Globalization of innovation: the moderating role of project-level investment strategy and country type in location choice for R&D-related FDI

Abstract

The current stage of globalization involves geographically dispersed research and development (R&D) investments that are not confined to advanced economies. These cross-border R&D investments are driven by multinational enterprises' (MNEs') strategies for exploring and/or exploiting foreign locations. In this paper, we analyse location choice and the moderating effect of project-level investment strategy (i.e. exploration or exploitation) and type of host economy (i.e. advanced or emerging) on the importance of the innovation framework and local innovation capabilities. Our analysis of 588 R&D-related foreign direct investment (FDI) projects in the pharmaceutical and biotech industries during the 2006-2016 period reveals that whereas a host country's innovation framework and capability overall do affect the location decision, their ultimate effects are conditional on the combination of project-level investment strategy and type of economy. Our findings have policy implications for FDI policies aiming at enhancing linkages between MNEs and local actors and national science, technology, innovation and educational policies and programmes.

Drivers of R&D greenfield investment projects in the communications, software and IT service industries in developing countries

“…Considering the complexity of globalization and FDI, MNEs may use a distinct, single strategy or a combination of the two strategies in their foreign subsidiaries (Haakonsson and Ujjual, 2015). MNE investment in accordance with exploitation strategies seeks to expand the current knowledge base and leverage already acquired skills and capabilities to utilize technologies (Choquette et al, 2021;Lavie et al, 2010). Hence, exploitation strategies tend to exploit existing competitive advantages (Kang et al 2021;Makino et al, 2002).…”

“…MNEs choose to focus on exploration strategies in developed countries, considering their advanced technological capabilities (Song et al, 2011). In some cases, however, MNEs use exploration strategies with the intent to invest in new, more creative R&D projects in developing countries in order to access specific tacit and locally bound knowledge that is unavailable in their home market (Choquette et al, 2021;Papanastassiou et al, 2020). Exploration strategies may thus generate additional innovation and facilitate the establishment of centres of excellence that become global leaders within the MNE in specific areas (Frost et al, 2002).…”

“…Previous research has argued that new larger R&D investments under exploration strategies tend to be located mainly in developed countries, owing to their higher innovation levels and stronger innovation capabilities (Choquette et al, 2021), whereas developing countries are the stage for exploitation investment in R&D owing to their lower R&D costs and capabilities (Demirbag and Glaister, 2010). However, as argued earlier, market and institutional developments have made developing countries more attractive destinations for R&D investment projects, including as locations for both exploiting and exploring knowledge (Andersson et al, 2016).…”

“…International business research has paid close attention to foreign direct investment (FDI) in research and development (R&D) (Choquette et al, 2021;Dachs and Zahradnik, 2022) and has shown that multinational enterprises (MNEs) play an important role in generating foreign R&D activities in both developing and developed countries. The last decades have seen a shift in the international R&D investment of MNEs from developed economies to emerging and developing ones (UNCTAD, 2005a;von Zedtwitz, 2004).…”

“…Choquette et al, 2021;Frost et al, 2002), little attention has been paid to the interdependence between the host-country context, firms' investment strategies and the size of R&D investment of digital MNEs in developing and developed countries. Accordingly, this paper explores the role of location and investment project characteristics in determining the size of MNEs' greenfield R&D investment in communication, software and IT service industries (used interchangeably with "digital industries" in the rest of the paper) 3 across the globe over the period 2003-2019. The ability of developing countries to attract R&D investment depends, among other things, on the host country's characteristics, such as innovation capabilities (Choquette et al, 2021). The globalization of R&D has led to higher technological intensity in MNEs' products, strengthening their competitive advantage through improved innovation capabilities in international operations (von Zedtwitz and Gassmann, 2002).…”