When Amazon was mulling over where to locate its latest headquarters, regions across the United States scrambled to make themselves as appealing as possible to the tech giant. Such measures are increasingly common in terms of attracting employers to regions crying out for high-skilled jobs, and the prosperity they’re believed to bring with them.
What is perhaps less well known are the attempts to entice cross-border R&D investments, yet such investments have doubled between 2003 and 2017. Recent research explores whether attempts to entice innovative multinationals are appropriate.
Sharing knowledge
The authors highlight that there is often an assumption that multinationals will share their knowledge with the local community, but this seldom occurs, despite clearly investing to access local knowledge repositories.
Indeed, while large firms will often have the potential to generate the largest knowledge spillovers, they also tend to have the least to gain from such an arrangement. This isn’t the case with firms further down the technological ladder, who are more inclined to engage in reciprocal knowledge sharing.
The researchers examined data from the United States Patent and Trademark Office (USPTO) to understand how firms impact the local innovation rate in a region. The study found that patenting rates in areas with new multinational R&D activity grew by around 14 centiles more than would otherwise have been the case without MNE activity.
This is largely due to local knowledge spillovers, as the R&D activity by the MNE prompts increased activity by local firms. What’s more, the success of the original MNE prompts other MNEs to consider the area a fertile environment for innovation, and begin their own R&D activity there.
Interestingly, however, the biggest gains come not from technology leaders, but rather from less illustrious multinationals, who tend to construct more local alliances and exchange more workers with local firms. More illustrious firms tend to rely far more on their headquarters as a source of talent.
Local policy
As a result, the researchers believe that foreign investments only really deliver results if they’re accompanied by robust local policies. For instance, if strategic alliances and labor pooling between the foreign firms and local peers can be delivered then it can produce real benefits. If local policies can reduce any barriers to achieving this then they can be extremely valuable.
For instance, officials can invest in human-capital via universities and other research centers so that there is an ample supply of resources for foreign firms to tap into. They can also work to bolster investment promotion agencies so that the searching and partnering with local partners is accelerated.
It’s also important to be mindful that foreign firms don’t create enclaves in their host communities, with the best talent ringfenced and minimal interaction with local stakeholders. Regions can overcome this risk by promoting knowledge transfers.
The research is a salient reminder that while attracting a high-profile foreign firm can be beneficial to a region, it’s by no means guaranteed, and local policymakers need to ensure that the right environment exists to ensure those gains are realized.
