharmaceutical companies had moved R&D operations abroad to such an extent that by the 1990s German pharmaceutical firms came to conduct half of their R&D in foreign countries, whereas the average percentage of R&D conducted by German companies abroad was only 17% (BMBF, 1999: 89). Objectively speaking, such an input measure of home base-compensating R&D may be somewhat questionable to the extent it fails to control for industry effects. In the background of such statistics, not only Hoechst but also Bayer had by this time defected from Germany to the US to conduct the bulk of their biotechnology research. Other cited input measures of the nation's weakness in biotechnology were that there were 300 biotechnology facilities in the US in 1994, compared to only six in Germany; and that there were about 1300 US biotechnology firms, compared to less than 100 in Germany (BMBF, 1996: 42). Although these are not proof of home base-compensating R&D per se, one could in principle derive a measure of home base-compensating R&D from them by counting only the biotech facilities and biotech start-ups under control by, or in partnership with, German drug firms. In terms of output measures, the same report noted that biotech patenting in the years 1987-94 had increased by only 16% in Germany, compared to 120% in the US (BMBF, 1996: 42). To become a bona fide indicator of home base-compensating R&D, such a figure would again require adjustment to measure patenting only by German pharmaceutical companies. Another output measure which the ministry could have mentioned, but did not, was commercial product innovation. Around the year 2000 there were over 300 biotech therapeutics in Phase II/III testing in the US, 79 in the UK, 22 in Switzerland, but only 4 in Germany (Ernst & Young, 2002a; Ernst & Young, 2002b). Such counts, limited to outputs of German pharmaceutical companies, could conceivably be used as a possible indicator of home base-compensating R&D, though of course factors other than R&D obviously influence the choice of country in which firms conduct drug-testing. To date the large-sample application of the framework of Fig. 1 has been confined to patent counts (output measures), specifically the distribution of MNC patents registered outside the firm's home country. Patel and Vega (1999) and Le Bas and Sierra (2002) classified patents in their data sets according to whether the home and host country of the MNC registering the patent had a revealed technological advantage (RTA) greater or less than 1 (analogous to revealed comparative advantage in trade) within the technological field of the patent in question. Fig. 2 summarizes the overall distribution of patents from both studies. As their authors expected, the studies indicated that home base-compensating R&D (quadrant 1) was less common than R&D in quadrants 2 and 3.5

5 Le Bas and Sierra (2002) qualify R&D in quadrant 1 as “technology-seeking FDI,” following the terminology of Shan and Song (1997); however, this terminology applies equally well to quadrant 3.

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Distribution of Foreign Patents by MNCs Strong Host Country R&D Weak Home Country R&D

1

Strong Home Country R&D

3

10.5%

Weak Host Country R&D

4

13.4%

17.1% 39.2%

16.1%

2

36.9% 31.3%

35.5% = Finding by Patel & Vega (1999)

= Finding by Le Bas & Sierra (2002)

Fig. 2. Distribution of Foreign Patents by MNCs.

Despite the well-known limitation of patent counts as a measure of R&D activity, these statistics are of interest. In particular, they suggest that R&D in quadrant 1 is actually a phenomenon of some importance. While the mean of the quadrant 1 share is modest, it will be seen that the variance is high. In many R&D areas, including areas of considerable economic importance, the quadrant 1 share is quite significant, sometimes the highest of all four quadrants. High levels of R&D in quadrant 1 can sound the alarm for R&D policy activism. The disaggregated results by technological field of Le Bas and Sierra (2002: 605) shed light on which areas of technology give rise most often to home-base compensating R&D (Table 1). The four technological fields in which home base-compensating R&D is most prevalent are 1) military/aerospace, 2) environmental/pollution technology, 3) construction and 4) semiconductor technologies. In these four areas, the percentage of patents is higher in quadrant 1 than in all of the other quadrants. In many other fields as well, the percentage of patents in quadrant 1 is significant (near or over the quadrant average of 25%) and exceeds the share of patents in quadrant 2; these include analytical/control instruments, motors-pumps-turbines, agricultural machinery, transport, and nuclear technology. Table 1 also lists, by way of contrast, those technological fields with the very lowest representation in quadrant 1. This variance across technological fields is significant enough to justify some commentary. The least surprising of the high-Q1 fields is semiconductors, in which economies of regional agglomeration and knowledge spillovers are especially pronounced and encourage concentration of corporate R&D in a small number of high-profile innovation clusters (Almeida and Kogut, 1999; Audretsch and Feldman, 2004). Less obvious cases are the other three high-Q1 technological fields military/aerospace, environmental/pollution, and construction technologies. On this matter, Le Bas and Sierra (2002: 602) supply further enlightening statistics. Three of the highest-Q1 fields (and the high-Q1 field of transport) reveal patterns of highly concentrated patenting in specific leading countries, namely Japan and the USA for semiconductors, France and the USA for military/aerospace, and Germany for transport and environmental/pollution technologies (Table 2).

