Hollenstein presentationMV

Characteristics of Foreign R&D Strategies of Swiss Firms: 

Characteristics of Foreign R&D Strategies of Swiss Firms Implications for Policy

Background: 

Background Outward-investments increasingly pertain to R&D as well We notice from casual observation and empirical research that the motives for performing R&D at foreign locations are changing (what also is reflected in theoretical thinking) Technology/knowledge sourcing is gaining ground as a motive of foreign R&D as compared to more traditional motives Increasing concern in the public that foreign R&D may “erode” the domestic knowledge base (“relocation”, substitution) On the other hand: Based on the belief that technology sourcing primarily is a means for augmenting the strategic assets of the (domestic) headquarter firm, it is hypothesised that foreign and domestic R&D are complements Background and research questions

Research questions: 

Research questions Which of the two competing hypotheses, on balance, is supported by the data in case of the Swiss economy? As the answer depends on the relative importance of alternative foreign R&D strategies: What strategies firms pursue in performing R&D at foreign locations? Which strategies are most prevalent? Based on this analysis: what are the direct home-country effects of Swiss firms’ foreign R&D strategies? What do we know about indirect home-country effects (spillovers)? What are the determinants of (the extent of) knowledge spillovers? Is the Swiss economy in a good position to capitalise on spillovers? What are the policy implications of the analysis, in particular in the Swiss case? Background and research questions

Outline: 

Outline Background and research questions Data Identifying foreign R&D strategies Method Empirical results Prevalence of alternative strategies Policy Implications based on: Direct home-country effects Indirect home-country effects (knowledge spillovers) Policy needs in the Swiss case Conclusions Outline

Data: 

Data Firm-level data stemming from the Swiss Innovation Survey 2002 Sample Stratified by 28 industries and 3 industry-specific firm size classes Coverage: manufacturing, construction, commercial services (firms with 5 or more employees) Response rate: 40% = 2583 firms, of which: 1078 firms performing R&D 156 firms performing R&D at foreign locations These 156 firms are the sample we use in our cross-section analysis In future research, we intend to analyse the topic based on four waves of the Swiss Innovation Survey Data

Starting point: 

Starting point We assume that firms may (but must not) be driven to invest in foreign R&D by more than one motive Therefore, a firm’s foreign R&D strategy can be described by a specific combination of such motives (“multiple” strategy) In order to identify different (multiple) R&D strategies we draw on information on the importance of seven motives of performing foreign R&D Assessments of the firms themselves 5-point Likert scale Identifying foreign R&D strategies: method

Motives of performing foreign R&D: 

Motives of performing foreign R&D % (highly) important * Supporting local production and sales 40 Proximity to leading edge universities 26 Proximity to highly innovative firms 35 Transfer of knowledge to the headquarter 26 Lower R&D costs 26 Higher public support for R&D activities 12 Ample supply of R&D personnel 38 * Value 4 or 5 on a five-point Likert scale Identifying foreign R&D strategies: method

A two-step procedure to identify R&D strategies: 

A two-step procedure to identify R&D strategies Step I Cluster analysis of 7 motives of foreign R&D The resulting four clusters contain firms that pursue a similar foreign R&D strategy in terms of the underlying combination of motives As cluster analysis is a purely statistical procedure (classification method), the interpretation of the four clusters as specific R&D strategies is preliminary Step II In order to check whether the clusters identified in the first step effectively may be interpreted as specific R&D strategies, we characterise them by four (partly theory-based) sets of variables Identifying foreign R&D strategies: method

Variables used in step II to characterize R&D strategies: 

Variables used in step II to characterize R&D strategies The motives used in the first step, i.e. the cluster analysis A large number of variables representing the most important ingredients of the OLI paradigm of explaining FDI O-advantages: innovation input/output, use of external knowledge, appropriability, technological opportunity, firm size, labour productivity L-disadvantages: innovation barriers in Switzerland I-advantages: R&D co-operation, firm size Market environment: demand prospects, intensity of price and non-price competition Structural characteristics of the firm: industry affiliation, firm age, export orientation, etc. (and firm size already mentioned above) Identifying foreign R&D strategies: method

