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World Investment report 2005 "Transnational Corporations and the Internationalization of R&D"
ARTICLE IN PRESS international business review International Business Review 15 (2006) 702–704 www.elsevier.com/locate/ibusrev
World Investment Report 2005 Transnational Corporations and the Internationalization of R&D United Nations, New York and Geneva, 2005
The United Nations Conference on Trade and Development (UNCTAD) has published its annual report ‘‘World Investment Report 2005’’ (WIR05). The main topic explored in this report is the internationalization of research and development (R&D) by transnational corporations (TNCs) and the implications for policy-making. As is pointed in the preface by Kofi Annan, Secretary-General of the United Nations, TNCs are internationalizing even the most knowledge-intensive corporate functions, and are also selecting developing countries in which to establish R&D facilities. The WIR05 is divided into two parts and includes a substantial Statistical Annex providing data on foreign direct investment (FDI) flows and stock for more than 200 economies. Part one, ‘‘End of the downturn’’, describes the global and regional trends in FDI flows by TNCs. It reports that FDI flows increased in 2004 after 3 years of decline. Global FDI outflows reached US$ 730 billion in 2004, almost half of this amount originated from the United States, the United Kingdom and Luxembourg. This trend is led by a marked increase in flows directed to developing countries, rising by 40%, to US$ 233 billion. This could be explained by the current intense competitive pressures leading firms to expand operations in growing markets and to rationalize production activities. The top destination of FDI flows to developing countries was Asia and Oceania. This region is also becoming an important source of FDI; the outward flows from this region reached US$ 69 billion in 2004. By contrast, FDI inflows to developed countries continued to decrease and fell to US$ 380 billion in 2004, with some exceptions such as the United States and the United Kingdom. The report predicts a rise in global FDI flows for 2006. Part two of the report is dedicated to the main topic of the 2005 edition: ‘‘R&D internationalization and development’’. This part discusses the growth of the internationalization of R&D by TNCs and its implications for developed and developing countries. The TNCs account for at least two-thirds of business expenditures on R&D and are the drivers of global R&D activities. Some TNCs spent more on R&D than some 0969-5931/$ - see front matter doi:10.1016/j.ibusrev.2006.08.002
ARTICLE IN PRESS P. Gugler / International Business Review 15 (2006) 702–704
703
whole countries did. As an example, the Ford Motor Company spent US$ 7.2 billion in 2002, whereas Ireland spent only US$ 1.4 billion. These TNCs increased their R&D expenditures abroad, especially in developing countries. (The R&D expenditure of foreign affiliates increased from 10% to 16% of global business R&D between 1993 and 2002.) Another trend in the internationalization of R&D is the emergence of foreign R&D activities of developing-country TNCs in developed and developing economies. These TNCs seek to access advanced technologies and to adapt products to their export markets. The types of R&D activities undertaken abroad vary by region. Among developing countries, Asia prevails in innovative R&D. Economies such as those of China, India, the Republic of Korea and Taiwan, Province of China, have important research centres, for example, the Toyota Technical Center Asia Pacific in Thailand. In Latin America and the Caribbean, relatively little FDI is in R&D-intensive activities. The R&D activities located in these regions mostly focus on adapting the technology or products to the local markets. Some African countries including Morocco and South Africa attract FDI in R&D, but R&D activities by TNCs are generally limited. Some new EU members have also attracted innovative R&D activities. The report discusses the driving forces behind this trend towards internationalization of R&D to developing countries. The TNCs are under pressure to internationalize R&D work because of the intensified competition, the increased costs of R&D in developed countries, the scarcity of qualified personnel and the complexity of R&D. Developing countries have increased their attractiveness thanks to the availability of scientific and engineering skills and personnel at competitive costs and the fast-growing markets. This trend is also facilitated by improvements in the investment climate, related to protection of intellectual property rights; reform of public research activities; infrastructure development; and investment promotion efforts targeting R&D activities. This trend towards internationalization of R&D to developing countries will certainly continue due to the increasing competitive pressure and the need for considerable numbers of specialized research staff, which TNCs can find in developing countries. In addition, the learning processes are cumulative, and developing countries that take part in the internationalization of R&D will be able to enhance their ability to conduct more R&D. The implications for both host and home countries are evaluated in the report. Together, inward and outward FDI in R&D enable countries to connect through international networks of innovation. Additionally, developing countries can gain access to technology and strengthen their innovation systems. However, inward FDI in R&D could also have some unwanted effects, such as the downsizing of existing R&D in the case of takeovers and the crowding out of local firms from the market for researchers. Moreover, some tensions may arise between TNCs and host-country governments when their objectives differ. TNCs may seek to maintain proprietary knowledge, whereas governments try to create spillovers. In order to benefit from spillovers, host governments must develop the absorptive capacity of the economy. In addition, the positive effects on a host economy are greater if TNCs interact with local firms and R&D institutions, and if the innovation system is advanced. Home countries are also affected by the internationalization of R&D. Their TNCs can improve their competitiveness, for example, by accessing new technologies and reducing costs among others, and thus generate spillovers in the home economy. The main concern is that this internationalization leads to the risk of hollowing out and the loss of jobs.