Table 1 Intersectoral Differences for Q1 Share. Distribution of EPO Patents 1994-96 in Sample of Le Bas and Sierra (2002). Very High Q1 Sectors: Q1 N Q2 and Q1 ≥ Q3

Q1

Q2

Q3

Q4

Military – Aerospace Environment – Pollution Building and Public Works Semiconductors

45 41 36 34

21 9 17 28

32 39 36 25

2 11 11 13

High Q1 Sectors: Q1 N Q2 and Q1 ≥ 23%

Q1

Q2

Q3

Q4

Analytical/Control Instruments Motors – Pumps – Turbines Agricultural Machinery Transport Nuclear Technology

23 29 33 24 24

21 5 14 15 11

30 48 36 57 65

26 18 17 4 1

Very Low Q1 Sectors

Q1

Q2

Q3

Q4

2 2 5

57 55 51

15 28 38

26 15 6

Audio-Visual Telecommunications Information Technology

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Table 2 National Concentration of Higher Q1 Fields. Country Shares of EPO Patent Source among MNCs in Sample of Le Bas and Sierra (2002): 1994-96. Share of Top Countries Military–Aerospace Environment–Pollution Transport Building and Public Works Semiconductors

France: 31% Germany: 30% Germany: 35% Germany: 23% Japan: 36%

USA: 38%

USA: 43% USA: 40%

Average Country Shares in Sample: Japan:10%; France: 11%; Germany: 23%; USA: 36%.