Four strategies of foreign R&D pursued by Swiss firms: 

Four strategies of foreign R&D pursued by Swiss firms Firms pursuing a broad-based strategy in terms of motives, with tapping into knowledge from universities and embodied in specialists as the most important elements (25% of firms, 11% of employment) Firms strongly embedded in foreign networks of highly innovative firms complemented by an intensive knowledge transfer to the domestic headquarter (24% of firms, 24% of employment) Firms pursuing a strongly focused strategy, with foreign R&D almost exclusively used as a means to extend local markets (36% of firms, 57% of employment) Firms pursuing, in terms of motives, a rather narrow-based strategy that aims at reducing R&D costs and gaining access to highly skilled personnel (15% of firms, 8% of employment) Empirical results

Characteristics of strategy I: 

Characteristics of strategy I (broad-based strategy in terms of motives, with particular importance of knowledge sourcing (universities, specialists) Strong O-advantages High internal R, D and other innovation expenditures as well as very intensive use of external knowledge Intensive patenting activities and generation of world novelties Favourable supply-side conditions (technological opportunies, appropriability) Several kinds of L-disadvantages In the first place: insufficient supply of highly/specifically qualified personnel In second instance: excessive regulation and insufficient financial incentives for performing R&D in Switzerland Structural characteristics Highly export-oriented medium-sized firms Younger than average Slightly over-represented in mechanical engineering and in services Empirical results

Characteristics of strategy II: 

Characteristics of strategy II (high relevance of knowledge sourcing from very innovative firms (networks) and intensive reverse knowledge transfer) Strong O- and I-advantages – excellent market perspectives Strongly research-oriented internal innovation activities based on an excellent staff and intensive use of science-oriented external knowledge (journals, patent documents) Tight network of R&D co-operation Supply-side conditions for generating innovations, surprisingly, are only average, whereas demand/market conditions are excellent Hardly any L-disadvantages These firms actively search worldwide for complementary knowledge at the most attractive locations rather than being pushed to perform R&D abroad Structural characteristics Large share of very small, in many instances young companies; however, four large MNE’s also pursue this strategy Pharmaceuticals, chemicals and services are over-represented Export-orientation is low (reflecting the high share of small firms) Empirical results

Characteristics of strategy III: 

Characteristics of strategy III (strongly focused strategy: foreign R&D almost exclusively is market-oriented) Quite weak O-advantages – strong market growth Only moderate internal innovation outlays (development-oriented), not matched by tapping into external knowledge sources Quite extensive network of R&D co-operation Weak supply-side conditions for generating innovations, but strongly growing markets characterised by fierce price competition (few competitors!) Only few L-disadvantages Highly-skilled personnel Structural characteristics Very high share of large, well-established (old) companies Extremely high export-orientation Over-representation of manufacturing (with the exception of pharmaceuticals/chemicals) Empirical results

Characteristics of strategy IV: 

Characteristics of strategy IV (rather narrow-based strategy that aims at reducing R&D costs and at accessing highly skilled personnel) Weak O- and I-advantages – market perspectives not promising Highly application-oriented internal innovation expenditures (engineering, follow-up investments), Quite substantial use of knowledge stemming from firms of the same value chain Given this pattern, firms pursuing this strategy are “incremental innovators” Slowly growing markets, characterised by fierce price competition Almost no L-disadvantages Structural characteristics Very high share of small, in many instances old companies Some over-representation of electrical engineering Empirical results

Assessment of the empirical results: 

Assessment of the empirical results The two-step procedure yields four clusters which safely may be interpreted as specific “types of foreign R&D strategies”, as the results are satisfactory by statistical criteria (cluster analysis) well-founded in theory (OLI paradigm of FDI) As hypothesised, it is sensible to conceptualise investments in R&D at foreign locations as “multiple” strategies” in terms of the underlying motives (although not all firms pursue broad-based strategies) Empirical results

Prevalence of alternative strategies in the Swiss case: 

