How Can Countries Benefit from the Presence of Multinational Firms ? Evidence from EU Member Countries and Some Thoughts on South East Europe Bernhard Dachs | AIT Foresight and Policy Development | Research, Technology and Innovation Policy

Foreign-owned firms – heroes or bad guys of the economy?  My presentation will focus on co-operation between foreign-owned firms (FoFs) and universities in South-Eastern Europe (SEE).  The activities of foreign-owned firms are often subject to discussions  For some, attracting FoFs are the key to economic growth, in particular in emerging economies  …while critics of globalization associate FoFs with decreasing social standards, rising environmental pollution and unethical behavior  This presentation focuses on the implications of the presence of foreign- owned firms for science, technology and innovation (STI) policy 2 05/10/2015

Characteristics of foreign-owned firms in an STI perspective  FoFs are often active in R&D intensive sectors  Pharma, computers, information technology, automotive …  Multinational firms often possess valuable knowledge and superior resources (Dunning, 1988, Markusen, 2002)  Exploitation of this knowledge is the very reason why they become multinational  FoFs are embedded in a intra-firm networks (Ghoshal, Bartlett, 1991)  At the same time, FoFs are also members in networks in their host countries 3 05/10/2015

Why FoFs are attractive for SEE countries?  R&D of FoFs can substantially raise aggregate R&D expenditure of countries in a short time  The Austrian experience, but also Ireland, Iceland, …  FoFs are important employers for researchers and university graduates  Embeddedness in a double network makes FoF a channel for international technology transfer  Knowledge and information spillovers from FoFs to domestic organisations  The channels include worker mobility, innovation co-operation, supplier- customer-relationships etc. 4 05/10/2015

Challenges for countries from the presence of FoF  Loss of control over domestic innovative capacity and commercialisation  Less basic, strategic research, less radical innovations, more adaptation  Competition for talent harms university research  Race to the bottom for R&D subsidies and unethical behaviour 5 05/10/2015 Source: UNCTAD, 2005

Empirical evidence of Science-industry relations To what extend do FoFs co-operate with domestic universities? Two conflicting hypotheses:  FoF can rely on superior internal knowledge, so there is no need to co- operate  On the other hand, they have more resources for co-operation than many domestic firms, because they are larger, have more R&D staff...  Data from the Community Innovation Survey 4, a survey on innovative activity in the European Union  Data covers the period

Share of co-operating firms, all partners, /10/2015 Source: CIS4, own calculations

Domestic university co-operation, /10/2015 Source: CIS4, own calculations

Co-operation with universities abroad, /10/2015 Source: CIS4, own calculations

Summary of the empirical results  Co-operation among firms in South-eastern European countries is lower than in many other European countries, in particular in BG and RO  A good argument to promote co-operation  Slovenia performs better than all other countries in the region  Already above EU average in some indicators  Foreign-owned firms are actively seeking co-operation and have a higher willingness to co-operate than domestic firms  Not in domestic science-industry co-operations  but with universities abroad

Why do foreign-owned firms perform so good?  The advantages of foreign-owned firms are not because of their ownership status (alone)  Regression analysis reveals that FoFs are simply better endowed for university/industry co-operation (Dachs and Pyka, 2009)  they are larger, have permanent R&D, a higher capacity to absorb knowledge and operate more often in science-based sectors  moreover, they have more management and financial capabilities and can spread risks over more projects  The differences are mainly caused by small, non-affiliated firms 11 05/10/2015

What could SEE countries do to attract foreign R&D? Various studies on location decisions of FoFs have revealed some principles of ‘good policy’ (OECD, 2005, UNCTAD, 2005)  Stable economic framework vs. special incentives  Studies have shown that stability is more important than special incentives  “Green field” investments in R&D without existing production are very rare  Incentives, however, can be decisive if firms choose between two countries  Equal treatment of foreign-owned and domestic firms  obligatory in EU competition law...  but also justified because research has shown that differences between Fo and domestic firms are due to special endowments and not due to the ownership status 12 05/10/2015

What could SEE countries do to attract foreign R&D?  Policy should promote the innovative capacities of both, foreign-owned and domestic firms  Provide funds to overcome financial, risk and capacity obstacles to innovation  Enable them to become suppliers for foreign-owned firms  Strengthen IPR protection  Improve university research and training  Availability of skilled personnel is a major incentive for FoFs to start R&D in a country  Programmes to promote R&D co-operation in general 13 05/10/2015

Thank you for your attention Bernhard Dachs Research, Technology and Innovation Policy, Department Foresight and Policy Development AIT-Austrian Institute of Technology