These numbers suggest that revealed technological advantage or disadvantage is not only a matter of technical know-how but also, in many sectors, of social and political factors. Military and aerospace technology is the special province of countries that, impelled by a social consensus on geopolitical necessities, invest overproportionately in the military assurance of their national sovereignty (France, US), with significant spillovers into civil aviation and aerospace (Nelson, 1993: chs. 2 & 6). Many other countries, e.g. Germany, are largely prohibited by social and political forces from pursuing parity in military technology. By the same token, however, Germany's revealed technological advantage in environmental technologies is indissociable from a demanding regulatory environment emanating from the primacy of environmental protection and resource conservation that informs broad strata of German society and politics (Beise and Rennings, 2005). Yet even in the politically less charged area of semiconductors, an idiosyncratic social element, including the exceptional interfirm mobility of people and ideas, is well documented (Saxenian, 1994; Almeida and Kogut, 1999). 3. Public Policy Ramifications of Home Base-Compensating R&D The upshot of the foregoing reinterpretation of Le Bas and Sierra (2002) is that catching up with leading nations in Q1dominated technological fields may require reforms that transcend the narrow confines of R&D policy per se. This notion is, in fact, broadly consistent with the experience of countries that have tried to enact reforms to encourage catch-up in coveted high-tech industry segments. Policy reforms to facilitate high-tech entrepreneurship do not only require R&D funds, but also – for example – deep structural reforms in the university system (Clark, 1998; Etzkowitz et al., 2003) and in the labor laws and intellectual property rights governing public science (Kneller, 2003a, b). Such reforms go hand in hand with profound institutional reforms such as making the state a major source of venture capital and start-up incubation (Adelberger, 2000; Kaiser and Prange, 2004). When policy-makers see their country as a victim of home base-compensating R&D in a vital technological field, this can serve as a stimulus to the reform of R&D policies as well as, on occasion, to broader social and political changes beyond the realm of R&D. The responses of German policy-makers to revealed domestic weaknesses in the commercialization of biotechnology research can be used to illustrate the issue. To return to the Hoechst case, the decision by a major German pharmaceutical company to bypass government research programs for the sake of establishing a major R&D center abroad was unprecedented at the time (early 1980s) and was perceived to be an embarrassing defection by Hoechst from the German science system. The Hoechst debacle accelerated the reorientation of German R&D policies for biotechnology toward genetic reengineering (third-generation biotech) and, more broadly, to more funding of basic science (Jasanoff, 1985; Adelberger, 1999).6 Yet these measures within the R&D realm alone did not suffice, for German drug firms continued to prefer setting up biotechnology facilities abroad. The German research ministry subsequently determined a need to alter the inhospitable political and legal environment for biotech research in the 1980s; thus, federal officials drafted new national safety regulations while conducting public campaigns to allay public fears concerning biotechnology facilities (Meyer auf der Heyde, 2003). As even these measures proved insufficient to spawn more biotech research within German borders, the federal research ministry embarked on entrepreneurship support programs for academic scientists, redrawing the boundaries between the public and private sector so that public-sector scientists could perform public science on the one hand while commercializing this same science for private profit on the other (Adelberger, 2000; Casper, 2000). A further initiative, the so-called BioRegio program of 1995 (Dohse, 2000), encouraged the development of regional start-up incubators to emulate US- and UK-style science entrepreneurship. These reforms were embedded in a wide variety of government initiatives involving multiple ministries and levels of government (federal, state, local) to promote individual risk-taking and entrepreneurship in German society (Lehrer, 2000). By this time, of course, such policies were not motivated just by home base-compensating R&D but by a general recognition in German society of the need to create a stronger industrial base in high-tech industries. Thus, the predicament of weak domestic R&D in a key technological field often requires a policy response that extends beyond additional public funding of R&D. Fig. 3 fleshes out this point by providing a framework of possible policy responses to home base-

6 Similarly, many large Japanese firms, especially also in pharmaceuticals, had come to look down on Japan's domestic universities as partners in R&D collaborations and had begun to prefer foreign universities as R&D partners (Kneller, 2003a, b). This led to substantial reform and decentralization of the Japanese university system.

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Framework of Policy Responses Organizational Reform of R&D? No No Social Changes Beyond R&D? Yes

Yes

1 Allocative R&D Reform

4 Organizational R&D Reform

3

2

SocioRegulatory Reform for R&D

Encompassing R&D Reform

Fig. 3. Framework of Policy Responses.