Prevalence of alternative strategies in the Swiss case The two “traditional”, (strongly) focused strategies 3 and 4 (market and cost orientation) are still more prevalent than those for which knowledge/technology sourcing is either at the core (strategy 2) or is at least an important element (strategy 1) Number of firms 51% Employment 65% Nevertheless, the two strategies that aim at augmenting a firm’s strategic assets have become highly relevant, in particular in terms of the number of firms (49%; employment: 35%) Strategy 3 (exclusively focusing on extending foreign markets) and strategy 2 (combining technology sourcing and reverse knowledge transfer) dominate the pattern of foreign R&D of Swiss firms Number of firms 60% Employment 81% Prevalence of alternative R&D strategies

Policy implications: 

Policy implications Direct effects of FDI in R&D on the domestic headquarter company (reflecting the prevalence of alternative strategies) as well as Indirect effects (knowledge spillovers to other domestic firms) are the basis for assessing whether foreign and domestic R&D, on balance, are complements or substitutes identifying policy needs and recommending some policy actions Policy

Slide18: 

Direct effects In view of the relative importance of the four strategies, we conclude that foreign and domestic R&D, on balance, are complements: Dominant role of the strongly market-oriented strategy 3, giving rise to firm-specific economies of scale in R&D at the headquarter Low importance of cost-oriented strategy 4 (relocation of FDI is hardly relevant) Reverse technology transfer is a core feature of strategy 2, thus enhancing the knowledge base at the (domestic) headquarter Knowledge transfer does not play such an outstanding role in case of strategy 1, but also is a relevant feature Policy

Slide19: 

Indirect effects Positive indirect effects (spillovers) would tilt the balance even further towards complementarity The extent of knowledge spillovers depends on several factors, such as The ability of firms to prevent know-how from leaking to (domestic) competitors The willingness to share knowledge with other (domestic) firms Most importantly: spillovers are the larger, the higher the capacity of domestic firms to absorb external knowledge Policy

Slide20: 

Therefore: There is a strong case for policies supporting the domestic firms’ absorptive capacity Strengthening the embeddedness of outward R&D investors in the domestic economy also contributes to increase knowledge spillovers Promoting clusters of vertical and horizontal partner firms of the outward investor Supporting R&D co-operation with research institutions (and other firms) Policy

Capitalising on spillovers: what about the Swiss case?: 

Capitalising on spillovers: what about the Swiss case? The Swiss economy is in a good position to benefit from spillovers Absorptive capacity of domestic firms is high The knowledge base is more widely distributed than elsewhere in Europe as Swiss SME’s are more innovative than those of all EU Member States Employment of highly qualified personnel is very high, what is partly due to immigration (in Switzerland, the number of graduates per age-group is only average) Policy

Slide22: 

Firms performing R&D abroad are well embedded in the Swiss economy R&D co-operation is more widespread than in most EU countries and strongly science-based There are some important clusters of knowledge-intensive industries such as pharmaceuticals/biotechnology, instruments/electronics, financial services Technology transfer between science (which is of very high standard) and industry works well Promoting R&D co-operation between universities and industry is a core activity of Swiss technology policy Policy

Recommendations for policy measures to increase the benefits of Swiss firms’ outward FDI in R&D: 

Recommendations for policy measures to increase the benefits of Swiss firms’ outward FDI in R&D Enhancing the domestic supply of highly qualified labour Increasing the number of graduates (in particular scientists/engineers) Promoting labour market participation of highly qualified women Mobilising the intellectual potential of foreign children growing up in Switzerland Policy

Slide24: 

Other measures to keep headquarters in Switzerland Securing the high standard of university research (science policy) Sticking to favourable IPR regulations Avoiding a too restrictive regulatory framework for performing R&D in promising fields (e.g. biotechnology) Providing an attractive tax environment etc. Promoting inward FDI to increase the benefits of outward FDI in R&D Inward FDI, among other things, may strengthen domestic clusters, thus enhancing the embeddedness of domestic companies that perform R&D at foreign locations Policy