ARTICLE IN PRESS 704
P. Gugler / International Business Review 15 (2006) 702–704
Protectionist measures are not an efficient way to create benefits for home and host countries, as they undermine the competitiveness of the country’s enterprises. The report therefore argues for policies that advance the specific innovation capabilities and the functioning of the national innovation system (NIS). The NIS is the net within which innovation occurs. It is formed by interactions between enterprises; suppliers; clients; public research institutions; universities and others, and can be influenced by government policies. To encourage innovation, policy should be focused on four areas: human resources; public research capabilities; protection of intellectual property rights and competition policy. Investment promotion agencies can also play a significant role. They can promote existing investment strategies, and may draw the attention of governments to areas that need improvements and could benefit from R&D by TNCs. Governments also have to consider developments in international investment agreements as they can affect investment in R&D activities. The protection of intellectual property rights at the international level is particularly relevant for R&D-related FDI. The final chapter of the report examines the role of international agreements in the area of the internationalization of R&D by TNCs. This report constitutes an important and comprehensive tool for use by scholars and business practitioners as well as governments. By focusing on the internationalization of the major driver of prosperity and competitiveness, the 2005 report provides crucial information for decision-makers in both developed and developing countries. Philippe Gugler Faculty of Economics and Social Sciences, University of Fribourg, Switzerland E-mail address: [email protected]
World Investment Report 2005 Transnational Corporations and the Internationalization of R&D United Nations, New York and Geneva, 2005
The United Nations Conference on Trade and Development (UNCTAD) has published its annual report ‘‘World Investment Report 2005’’ (WIR05). The main topic explored in this report is the internationalization of research and development (R&D) by transnational corporations (TNCs) and the implications for policy-making. As is pointed in the preface by Kofi Annan, Secretary-General of the United Nations, TNCs are internationalizing even the most knowledge-intensive corporate functions, and are also selecting developing countries in which to establish R&D facilities. The WIR05 is divided into two parts and includes a substantial Statistical Annex providing data on foreign direct investment (FDI) flows and stock for more than 200 economies. Part one, ‘‘End of the downturn’’, describes the global and regional trends in FDI flows by TNCs. It reports that FDI flows increased in 2004 after 3 years of decline. Global FDI outflows reached US$ 730 billion in 2004, almost half of this amount originated from the United States, the United Kingdom and Luxembourg. This trend is led by a marked increase in flows directed to developing countries, rising by 40%, to US$ 233 billion. This could be explained by the current intense competitive pressures leading firms to expand operations in growing markets and to rationalize production activities. The top destination of FDI flows to developing countries was Asia and Oceania. This region is also becoming an important source of FDI; the outward flows from this region reached US$ 69 billion in 2004. By contrast, FDI inflows to developed countries continued to decrease and fell to US$ 380 billion in 2004, with some exceptions such as the United States and the United Kingdom. The report predicts a rise in global FDI flows for 2006. Part two of the report is dedicated to the main topic of the 2005 edition: ‘‘R&D internationalization and development’’. This part discusses the growth of the internationalization of R&D by TNCs and its implications for developed and developing countries. The TNCs account for at least two-thirds of business expenditures on R&D and are the drivers of global R&D activities. Some TNCs spent more on R&D than some 0969-5931/$ - see front matter doi:10.1016/j.ibusrev.2006.08.002
ARTICLE IN PRESS P. Gugler / International Business Review 15 (2006) 702–704
703