compensating R&D. In some cases, all that may be necessary is better funding of the technological field in question, a so-called allocative reform (quadrant 1). Often however, the policy responses will require an organizational reform of R&D institutions (horizontal axis) and/or broader changes in society, especially changes in norms, values, and priorities (vertical axis). We consider both dimensions in turn. While launching new spending projects in R&D is often a straightforward matter, governments face numerous obstacles in their ability to reform existing R&D institutions. The horizontal axis highlights the fact that the organization of R&D institutions (as opposed to mere R&D spending levels) often matters a great deal, making the reorganization of national R&D (as opposed to mere allocative changes across R&D programs) an important policy challenge. The importance of the way R&D activities are organized as opposed to mere aggregate input-output characteristics of R&D has been demonstrated at multiple levels. First, the decreasing reliance of corporations on firm-internal R&D and increasing reliance on external sources of R&D and technology (Chesbrough, 2003) has been accompanied by a proliferation of organizational modes governing the performance of innovation activities (Antonelli, 2006). Second, organizational factors appear to moderate the relationship between R&D inputs and R&D outputs in powerful ways. National innovation systems vary significantly in their economic productivity from country to country. Though Europe's science and technology systems are on a par with those of the US and Japan, the commercial productivity of European R&D (in terms of patents and products for international growth markets) has traditionally lagged significantly behind that of the other Triad members (Coriat, 1995; Tijssen and van Wijk, 1999). Even within a national innovation system like the German one, certain R&D institutions are vastly more productive than others in fostering patents and commercialization of new products (Beise and Stahl, 1999).7 These studies suggest that innovation outputs are dependent as much on the organizational arrangements governing R&D resources as on the quantity of R&D inputs per se. In fact, organizational reforms of R&D programs, be it the government-sponsored Sematech consortium for US semiconductors (Langlois and Steinmueller, 1999) or the BioRegio interregional competition for German biotechnology (Casper, 2000; Dohse, 2000), often do have a significant effect on outcomes. The BioRegio competition involved an “organizational” R&D reform because federal R&D support programs, long governed on a “corporatist” basis (with tripartite decision-making panels of appointed experts from industry, academia, and government) to distribute R&D funds to a broad range of industry constituents (Jasanoff, 1985), were reformed to devolve R&D policy initiatives to lower levels. Instead of R&D funds for biotechnology being granted directly to projects by ministry officials and expert panels at the federal level, the new policies relied on regional innovation networks to be built bottom-up by self-organizing municipalities and states (Eickelpasch and Fritsch, 2005). Another and more common organizational R&D reform in many countries (e.g. Japan, France, Germany) involves changing the administrative status of national universities and research institutes so that they enjoy greater latitude to pursue entrepreneurial and industrial opportunities. Turning to the vertical axis, some responses to home base-compensating R&D require social changes that extend beyond the confines of R&D per se, such as those involving new social priorities, different career and work patterns, and altered buying and consumption habits. Certainly some social changes cannot be engineered by the state. A pacifistic society cannot be made more militaristic simply in order for a nation to improve its investment climate for the development of military and aerospace technology. But in other areas, society may be more malleable and responsive to state initiatives, especially those that alter the cost/benefit calculus of buyers and/or suppliers in targeted technological fields. For example, workers in technology-related areas were long considered risk-averse and culturally ill-suited to entrepreneurship in countries like France and Germany, yet in fact

