Christian Le Bas (LEFI, Université Lumière Lyon 2) Workshop DIME Distributed Networks and the Knowledge-based Economy may 2007 The Multinationals’ location in Knowlegde Activities: The determinants of home-base- augmenting and home-base-exploiting strategies Laboratoire d’Économie de la Firme et des Institutions EA Université Lumière Lyon 2

2 Contents 1. The internationalization of MNCs R&D activities and the context and the purpose of the study 2. Four types of corporate technological internationalisation: a taxonomy 3. Four locational strategies for FDI in R&D: crossing the home and host revealed technological advantages with patent data 4. The data set 5. The main empirical trends. 6. The main variables: definition and measurement. 7. Four Models for the choice between HBE and HBA 8. Models and estimates 9. Results and comments 10. Research agenda

3 1. The internationalization of MNCs R&D activities: context and purpose of the study The MNCs are increasingly viewed as Inter-organizational complex Networks for innovation. Knowledge is the basic resource which “flows” within theirs borders (Cantwell and Iammarino, 2001; Goshal and Barlett, 1990, Castellini and Zanfei, 2006). MNCs rapidly increase their foreign direct investment in R&D: Cantwell (1989), Cantwell and Piscitello (2000), Dunning and Narula (1995), Dunning (1997). Our concern here is not why a MNC does FDI in R&D but why it invests here (for instance in country A) and not there (for instance in country B). We basically are concerned by the locational strategies of MNCs in terms of technological (R&D) activities. We find two basic strategies exist regarding the foreign R&D motives MNCs perform and we account for their determinants.

4 2. Four types of corporate technological internationalisation Useful starting point the Dunning (2000) taxonomy: asset-augmenting (AAA) versus asset-exploiting (AEA) activities taken up later by Patel and Vega (1999) or Le Bas and Sierra (2002). Strategy 1: Technology-seeking FDI in R&D. The first type of strategy is directed towards offsetting home country weaknesses in a given technological field by selecting a host country with proven strength in the desired technology. Strategy 2: Home-base-exploiting FDI in R&D (Kuemmerle, 1999). It is the exact opposite of strategy 1. The rationale for the investment here is to exploit the existing corporate-specific capabilities in foreign environments. Strategy 3: Home-base-augmenting FDI in R&D (Kuemmerle, 1999) or “strategic asset-seeking R&D” (Dunning and Narula, 1995). This third strategy consists in targeting technologies in which the firm has a relative advantage at home and the host country is also relatively strong. Strategy 4: Market-seeking FDI in R&D (Dunning, 1998). The motivation for this fourth type of strategy does not seem to be technology-oriented.

5 3. Four locational strategies for FDI in R&D: crossing the home and host revealed technological advantages with patent data Technological activities in the host country Corporate technological activities in the home country Strong Weak Strategy 1 HomeRTA < 1 HostRTA > 1 Strategy 4 HomeRTA < 1 HostRTA < 1 Strong Strategy 3 HomeRTA > 1 HostRTA > 1 Strategy 2 HomeRTA > 1 HostRTA < 1 Source: adapted from Patel and Vega (1999) and Le Bas and Sierra (2002). For each MNC we know the number of patents granted and their breakdown by the four strategies and consequently their dominant strategy.

6 4. The data set We use a database on MNCs European patenting Through the patent document we get information on the place in which the invention has been made (the address of the inventor) and we can map out the MNCs R&D world-wide network. 297 MNCs among a sample of 345 MNCs with the highest volume of patenting during the period Only MNCs having strategy 2 (HBE) and strategy 3 (HBA) as dominant strategy (most important strategy in terms of patents) 2 periods of time: and Patent technological classification comprises 6 technological fields and 30 sub-technological fields (listed in Le Bas and Sierra, 2002). 3 groups of “triadic firms”: USA, Japan, Europe

7 5. The main empirical trends The large firms must necessarily employ both options (HBA, HBE) simultaneously (Narula, 1995). But there is a dominant strategy (the one that encompasses the greater number of patents) that matches the Firm general strategy. Domination of strategy 3: For the overall sample of patents we get the following percentages: 7.8 % for strategy 1; 34.8 % for strategy 2; 52.4 % for strategy 3; and 4.9 % for strategy 4 (also confirmed by Cantwell and Piscitello, 2004; Le Bas and Sierra, 2002; Patel and Vega, 1999) In terms of dominant corporate strategy (see also: Le Bas and Patel, 2005): for nearly 70% of the Firms sample strategy 3 is dominant (more patents). Some particular cases: Japanese firms are more strategy 2-oriented, European firms score highest for strategy 3 Stability over time (through the 2 time period) as far as technological internationalization strategy is concerned. Firms tend to persist in their strategy. As a result we hypothesise the choice of the dominant strategy between HBE and HBA is “rational” and could/should be (logically) explained.

8 6. The main variables: definition and measurement Set of variables that lay out Firm characteristics which could explain the choice Technological diversification: DIV (i,t) Level of technological internationalization: INT(i,t) Size of technological activity: Tecsize (i,t)) Firm nationality (dummy) Firms’core technological competences (dummy) The number of countries in which the MNCs is established (Network complexity) does not work.

9 7. Four Models for the choice between HBE and HBA We clearly are in the frame of a binomial choice. The dependent variable is qualitative Model 1 is the “standard” binomial logit model for finding the main factors explaining the choice of strategy 3 versus strategy 2 Model 2 is a panel binomial logit model with random effects. Model 4 is a binomial logit model in which the proportions are used. In comparison with model 1, we now use all the available information. For two MNCs having a preference for HBA as a dominant strategy, it may be that the proportion of patents matching the HBA strategy is not the same. This fourth model takes this into account. In Model 3 the dependent variable the proportion of patents relating to each of the four strategies and explain it by a set of measurable variable. We use the standard OLS method which can be applied here as a first approximation.

10 8. Models and estimates Absolute values of t- statistics under the parameters estimates: *** significant at the 1 percent level ** significant at the 5 percent level * significant at the 10 percent level Dummies for USA and for consumer goods, building and public works are omitted; default effects are included within the intercept? Source: own calculations (LIMDEP v.3.08) Estimation results for the choice of HBA strategy models

11 9. Results and comments Increasing (decreasing) technological diversification always tends to decrease (increase) the probability to choose the HBA (HBE) strategy. This confirms the importance of the ongoing process of technological diversification. It is difficult to find an effect of the level of technological internationalization after we control for other variables effects, apart from OLS regressions. The size of technological activity has a very weak (but significant) positive effect on the probability to choose the HBA strategy (when we control for firm nationality and macro-fields). The dummy variables for nationality deliver some interesting perspectives. When a firm is “native” from the US or from a European country, the probability to choose strategy 3 will be stronger. The reverse is true for Japanese firms.

Research agenda 1. Updating 2. Articulating 3. Testing