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