7 For example, after World War II the federal government established 13 large-scale federal research centers to strengthen the research capabilities necessary for the new sectors. However, they proved to be organizationally too inflexible to keep up with the pace of change in new technologies and industries. Worse yet, the Federal Research Ministry has found closure or downsizing difficult for political reasons underlining the structural inertia of R&D systems (Hohn and Schimank, 1990; Stucke, 1993).

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policy-makers in these countries have been able to nurture a “culture” of technology entrepreneurship through an array of support programs (Lehrer, 2000; Trumbull, 2004). Another example of attempted government-engineered social change can be seen in the Japanese government's ambitious science and technology plan of 2001-5, which, among other things, aimed to transform the nation's education and R&D system to excel in basic (as opposed to only applied) research. The plan stated that the nation's commitment to science needed to extend beyond the nuts and bolts of R&D policy to the overall outlook of society: In promoting S&T [science and technology] to make Japan into the nation it aims to become, we must adopt and implement S&T policies formed on the basis of how they relate to society. As S&T holds true value only if accepted by society, society's understanding, judgment, and acceptance of S&T are crucial. This is a point to be recognized and striven not only by the natural scientists and technological experts, but by experts in the social sciences and humanities as well (Government of Japan, 2001). How can one distinguish between “mere” R&D changes and broader social changes beyond R&D? One indicator is whether the reform initiatives in question involve executive offices beyond just the research ministry. For example, Germany's program to foster entrepreneurial start-ups by academics, EXIST-Existenzgründer aus Hochschulen (Entrepreneurs from Colleges and Universities), was launched in December 1997 as a joint initiative of the research and economics ministries. Similarly, the Genetic Engineering Law (1990; revised 1993), setting standards for safety standards at biotechnology facilities, required multiple ministries to sign off on it (Meyer auf der Heyde, 2003). In fact, this reform required more than just traditional legislation. The reform involved an outright public relations campaign – also led by the research ministry – to promote a greater acceptance of biotechnology research in German society through publications and talks by ministry officials. Indeed, German policies to promote biotechnology provide a good illustration of the framework of Fig. 3, as different policy initiatives can be plotted in different quadrants. Basic budgeting decisions to increase R&D funding for biotechnology, although obviously important, require neither social change nor reorganization of R&D (quadrant 1: Allocative R&D Reform). The EXIST competition for promoting technology entrepreneurship at German universities, in contrast, constitutes a good example of an “encompassing” reform that involved both an element of social change and a certain reorganization of the R&D system (quadrant 2: Encompassing R&D Reform). The Genetic Engineering Law involved social change but did not affect the R&D system (quadrant 3: Socio-Politico R&D Reform). Finally, decisions in the 1980s to reorient biotechnology more towards basic research did not involve social change but did require reorganization of R&D, since it was necessary to involve universities and public research laboratories much more deeply in decision-making processes and funding programs (quadrant 4: Organizational R&D Reform). The upshot of the foregoing discussion is that R&D is often a difficult policy area in which to conduct reform. When this is the case, efforts by domestic firms to encourage reform via the usual channels of firm-government dialogue and lobbying may be insufficient, even when policy-makers are actually sympathetic to calls for deeper reforms. The relevance for firm influence on public policy, as a component of their corporate social responsibility, will be considered in Section 5 below.

