Can FDI Spur Innovation in Developing Countries?

1. Can FDI Spur Innovation in Developing Countries? Nagesh Kumar RIS, New Delhi CTDS

2. Background • Global innovative activity is highly concentrated: top 10 countries account for • 84% of R&D expenditure • 95% of world patents • 91% of technology fees paid • Recent trend of globalization of MNEs’ R&D activity • Potential to contribute to the innovative capability in host countries • Alter the global pattern of technology generation CTDS

3. Trends and patterns in overseas R&D • Overseas R&D activity is still the least globalized of MNEs’ activities • Largely concentrated in developed countries • 91% of overseas R&D activity of US MNEs is located in other developed countries • The rest is concentrated in a handful of relatively advanced developing countries CTDS

4. Motivations for internationalization of R&D by MNEs • Adaptations for local markets • To exploit cheaper resources such as manpower • Strategic reasons: to absorb spillovers of knowledge from the national innovation systems in other countries CTDS

5. Lessons from studies on Determinants of Location of Overseas R&D • Analysis covering R&D investments by the US and Japan in 74 countries, in 7 branches of manufacturing, across 3 points of time suggests following factors as the important attractions: • Availability and cost of R&D manpower in the country • Scale of innovative activity in the country • Technology specialization of the country in the industry of investor • Market size of the country • Implications: • MNEs locate R&D activity in countries that are already technologically advanced • The countries that are poor technologically have very little prospect of attracting MNEs investments in R&D activity • They thus actually perpetuate the global asymmetries CTDS

6. Gains from R&D Activity of MNEs • Nature of R&D activity of MNEs and local firms different • Indian study covering 4000 enterprises over 10 years • R&D activity of MNE affiliates was motivated to adapt their products to local requirements or doing projects for their parents • R&D activity of domestic enterprises was either motivated to absorb and adapt the licensed technology or towards strengthening their international competitiveness • Implication: gains from R&D activity of MNE affiliates and domestic firms could be very different CTDS

7. Is there a role for the government policies? • Governments impose various performance requirements on foreign investors, e.g.: • Local content requirements (LCRs) in different forms • Export performance requirements in different forms • Indirect export performance requirements in the form of trade balancing or dividend balancing, or foreign exchange neutrality requirements • Requirement to establish a joint venture with domestic participation or for minimum level of domestic equity participation • Employment performance requirements • Requirement to transfer technology, production processes or other proprietary knowledge • R&D requirements CTDS

8. Evidence • Domestic equity requirements and Technological Capability and Innovation • Favourable externalities in the form of local learning and absorption of knowledge brought-in: Case studies from Korea (Kim 1997); India (UNCTAD 2003) • Do they affect the content of technology transfer? • Cases to show that key technologies may not be transferred to even 100% subsidiaries • gains of local learning may outweigh the possible costs • Also case studies on favourable impact of PRs e.g. LCRs and EPRs CTDS

9. Concluding Remarks • Globalization of R&D activity is hardly able to contribute to building of innovative capability in developing countries • Performance requirements can play a useful role in building local technological capability • Developed countries have used them effectively in their process of development • It is now the turn of developing countries to use them • Need to preserve this policy space for development: NO to international rules on investment • Review of TRIMs Agreement to seek flexibilities for developing countries to impose PRs that are phased out CTDS