Attracting and embedding R&D by multinational firms: policy recommendations for EU new member states

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