4. To Act or Not to Act: A Micro-Macro Framework and Propositions Concerning Home Base-Compensating R&D The preceding typology of possible government responses to home base-compensating R&D omits one further policy option, which is simply for policy-makers to abstain from any significant action at all. All of the preceding four activist options involve costs (financial, political, administrative, etc.). The question is whether the potential benefits outweigh the costs to policy-makers of embarking on any of the outlined courses of R&D reform. In other words, home base-compensating R&D by domestically based MNCs may, instead of motivating reform, actually induce policy-makers to consign the R&D area in question to “benign neglect,” either by leaving current policies untouched or possibly even by slowly withdrawing resources from the affected R&D area. The following formalization of the issue is modeled as interactions between the micro level of firms and the macro level of the national environment for R&D (Murmann, 2003; Asakawa, 2004). The model depicted in Fig. 4 is not intended to provide a

Benign Neglect of Sector

MACRO LEVEL

National R&D Weakness in Given Sector

P3

P1

R&D Policy Reforms (Fig. 3) 1

4

3

2

P2, P4, P5

Home BaseCompensating R&D by MNCs

MICRO LEVEL

Fig. 4. Framework and Propositions.

P6

Recommitment of Domestic MNCs to Home Base R&D

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comprehensive view of the R&D reform process but simply a framework for formulating propositions about the conditions under which home base-compensating R&D is likely (or not likely) to trigger an effort at R&D policy reform. The exogenous condition presupposed by the framework is comparative national weakness in a given area of R&D. Obviously, firms have many options for dealing with this (lobbying, forming consortia, etc.). The one firm response dealt with in this model is home-base compensating R&D. Firms that were “born in the wrong place” can overcome locational disadvantages by moving significant R&D activities outside their national borders (Doz et al., 2001). The same applies to firms based in a national R&D environment that has become infertile. Just as Hirschman (1970) assumed that employees choose the “exit” option in response to declining organizations when they believe that improvement of the situation is unlikely, we hypothesize that pessimism about the prospects for domestic improvement in key R&D areas is an important motivation for home base-compensating R&D by firms. Proposition 1. National weakness in key R&D areas provides a motivation for firms to implement home base-compensating R&D and transfer of major R&D activities in these areas to locations outside the home country when they consider domestic improvement in these R&D areas an unlikely prospect. Presumably, MNCs rarely engage in foreign R&D with any conscious intention of motivating R&D reform in their home country. If their actions actually happen to help stimulate such reform, these are usually unintended consequences. The remaining propositions consider possible responses by policy-makers once the decision by domestic companies to implement home basecompensating R&D has already been taken. To reiterate, home base-compensating R&D is not the only factor that may trigger some kind of R&D reform but merely the focus of the present analysis. Regardless of how pronounced domestic R&D weakness and home base-compensating R&D by domestic firms are discovered to be, the policy response to home base-compensating R&D will depend largely on the economic attractiveness or political importance of the sectors concerned. The likelihood of R&D reform is greater when the R&D area in question affects a sector of the economy that is strategic, is a source of economic growth, and/or is of high politico-symbolic importance. “Strategic” sectors are those with an important impact on the overall economy because many other sectors rely on them, i.e. they are a source of significant inter-industry economic and knowledge spillovers. “Growth” sectors are defined as those in which average annual growth rates exceed average growth in GNP. Since policy-makers are invariably under pressure to preserve and create jobs, national R&D weaknesses affecting sectors that are strategic and/or offer prospects for economic growth will be given priority. In addition, some sectors may be targeted for R&D reform simply because of their political importance (e.g. the auto industry in the US). This is consistent with the findings of Håkanson (1990) that European firms often cannot divest their R&D units due to political pressures. In such cases, policy-makers would notice that domestic firms freeze R&D expenditures in the home country while engaging in home base-compensating R&D by expanding R&D investments abroad. Proposition 2. The probability that home base-compensating R&D can constitute a positive longer-run stimulus to R&D reform in the firm's home country is highest in sectors that are either strategic (inter-industry economic and knowledge spillovers), feature above-average growth, and/or are of high political importance. In contrast, home base-compensating R&D in mature and declining markets may provoke a very different reaction at the government level. In mature sectors, generally defined as those in which average annual growth rates are at or below average growth in GNP, one conclusion policy-makers may draw is simply that the home country offers no particular comparative advantage in the sector. This may be especially true in manufacturing industries like textiles that are presumed to migrate rather naturally from older industrial nations to newly industrializing countries. In sectors whose overall contribution to GNP is stagnant or declining, the government will view reform efforts as a waste of effort and shift its resources to strategically more important sectors. Proposition 3. In mature or declining sectors, home base-compensating R&D by domestic firms promotes gradual withdrawal of government support for the R&D areas concerned rather than R&D reform. Nonetheless, this proposition may be subject to some exceptions. Uncertainty about the future evolution of industries and technologies may make it reasonable to maintain a moderate level of R&D support even in some mature industries. Mature industries sometimes feature rapid technical change in certain segments or components. For example, although the automobile industry is mature, fuel and engine technologies are undergoing high levels of innovation and invigorating important sub-sectors of the economy. Home base-compensating R&D can only serve as an important signal to policy-makers if the signal is strong enough to be remarked. Home base-compensating R&D by comparatively small companies is unlikely to register on the radar screen of policymakers. Instead, it is the R&D exodus of larger key industry players that will attract government attention (as in the Hoechst case discussed above). “High-profile players” are those firms sufficiently central to a nation's economy that their individual actions attract public notice, potentially placing elected officials and other policy-makers under pressure. The actual firm size or stature needed to fulfill this criterion is highly dependent on factors like country size, industry size, economic openness, and political tradition. If a country has many large domestic firms, for example, then home base-compensating R&D by only one of them may generate scant attention. A country featuring many different internationally competitive industries will likely be less alarmed than a country dependent on a few core industries.

