Intellectual property rights protection and location of R&D by multinational enterprises
| Date | 01 March 2004 |
| Published date | 01 March 2004 |
| Pages | 59-76 |
| DOI | https://doi.org/10.1108/14691930410512923 |
| Author | Prabuddha Sanyal |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Intellectual property rights
protection and location of R&D
by multinational enterprises
Prabuddha Sanyal
American University, Washington, DC, USA
Keywords Multinational companies, Research, Development, Patenting, Protectionism
Abstract This paper explores the determinants of R&D location of US multinational enterprises
(MNE). The major aim is to determine the impact of intellectual property rights protection on R&D
investment by US multinationals in a sample of developed and developing economies. Some of the
major findings show that in developing economies, MNEs primarily rely on the scope of foreign
direct investment, while locating their R&D facilities overseas. On the other hand, for developed
countries, the scope of patent protection laws is a major factor for MNEs to undertake R&D
investment. Another finding is that in developing economies, location of R&D is motivated by the
need to adapt products and processes to conditions in foreign markets. Further, in the food and
chemical industry, evidence shows that weaker patent protection may be desirable for technology to
flow to these sectors in developing economies. An important policy implication is that entry of firms
enhances global innovations.
1. Introduction
Internationalization of R&D activity by multinational enterprises (MNEs) has
attracted a lot of attention during the 1990s. During the 1970s, it was argued
that MNEs entered a market to avoid tariffs or to control strategic resources of
an economy. MNEs perform their major part of the R&D at home, because of
scale economies in R&D, proximity to company headquarters, and maintaining
the secrecy of firms’ technology, just to name a few reasons. Recently, it has
been suggested that overseas R&D is also undertaken to gain access to
knowledge and to benefit from localized R&D spillovers. Dunning (1994) noted
that in the USA, 15.4 percent of all R&D in industry was conducted by foreign
affiliates during the 1990s as compared with 6.4 percent during the 1980s. The
geographic distribution of overseas R&D activity of MNEs has also been
highly uneven across countries. The existing literature has focused on
analyzing the determinants of inter-industry variation in the propensity to
internationalize R&D. However, the factors that determine the location of
overseas R&D by multinationals have not been systematically investigated.
The international distribution of R&D activities of MNEs is highly uneven,
depending on other things, the nature of foreign direct investment (FDI)
received by the country and the resources and environment prevailing in the
country for undertaking technological activities. The treatment of intellectual
property, among other policy instruments can also be an important factor on a
country’s ability to attract R&D investments from MNEs.
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
www.emeraldinsight.com/researchregister www.emeraldinsight.com/1469-1930.htm
Intellectual
property rights
protection
59
Journal of Intellectual Capital
Vol. 5 No. 1,
pp. 59-76
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930410512923
This paper addresses the important question as to how important patent
protection is in explaining the location of overseas R&D investment by MNEs
after controlling for additional factors. The analysis focuses on the potential
role played by such factors as technological intensity, market orientation of US
R&D investment in the host countries and the resources available along with
the policy instruments of the host country such as intellectual property
regimes.
The structure of the paper is as follows. Section 2 reviews the trends in
internationalization of R&D and technological activities of MNEs from USA.
Section 3 reviews the existing literature on determinants of overseas R&D.
Section 4 provides the major motivations of setting R&D abroad and
formulates the hypotheses for explaining its location. Section 5 presents
empirical findings for the entire sample, the subsamples according to the level
of development of the country and industry level tests in verifying the role of
patent protection on the location of R&D. The final section concludes the paper
with a few policy implications on the findings.
2. Trends in internationalization of R&D activity
Patel and Pavitt (1991) analyzed the importance of overseas R&D in generation
of technology for the 686 largest manufacturing corporations by examining the
origin of patents obtained by them in the USA. Their findings indicate that
technological activities of large corporations were largely concentrated in home
countries and not yet globalized considerably. The US corporations obtained
3.2 percent of their patents on the basis of research abroad, whereas German
MNEs obtained 6.9 percent. Cantwell (1989) further analyzed the same data on
US patenting by the world’s leading firms and noted substantial variation
across industry groups in the propensity of patenting from overseas R&D. He
finds that food MNEs were the most internationalized in R&D, followed by
pharmaceuticals and non-metallic mineral products.
Baldwin and Hanel (2000) analyze the determinants of the Canadian
innovation process. They classify sectors into three main categories. The core
sector consists of chemical, mechanical, instruments and electronics and
producing major innovations for the rest of the economy. The secondary
sector (rubber and plastics, primary metals and transportation equipment is
somewhat less innovative but diffuses technology via new products to the
other sector. The remaining industries (food and beverages, clothing, textiles
and wood) are the least innovative in the sense that they generate less of new
technologies to other sectors. They find that foreign firms are likely to
introduce more innovations than their domestic counterparts after controlling
for other factors. A breakdown by sector of activity shows that foreign-owned
firms in the core sector perform ongoing R&D about as frequently as their
domestic counterparts. It is in the secondary and other sector, where
domestically-owned firms as a group are less likely to perform R&D than
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