S&E Indicators 2006 - Chapter 4: Research and Development: Funds and Technology Linkages - R&D Investments by Multinational Corporations

R&D Investments by Multinational Corporations

U.S. Affiliates of Foreign Companies
U.S. MNCs and Their Overseas R&D
Comparison of R&D Expenditures by U.S. Affiliates of Foreign Companies and Foreign Affiliates of U.S. MNCs

Multinational corporations (MNCs) have been expanding R&D outside their home countries in recent decades (see sidebar "Foreign Direct Investment in R&D"). R&D investments by MNCs, within their affiliates or with external partners in joint ventures and alliances, support the development of new products, services, and technological capabilities. These investments also serve as channels of knowledge spillovers and technology transfer that can contribute to economic growth and enhance competitiveness. International R&D links are particularly strong between U.S. and European companies, especially in pharmaceutical, computer, and transportation equipment manufacturing. More recently, certain developing or newly industrialized economies are emerging as hosts of U.S.-owned R&D, including China, Israel, and Singapore.

U.S. Affiliates of Foreign Companies

U.S. affiliates of foreign companies have a substantial presence in the U.S. economy. Their value added as percent of total U.S. private industry value added grew from 4.9% in 1997 to 5.7% in 2002 (Zeile 2004). Within U.S. affiliates, the largest industries in terms of value added were wholesale trade (16.8%), which includes large affiliates with substantial secondary operations in manufacturing, chemicals (9.6%), transportation equipment (7.6%), and computer and electronic products (4.9%) in 2002 (Zeile 2004:198). Economic activities by U.S. affiliates of foreign companies, including production, employment, and R&D among others, reflect the combined effect of new investment flows, either as new facilities or through mergers and acquisitions, as well as changes in their existing U.S. operations.[75] According to BEA, new investments flows in the United States by foreign direct investors (measured as investment outlays for businesses established or acquired) increased substantially between 1998 and 2000, before declining consecutively in 2001 and 2002, along with sluggish U.S. economic activity and slower worldwide mergers and acquisitions (Anderson 2004).[76]

R&D expenditures by majority-owned U.S. affiliates of foreign companies (henceforth, U.S. affiliates) grew substantially in the late 1990s, concurrently with large investments inflows, followed by smaller but still significant increases in the early 2000s. In 2002, R&D performed by majority-owned U.S. affiliates reached $27.5 billion, an increase of 2.3% from 2001 (after adjusting for inflation) (appendix table 4-48 ). By comparison, total U.S. industrial R&D performance (which includes all companies located in the United States regardless of ownership status) declined by 5.6%, after adjusting for inflation. U.S. affiliates' R&D expenditures accounted for 14.2% of total U.S. industrial R&D performance in 2002 compared with just above 13% from 1998 to 2001 (figure 4-46 ). Of the $27.5 billion in R&D performed by U.S. affiliates in 2002, $24.9 billion was performed for affiliates themselves; $2.1 billion for others (including their foreign parents and affiliates of the same company located outside the United States); and $555 million was performed for the U.S. federal government (appendix table 4-50 ).

Manufacturing accounted for about three-fourths of U.S. affiliates' R&D, including 29% in chemicals, 18% in computer and electronic products, and 12% in transportation equipment (table 4-16 ; appendix table 4-49 ). U.S. affiliates owned by European parent companies accounted for three-fourths ($20.7 billion of $27.5 billion) of U.S. affiliates R&D in 2002 (figure 4-47 ), reflecting their sizable investment shares in the U.S. economy and their focus in R&D-intensive industries. German-owned affiliates classified in transportation equipment performed $2.4 billion of R&D in 2002, which represented 75% of all U.S. affiliates' R&D in this industry and 42% of total R&D performed by German-owned U.S. affiliates (table 4-16 ). On the other hand, Swiss- and British-owned affiliates were notable within chemicals, which includes pharmaceuticals and medicines, performing a combined 57% of chemicals R&D by U.S. affiliates.

Majority-owned U.S. affiliates of foreign companies employed 128,100 R&D personnel in 2002, up 0.6% from 2001 [77] Over the same period, affiliates' overall employment declined by 3.1%. Manufacturing affiliates represented 41% of affiliates' overall employment but over three-fourths of R&D employment in 2002, consistent with their large share in R&D expenditures. For trends in R&D employment in all U.S. affiliates of foreign companies in the 1990s, see NSF/SRS (2004b).