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As mentioned, “exit” implies the actors’ belief that prospects for improvement are dim (Withey and Cooper, 1989). Otherwise, actors resort to “voice” or “loyalty” strategies instead (Hirschman, 1970). There is, nonetheless, a basic difference between the R&D exit of firms from countries and the more familiar exit-loyalty-voice situation of individual employees considering whether or not to leave their firm. When dissatisfied employees decide to leave their companies, the latter may be able to replace them with equally qualified employees rather easily, so that exit by particular individuals may not induce firms to change. In contrast, one reason that home base-compensating R&D by high-profile firms may have a policy effect at the macro level is that R&D investments by these firms usually cannot be replaced in the short term by the R&D of equally significant firms domestically or from abroad. Proposition 4. Home base-compensating R&D constitutes a stimulus to R&D reform when practiced by “high-profile players” in the economy, that is, large domestic firms whose actions attract public notice. When home base-compensating R&D catches the attention of policy-makers, the likelihood of the government undertaking R&D reform efforts to regain national competitiveness in the affected sector hinges on the assessment that reform efforts will actually affect the competitive advantage of domestic firms in the sector. In general, policy-makers have greater influence over supply factors than demand factors. Particularly in science-based sectors (Pavitt, 1984; Lehrer, 2005) where firms compete largely on the basis of scientific research, R&D reform holds out the prospect of influencing firms’ R&D decisions. Both synthetic dyestuffs in the 19th century (Murmann, 2003) and biotechnology at present (Casper and Kettler, 2001; Gittelman, 2006) are good examples of science-based industries where R&D policies of the state affect national competitiveness. Such sectors are attractive targets for R&D reform; in contrast, competitiveness in areas like cellular telephony and consumer electronics often depends heavily upon demand factors that are less tractable to government influence (Beise, 2001; Lehrer, 2005). Proposition 5. Home base-compensating R&D is more likely to constitute a stimulus to R&D reform in science-based sectors than in sectors where scientific research plays a less central role as a basis of firms’ competitive advantage. The primary goal of national R&D reform is to improve the supply of important R&D factors in the sector concerned. One possible dividend to nations of upgrading an important area of R&D is that aggressively pursued R&D policies may encourage new firm entry into the affected sectors and intensify competition (Narula, 2003). Even those firms which engaged in home basecompensating R&D as a consequence of weaknesses in the home-country innovation system may at some point decide to recommit to conducting R&D in their home country. To return to the example of Germany, Hoechst and Bayer now engage in a wide range of alliances with biotech firms within Germany following the proliferation of biotech start-ups spawned by German R&D reform policies. Proposition 6. R&D reform at the national level encourages firms to recommit to R&D in the sector concerned, thereby intensifying competition and eventually raising the commercial productivity of R&D. The recommitment of domestic firms to an R&D area in the home country intensifies interfirm rivalry and enhances the overall pace and quality of innovation by firms within the sector (Porter, 1990). Often the effects of competition are overlooked in studies of how policy-makers nurture their national innovation systems. For example, despite the common belief that MITI chose winners and allocated resources into selected Japanese firms and industries, the intensity of domestic competition seems best to explain patterns of leadership in technology and innovation (Porter, 1990; Fransman, 1999). The foregoing propositions can be mapped onto the micro-macro framework presented earlier (Fig. 4).

5. Implications for MNCs’ Corporate Social Responsibility If it is true that MNCs can directly or indirectly encourage policy reforms in their home country by bolstering their R&D activities abroad as opposed to at home, this adds a new level of complexity to discussions about the proper role of corporations in influencing the formulation of public policy. Prior discussions of corporate social responsibility (CSR) generally plead for a fairly linear process by which corporations should participate in dialogue for improving the overall framework for business in their own country (Chen et al., 2009). However, in some instances firms may actually send more powerful signals through exit (such as home base-compensating R&D) than through voice (such as lobbying or interaction with public officials). In such an instance, the process of influencing public policy is substantially less linear than that advocated by CSR scholars. To flesh out this point, we briefly summarize and comment on some of the scholarship concerning the social responsibility of firms for participating in regulatory reform within their home or host countries (Ulrich, 1995; Göbel, 2006). In his deliberations on the public obligations of business enterprises, Ulrich (1995: 50) evokes the “regulatory coresponsibility” of firms to improve the environment in which business is conducted. It is not enough for firms to abide by the prevailing laws governing competition and commerce; they are enjoined to participate in the reform of such laws and institutions so as to create the requisite legal-regulatory incentives to actually encourage ethical conduct. This responsibility arises from the fact that laws, ordinances, and institutions regulating business conduct always contain loopholes. Public officials are only in partial

