Attracting and embedding R&D by multinational firms: policy recommendations for EU new member states
Rajneesh Narula
#2009-033
This paper asks: what can governments of new member states do to
encourage MNEs to invest in R&D? There are two types of MNE R&D.
Innovation can be undertaken in order to adapt its existing products and
services to local stimuli. This is ‘demand-driven R&D’. Innovation can
also be in stand-alone R&D facilities which are considerably more
knowledgeintensive, and imply a considerably greater dependence on
domestic knowledge sources and infrastructure. This is ‘supply-side
R&D’. These two types of R&D require somewhat different approaches, and
necessarily imply different policy options. In this paper, furthermore,
we focus on the MNE and the potential for linkages, and do not limit
ourselves to FDI and spillovers. MNEs engage in a variety of other
informal and non-equity agreements to engage in knowledge exchange. We
also deliberately consider the scope and competence at the MNE
subsidiary level. These two novelties are useful in helping highlight
the point that the tendency to focus on FDI flows is flawed, since
knowledge exchanges and innovation are establishment level phenomena. An
MNE policy is required which must link FDI policy and industrial policy
in tandem. This paper argues that it is most practical to recommend that
new member states focus on attracting and fostering demand-driven R&D
activities by MNEs. Furthermore, we recommend that governments reduce
the emphasis on costs while increasing the emphasis on specialised
locationbound knowledge assets, and setting up programmes that foster
demand-oriented upgrading of public R&D and human capital.
keywords: R&D, MNEs, EU expansion, human capital, new member states,
innovation policies
JEL codes: O3, F2, P3
UNU-MERIT Working Papers
ISSN 1871-9872