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U.S. MNCs and Their Overseas R&D

In 2002, majority-owned foreign affiliates of U.S. MNCs (henceforth, foreign affiliates), performed $21.2 billion in R&D abroad, up 5.6% from 2001, after adjusting for inflation.[78] Except for 2001, R&D expenditures by foreign affiliates increased annually from 1994 to 2002 (table 4-17 ). After modest increases through 1998, affiliates' R&D expenditures accelerated in 1999, in part due to international mergers and acquisitions.

U.S. MNCs comprise U.S. parent companies plus their foreign affiliates.[79] From 1994 to 2002, more than 85% of the combined global R&D expenditures by U.S. MNCs were performed at home (table 4-17 ). However, R&D expenditures by foreign affiliates grew at a faster rate (average annual rate of 7.5%) over this period than did R&D expenditures by their U.S. parent companies at home (5.3%). Consequently, the share of foreign affiliates' R&D expenditures within the global MNC increased from 11.5% in 1994 to 13.3% in 2002.[80]

Furthermore, the geographic distribution of these expenditures has evolved to reflect the extent of globalization (figure 4-48 ). In 1994, major developed economies or regions (Canada, Europe, and Japan) accounted for 90% of overseas R&D expenditures by U.S. MNCs. By 2001, this combined share was down to 80%.[81] The change reflects modest expenditures growth in European locations, compared with larger increases in Asia (outside Japan) and in Israel. Nevertheless, affiliates located in Europe accounted for at least 60% of these R&D expenditures in 2001 and in 2002, led by the United Kingdom and Germany (figure 4-47 ; appendix table 4-51 ).

R&D expenditures by foreign affiliates in mainland China and Singapore accelerated in 1999, exceeding half a billion dollars annually since 2000. By 2002, they became, respectively, the second and third largest Asia-Pacific hosts of U.S. R&D after Japan and ahead of Australia, according to available data (appendix table 4-51 ).[82]

Brazil and Mexico have represented around 80% or more of R&D expenditures by U.S. MNCs in Latin America since 1994. Finally, Israel and South Africa represent virtually all of the R&D expenditures by U.S. MNCs in their respective regions over the same period (appendix table 4-51 ).

Three manufacturing industries accounted for most foreign affiliate R&D in 2002: transportation equipment (28%), computer and electronic products (25%), and chemicals (including pharmaceuticals) (23%) (table 4-18 ; appendix table 4-52 ). The largest nonmanufacturing R&D-performing industry was professional, technical, and scientific services (which include R&D and computer services), with 6% of the total. The industry distribution in European locations is similar to the average across all host countries, whereas half of affiliates' R&D expenditures in Canada and Japan are performed by affiliates classified in transportation equipment and chemicals, respectively. More than half of foreign affiliates' R&D located in the Asia-Pacific region and in Israel was performed by affiliates classified in computer and electronic products.[83]

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Comparison of R&D Expenditures by U.S. Affiliates of Foreign Companies and Foreign Affiliates of U.S. MNCs

From 1997 to 2002, R&D expenditures by U.S. affiliates of foreign companies grew faster than did R&D expenditures of foreign affiliates of U.S. MNCs (9.8% average annual growth rate and 7.7%, respectively). The difference between these two indicators of international R&D activity in the United States and activity by U.S. MNCs overseas jumped by $5 billion to $7.7 billion at the start of the movement by foreign MNCs in 1998 toward large U.S. investments. Since then, this difference has remained between $5.7 and $6.7 billion (figure 4-49 ), or close to 3% of total U.S. industrial R&D. At the regional level, R&D expenditures by European-owned companies in the United States accounted for most of this difference. Within chemical manufacturing (which includes pharmaceuticals and medicines), affiliates of foreign companies in the United States performed $3.2 billion more in R&D expenditures compared with foreign affiliates of U.S. MNCs. Conversely, foreign affiliates of U.S. MNCs classified in transportation equipment performed $2.7 billion more in R&D expenditures compared with transportation equipment affiliates of foreign companies in the United States. For information on an ongoing project investigating the development of integrated statistical information on these U.S. and cross-border R&D investments, see sidebar "Indicators Development on R&D by MNCs."