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possession of the knowledge required to craft equitable regulation and formulate requisite reforms. Firm managers enjoy situational advantages that give them unique knowledge and perspectives about which rules and regulations are equitable and which ones create incentives to act unethically. Similarly, Behnam (1998) speaks of the “amelioration role” that firms play in closing regulatory loopholes and in advocating needed legal-regulatory development. This involves not only co-operating in good faith with public officials and non-profit organizations but also undertaking initiatives such as educating consumer groups and the larger public about specialized issues of importance to the general welfare (Göbel, 2006). Ulrich (2007) considers firms to have a “republican” duty to point out defects in the res publica as part of their “responsibility for the condition of the regulatory framework under which business citizens strive for their economic existence” (Ulrich, 1995: 51). One problem with such injunctions is that they make little real allowance for the disparity between good intentions and actual efficacy. To return to the example of German biotechnology, one reason Hoechst and Bayer “defected” to the United States is that their complaints about the unfavorable climate for biotechnology research in Germany long went unheeded. This was not due to an absence of public dialogue on the part of Hoechst and Bayer nor to deafness on the part of public officials. Instead, the extent of reforms that were required simply transcended what normal conversations between public-sector and private-sector actors could hope to achieve. The need for clearer and looser safety standards ran up against deep-seated fears in public opinion, while the need for entrepreneurial biotechnology scientists required large-scale reform of Germany's public-sector R&D institutions and the laws governing the private appropriation of public science. Although Hoechst and Bayer did not defect to the US biotechnology sector with any explicit aim of encouraging greater reform in Germany's national R&D system, they had the clear effect of signaling the need for such reform. To the extent that exit can achieve results that voice alone cannot, conventional CSR prescriptions about the co-responsibility of firms for the regulatory environment of business may be oversimplified. Obviously this is not to argue that home basecompensating R&D necessarily constitutes a valuable input to public policy-making in the firm's home country. But it does confirm the profundity of Hirschman's insight into the special informational value of exit modes of behavior. When firms switch from voice to exit, they amplify the earnestness of their policy signals in a way that voice alone may not always be able to effect. Taking together the propositions considered in the previous section, we hypothesize: Recapitulatory Proposition. The probability that home base-compensating R&D can constitute a positive longer-run stimulus to R&D reform in the firm's home country is highest when practiced by “high-profile players” in sectors that are science-based and that are either strategic (inter-industry economic and knowledge spillovers), feature above-average growth, and/or are of high political importance. This proposition, though phrased in behavioral terms, responds to the obvious need opened up by this paper to specify when home base-compensating R&D by MNCs can represent a potentially constructive action from a corporate social responsibility point of view. We postulate that the potentially positive stimulus to reform in the country resides in the special quality and strength of the signal communicated by firm exit in the form of home base-compensating R&D. 6. Conclusion and Limitations The situation in which a multinational firm compensates for home-country R&D weakness by locating vital R&D activities abroad has generally been considered a comparatively marginal phenomenon. In this paper we marshaled evidence suggesting that home base-compensating R&D may be more important than generally assumed. Among other things, one effect of home basecompensating R&D may be to induce any number of possible paths of R&D reform in the home country (section 3). The policy significance of home base-compensating R&D goes hand in hand with the increasing role of “open innovation” (Chesbrough, 2003; Chesbrough and Appleyard, 2007), that is, the increasing reliance by firms on external technology markets in conjunction with their own internal R&D function to generate innovative products and processes (Guth, 2009). To accommodate this shift in how firms innovate, countries and regions need to nurture these technology markets and they essentially compete with one another in the way they do this. R&D competition among nations makes home base-compensating R&D a phenomenon of growing importance. As discussed, the effectiveness of nations’ R&D policy depends on more than just spending levels. It depends also on the way R&D programs are organized, on policies pursued outside the realm of R&D per se, and on the broader values of society. While technocratic responses to home base-compensating R&D may suffice in some instances, in many others broader organizational, political, and social changes must be envisaged in order to stem the flow of home base-compensating R&D deemed contrary to the national economic interest. As for multinational corporations, the preceding discussion clearly does not amount to any specific advocacy of home basecompensating R&D. Yet it does provide some guidance and intellectual grist for MNC managers who must feel that injunctions to dialogue about public policy amelioration occasionally butts against certain limitations on what can be achieved with dialogue alone. Although this issue was explored only in the highly specialized area of R&D, an obvious avenue for follow-up research concerns MNC activities beyond the specific domain of R&D. MNCs are reputed for making localization decisions primarily on the basis of cost factors and availability of key resources. Somewhat akin to the way Porter (1990) identified the dynamically adaptive properties of clusters as a factor that could influence MNC localization decisions, this research broadly suggests that MNCs might make localization decisions concerning certain activities, especially knowledge-intensive ones, according to the dynamic capacity

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of legislators, regulators, and policy-makers to craft laws and institutions adapted to the rapidly changing business requirements of large corporations – or according to the absence of such policy-making dynamism.

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