Foreign and Domestic R&D Investment

René Belderbos, Department of Applied Economics, Katholieke Universiteit Leuven

A considerable share of R&D investment is due to multinational firms that simultaneously
operate R&D bases at home and abroad. The existing empirical literature on R&D investment
has however ignored the possibility that domestic and foreign R&D investments are
simultaneously decided. In this paper, we draw on the technological opportunity,
appropriability, and demand framework suggested by Cohen and Klepper (1996) to develop a
simple model of foreign and domestic R&D investment. We test the model’s predictions
concerning the ratio of foreign to domestic R&D investment on a sample of 146 Japanese
multinational firms’ R&D investments in Japan and the United States in 1996. The empirical
results confirm that the foreign R&D ratio depends on relative technological opportunities,
relative demand conditions, and a proxy for firm-level R&D productivity. When
differentiating between research and development activities, foreign research is driven by
technological opportunity and foreign development by the demand factor, as expected.

Date: 17 May-00 0000