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Foreign Direct Investment in R&D

Direct investment refers to the ownership of productive assets outside the home country by multinational corporations (MNCs). More specifically, the U.S. Bureau of Economic Analysis (BEA) defines direct investment as ownership or control of 10% or more of the voting securities of a business in another country. A company located in one country but owned or controlled by a parent company in another country is known as an affiliate. Affiliate data used in this section are for majority-owned affiliates, i.e., those in which the ownership stake of parent companies is more than 50%. Statistics on R&D by affiliates of foreign companies in the United States and by foreign affiliates of U.S. MNCs and their parent companies are part of operations data obtained from BEA's Survey of Foreign Direct Investment in the United States (FDIUS) and BEA's Survey of U.S. Direct Investment Abroad (USDIA), respectively. Operations data exclude depository institutions and are on a fiscal-year basis.

Global R&D supports a range of objectives, from production to technology adaptation to development of new products or services (Kumar 2001; Niosi 1999). The location decision for global R&D sites is driven by (1) market-based and science-based factors, ranging from cost considerations and the pull of large markets to the search for location-specific expertise (von Zedtwitz and Gassmann 2002); (2) the balance between home- and overseas-based advantages in advancing corporate technology goals (Bas and Sierra 2002); and (3) the focus of R&D in terms of research or development. Barriers or challenges include intellectual property protection and coordination and management issues (EIU 2004).

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Indicators Development on R&D by MNCs

In recognition of the increasing international dimensions of U.S. R&D, the National Science Foundation (NSF) Division of Science Resources Statistics proposed and funded a 3-year exploratory project aimed at the integration of statistical information from the Bureau of Economic Analysis' (BEA's) international investment surveys with the NSF Survey of Industrial Research and Development, which is conducted by the U.S. Census Bureau.

The study demonstrated the feasibility of linking companies covered in the BEA MNC surveys with those covered by the NSF Survey of Industrial R&D. The study also generated statistical benefits by expanding the sampling frame of participant surveys. Further, the project confirmed that, for the most part, the data reported to the U.S. Census Bureau and BEA are comparable, and it also documented definitional and methodological differences that warrant further statistical and analytical investigation. If future links are undertaken, integrated data may support a richer analysis of R&D patterns, including MNCs' R&D spending by character of work and by state location.

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Footnotes

[75] For the purposes of BEA FDI surveys, the United Sates includes the 50 states, Washington, DC, Puerto Rico, and all U.S. territories and possessions.

[76] New investments more than doubled from 1997 to 1998 to $215 billion, reaching a peak at $336 billion in 2000. In 2001, new investments decreased by more than one-half and have been in the $50–$60 billion range in 2002 and 2003, closer to the levels in the late 1980s and mid-1990s (Anderson 2004).

[77] R&D employment data from BEA measure the number of scientist and engineers devoting the majority of their time to R&D.

[78] BEA data on overseas R&D and other foreign operations of U.S. MNCs are converted to U.S. dollars using market exchange rates according to Statement of Financial Accounting Standards No. 52 - Foreign Currency Translation (U.S. Financial Accounting Standards Board). Constant or inflation-adjusted dollar expenditures are not available. See appendix table 4-55 and 4-56 for selected data from the NSF Survey of Industrial Research and Dvelopment on overseas R&D expenditures by companies with R&D activities in the 50 U.S. states and Washington, DC.

[79] BEA defines a parent company of a U.S. multinational corporation (MNC) as an entity (individual, branch, partnership, or corporation), resident in the United States, that owns or controls at least 10% of the voting securities, or equivalent, of a foreign business enterprise. See appendix table 4-53 and 4-54 .

[80] R&D employment data for foreign affiliates from BEA are available only in 5-year intervals. According to the latest available data as of early 2005, U.S. MNCs employed a global R&D workforce of 770,300, or close to 3% of their employees in 1999 (NSF/SRS 2004b). U.S. parent companies employed 84% (646,800) of their R&D workers domestically; the remaining 16% (123,500) worked abroad for their foreign affiliates. For analysis of trends in overall overseas employment by affiliates of U.S. MNCs, see Mataloni (2004).

[81] Preliminary regional totals for Africa, Europe, and Latin American and Western Hemisphere are not available for 2002.

[82] Since the late 1990s, majority-owned affiliates appear to be the preferred investment mode for U.S. MNCs in mainland China, at the expense of alliances or joint ventures (NSF/SRS 2004a).

[83] For further analysis, see Moris (2005).