1. Knowledge Flows between Multinational Enterprises and National Innovation Systems 2 nd EUROFRAME Conference: Trade, FDI and relocation: challenges for the EU? Bernhard Dachs (ARC-sys), Bernd Ebersberger (FhG-ISI)

2. © systems research & Fraunhofer ISI Introduction Paper asks about knowledge and information transfer from the host country to affiliates of Multinational Enterprises (MNEs) Policy relevance: Fears in Europe and the US that MNEs may relocate innovative activities because of cost advantages If innovation is an interactive process... A high degree of interactions between MNE and the host country may reduce the danger of relocation of MNE innovative activities

3. © systems research & Fraunhofer ISI Theoretical approaches There is no clear picture on this question in the literature: international business literature tries to explain FDI and exports in a common microeconomic framework (knowledge capital model, Markusen 2002) Affiliates mostly exploit assets created by the partent company approaches to „local embeddedness“ of affiliates associated with the literature on local spillovers, innovative strategies of MNEs and global alliances Affiliates actively increase the stock of knowledge of the MNE

4. © systems research & Fraunhofer ISI apporaches to local embeddedness no coherent framework but some building blocks: Internationalisation is a source, not a result of knowledge creation (‚home base augmenting‘ vs. ‚home base exploiting‘ – Kuemmerle 1997) A reason for this is the partly tacit, context-specific, and local nature of knowledge and spillovers (Breschi and Lissoni 2001) foreign affiliates act in many cases as ‚surveillance outposts‘, or ‚antennas‘ to benefit from local spillovers (Florida 1997, Almeida 1999) MNEs give themselves a more decentralized organisational form (Zanfei 2000), where local affiliates enjoy wider mandates (Birkinshaw; Hakanson)

5. © systems research & Fraunhofer ISI Questions Does foreign ownership have an impact on: the propensity to enter into co-operation for innovation with different kinds of partners? on which knowledge sources the firm relies for innovation? Does the home country of the MNE determine the co- operation or sourcing behavior of the firms? ‘Cultural’ proximity and long-lasting business relations may ease co-operation between AT, D, CH

6. © systems research & Fraunhofer ISI Data Community Innovation Survey 3 (CIS 3) for Austria A survey of innovative enterprises in all member countries of the EU covering 2000 - 2002 Sample size: 618 (only group enterprises) Austrian-owned firms: 390 Foreign-owned firms: 228 -German-Liechtenstein-Swiss-owned (GLS) 118 -Anglo-Saxon-owned (AS) 53 -European-owned (EU) 47

7. © systems research & Fraunhofer ISI Types of interaction in the data formal co-operation with different partners, dom. and abroad a co-operation on a contractual basis may also include risk sharing, exploitation of economics of scale involves exchange in both directions and mutual learning builds up trust and a common codebook (tacitness) valuation of different information sources for innovation much more informal include demonstration, imitation, reversed engineering,...

8. © systems research & Fraunhofer ISI Empirical model The impact of foreign ownership compare the actual behavior with the counterfactual behavior counterfactual behavior: "How would the foreign-owned firm have behaved if it was in domestic rather than foreign ownership?" counterfactual situation not observable counterfactual situation is estimated by means of a kernel based matching procedure mean effects are computed

9. © systems research & Fraunhofer ISI Results – impact of foreign ownership I.FOEUGLSAS Collaboration Total (.) Domestic (-) -Vertical(-) -Horizontal(.) -Science(-) International (.) -Vertical(.) -Horizontal(.) -Science(.) Valuation of information -Internal + grp.(+) -External firms(-) -Science(.)

10. © systems research & Fraunhofer ISI Results – impact of foreign ownership II.FOEUGLSAS Collaboration Total (.) (.) (.)(-) Domestic (-)(.)(.)(-) -Vertical(-) (.) (.) (-) -Horizontal(.) (.) (.) (-) -Science(-) (.) (.) (-) International (.) (.) (.) (.) -Vertical(.) (.) (.) (.) -Horizontal(.) (.) (.) (.) -Science(.) (.) (.) (.) Sourcing -Internal(+) (+) (+) (+) -External(-) (-) (-) (-) -Science(.) (.) (.) (.)

11. © systems research & Fraunhofer ISI Likelihood of foreign and domestic enterprises to enter into co-operative arrangements Type of co-operationsAll foreign-ownedAustrian All co-operations0.3070.355 Domestic co-operations0.2280.333 International coop0.2380.249 Type of co-operations European (incl GLS)Austrian European (without GLS)Austrian All co-operations0.3640.3610.4000.321 Domestic co-operations0.2990.3390.3000.305 International coop0.2730.2490.3500.207 Type of co-operationsAnglo-SaxonAustrianGLSAustrian All co-operations0.1250.3330.3510.374 Domestic co-operations0.0000.3060.2980.350 International coop0.1250.2470.2460.264

12. © systems research & Fraunhofer ISI Effects of Foreign ownership:... leads to less domestic co-operation,... but not to a significantly lower overall co-operation propensity... causes companies to draw more on group internal knowledge sources for innovation.  this points to ‘home-base exploiting’ behavior Differences with respect to parent home country exist but they cannot be explained by neighborhood (D/LI/CH)

13. © systems research & Fraunhofer ISI international business literature: Knowledge capital model (Markusen 2002) MNEs possess firm-specific assets these assets are intangible and transferable within the firm MNEs use these assets to enter foreign markets because they give them advantages over incument competiors to fully exploit these assets, they have to be adopted to local needs, consumer tastes, regulation etc. engineering and R&D units are located at target markets of MNEs for these adjustments, but main R&D is concentrated at the home country

14. © systems research & Fraunhofer ISI Results and Conclusions Bu there is no pure ‘home-base exploiting’, since International co-operation is unaffected by ownership Differences mostly come from Anglo-Saxon enterprises Some pairs even show a higher propensity for the foreign-owned enterprises

15. © systems research & Fraunhofer ISI Policy implications A lower propensity for foreign-owned firms to enter domestic co-operations may point to a weaker ‘embeddedness’ of MNE affiliates However, important sub-groups of the population don’t show such effects; even domestic linkages are quite strong for large parts of the MNE population Therefore, the danger of relocation of innovative activities may be overstated in current discussions because MNE affiliates strongly depend on their business environment in Austria

16. © systems research & Fraunhofer ISI Thank you!

17. © systems research & Fraunhofer ISI Relation to findings from other countries Impact on collaboration with domestic actors Collaborationtotalvert.sci. Austria: # (.)(.)(.) Denmark: (.)(.)(.) Finland:NMN (Nordic)(+)(+)(.) Norway:(.)(.)(.) Sweden: *EU, **AS(.) (+)*(+)* ** Internal sourcing Austria: AS, GLS, EU (+) Denmark: NMN, AS (+) Finland:NMN(+) Norway:NMN, AS, EU(+) Sweden: NMN, AS, EU (+) Nordic countries taken from Ebersberger & Lööf (2005) # for EU and GLS owned, AS owned (-)