whole countries did. As an example, the Ford Motor Company spent US$ 7.2 billion in 2002, whereas Ireland spent only US$ 1.4 billion. These TNCs increased their R&D expenditures abroad, especially in developing countries. (The R&D expenditure of foreign affiliates increased from 10% to 16% of global business R&D between 1993 and 2002.) Another trend in the internationalization of R&D is the emergence of foreign R&D activities of developing-country TNCs in developed and developing economies. These TNCs seek to access advanced technologies and to adapt products to their export markets. The types of R&D activities undertaken abroad vary by region. Among developing countries, Asia prevails in innovative R&D. Economies such as those of China, India, the Republic of Korea and Taiwan, Province of China, have important research centres, for example, the Toyota Technical Center Asia Pacific in Thailand. In Latin America and the Caribbean, relatively little FDI is in R&D-intensive activities. The R&D activities located in these regions mostly focus on adapting the technology or products to the local markets. Some African countries including Morocco and South Africa attract FDI in R&D, but R&D activities by TNCs are generally limited. Some new EU members have also attracted innovative R&D activities. The report discusses the driving forces behind this trend towards internationalization of R&D to developing countries. The TNCs are under pressure to internationalize R&D work because of the intensified competition, the increased costs of R&D in developed countries, the scarcity of qualified personnel and the complexity of R&D. Developing countries have increased their attractiveness thanks to the availability of scientific and engineering skills and personnel at competitive costs and the fast-growing markets. This trend is also facilitated by improvements in the investment climate, related to protection of intellectual property rights; reform of public research activities; infrastructure development; and investment promotion efforts targeting R&D activities. This trend towards internationalization of R&D to developing countries will certainly continue due to the increasing competitive pressure and the need for considerable numbers of specialized research staff, which TNCs can find in developing countries. In addition, the learning processes are cumulative, and developing countries that take part in the internationalization of R&D will be able to enhance their ability to conduct more R&D. The implications for both host and home countries are evaluated in the report. Together, inward and outward FDI in R&D enable countries to connect through international networks of innovation. Additionally, developing countries can gain access to technology and strengthen their innovation systems. However, inward FDI in R&D could also have some unwanted effects, such as the downsizing of existing R&D in the case of takeovers and the crowding out of local firms from the market for researchers. Moreover, some tensions may arise between TNCs and host-country governments when their objectives differ. TNCs may seek to maintain proprietary knowledge, whereas governments try to create spillovers. In order to benefit from spillovers, host governments must develop the absorptive capacity of the economy. In addition, the positive effects on a host economy are greater if TNCs interact with local firms and R&D institutions, and if the innovation system is advanced. Home countries are also affected by the internationalization of R&D. Their TNCs can improve their competitiveness, for example, by accessing new technologies and reducing costs among others, and thus generate spillovers in the home economy. The main concern is that this internationalization leads to the risk of hollowing out and the loss of jobs.
ARTICLE IN PRESS 704
P. Gugler / International Business Review 15 (2006) 702–704
Protectionist measures are not an efficient way to create benefits for home and host countries, as they undermine the competitiveness of the country’s enterprises. The report therefore argues for policies that advance the specific innovation capabilities and the functioning of the national innovation system (NIS). The NIS is the net within which innovation occurs. It is formed by interactions between enterprises; suppliers; clients; public research institutions; universities and others, and can be influenced by government policies. To encourage innovation, policy should be focused on four areas: human resources; public research capabilities; protection of intellectual property rights and competition policy. Investment promotion agencies can also play a significant role. They can promote existing investment strategies, and may draw the attention of governments to areas that need improvements and could benefit from R&D by TNCs. Governments also have to consider developments in international investment agreements as they can affect investment in R&D activities. The protection of intellectual property rights at the international level is particularly relevant for R&D-related FDI. The final chapter of the report examines the role of international agreements in the area of the internationalization of R&D by TNCs. This report constitutes an important and comprehensive tool for use by scholars and business practitioners as well as governments. By focusing on the internationalization of the major driver of prosperity and competitiveness, the 2005 report provides crucial information for decision-makers in both developed and developing countries. Philippe Gugler Faculty of Economics and Social Sciences, University of Fribourg, Switzerland E-mail address: [email protected]