How Can Countries Benefit from the Presence of Multinational Firms ?

1. How Can Countries Benefit from the Presence of Multinational Firms ? Evidence from EU Member Countries and Some Thoughts on South East Europe Bernhard Dachs | AIT Foresight and Policy Development | Research, Technology and Innovation Policy

2. Foreign-owned firms – heroes or bad guys of the economy? My presentation will focus on co-operation between foreign-owned firms (FoFs) and universities in South-Eastern Europe (SEE). The activities of foreign-owned firms are often subject to discussions For some, attracting FoFs are the key to economic growth, in particular in emerging economies …while critics of globalization associate FoFs with decreasing social standards, rising environmental pollution and unethical behavior This presentation focuses on the implications of the presence of foreign-owned firms for science, technology and innovation (STI) policy

3. Characteristics of foreign-owned firms in an STI perspective • FoFs are often active in R&D intensive sectors • Pharma, computers, information technology, automotive … • Multinational firms often possess valuable knowledge and superior resources (Dunning, 1988, Markusen, 2002) • Exploitation of this knowledge is the very reason why they become multinational • FoFs are embedded in a intra-firm networks (Ghoshal, Bartlett, 1991) • At the same time, FoFs are also members in networks in their host countries 20/08/2014 3

4. Why FoFs are attractive for SEE countries? • R&D of FoFs can substantially raise aggregate R&D expenditure of countries in a short time • The Austrian experience, but also Ireland, Iceland, … • FoFs are important employers for researchers and university graduates • Embeddedness in a double network makes FoF a channel for international technology transfer • Knowledge and information spillovers from FoFs to domestic organisations • The channels include worker mobility, innovation co-operation, supplier-customer-relationships etc. 20/08/2014 4

5. Challenges for countries from the presence of FoF • Loss of control over domestic innovative capacity and commercialisation • Less basic, strategic research, less radical innovations, more adaptation • Competition for talent harms university research • Race to the bottom for R&D subsidies and unethical behaviour Source: UNCTAD, 2005 20/08/2014 5

6. Empirical evidence of Science-industry relations To what extend do FoFs co-operate with domestic universities? Two conflicting hypotheses: FoF can rely on superior internal knowledge, so there is no need to co-operate On the other hand, they have more resources for co-operation than many domestic firms, because they are larger, have more R&D staff... Data from the Community Innovation Survey 4, a survey on innovative activity in the European Union Data covers the period 2002-2004

7. Share of co-operating firms, all partners, 2002-2004 Source: CIS4, own calculations 20/08/2014

8. Domestic university co-operation, 2002-2004 Source: CIS4, own calculations 20/08/2014 8

9. Co-operation with universities abroad, 2002-2004 Source: CIS4, own calculations 20/08/2014 9

10. Summary of the empirical results Co-operation among firms in South-eastern European countries is lower than in many other European countries, in particular in BG and RO A good argument to promote co-operation Slovenia performs better than all other countries in the region Already above EU average in some indicators Foreign-owned firms are actively seeking co-operation and have a higher willingness to co-operate than domestic firms Not in domestic science-industry co-operations but with universities abroad

11. Why do foreign-owned firms perform so good? • The advantages of foreign-owned firms are not because of their ownership status (alone) • Regression analysis reveals that FoFs are simply better endowed for university/industry co-operation (Dachs and Pyka, 2009) • they are larger, have permanent R&D, a higher capacity to absorb knowledge and operate more often in science-based sectors • moreover, they have more management and financial capabilities and can spread risks over more projects • The differences are mainly caused by small, non-affiliated firms 20/08/2014 11

12. What could SEE countries do to attract foreign R&D? Various studies on location decisions of FoFs have revealed some principles of ‘good policy’ (OECD, 2005, UNCTAD, 2005) • Stable economic framework vs. special incentives • Studies have shown that stability is more important than special incentives • “Green field” investments in R&D without existing production are very rare • Incentives, however, can be decisive if firms choose between two countries • Equal treatment of foreign-owned and domestic firms • obligatory in EU competition law... • but also justified because research has shown that differences between Fo and domestic firms are due to special endowments and not due to the ownership status 20/08/2014 12

13. What could SEE countries do to attract foreign R&D? • Policy should promote the innovative capacities of both, foreign-owned and domestic firms • Provide funds to overcome financial, risk and capacity obstacles to innovation • Enable them to become suppliers for foreign-owned firms • Strengthen IPR protection • Improve university research and training • Availability of skilled personnel is a major incentive for FoFs to start R&D in a country • Programmes to promote R&D co-operation in general 20/08/2014 13

14. Bernhard Dachs Research, Technology and Innovation Policy, Department Foresight and Policy Development AIT-Austrian Institute of Technology Thank you for your attention