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The Globalization of R&D by US Multinationals: What Are the Effects at Home?

by and Lindsay Oldenski | February 18th, 2014 | 11:42 am
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The National Science Board’s Science and Engineering Indicators 2014 report confirms once again that the globalization of research and development (R&D) by US multinational corporations (MNCs) is expanding.1 The report finds that most R&D by US MNCs is still performed in the United States, but affiliates of US MNCs in other regions, especially in Asia, are increasing their share of the total. As in previous years, this phenomenon is likely to promote apprehension in Washington that expansion of R&D abroad is shrinking the US lead in science and technology. But these fears are misplaced and based on fallacious assumptions.

To be sure, there are many reasons for the United States to want R&D expenditures of all corporations (not just US corporations) to take place in the United States. Direct benefits include breakthrough innovations, production process improvements, and advances in the quality of goods and services in the United States, accompanied by economies of scope and scale (clustering effects). The effects of high-paying jobs benefit firms, workers, and communities across America.

Two assumptions help to explain US apprehensions—that overseas R&D expenditures substitute for domestic R&D expenditures and that R&D activity abroad confers little benefit in the United States and might actually undermine US prosperity. In fact, external R&D expenditures may complement and support domestic R&D and production activity, and new laboratories, R&D campuses, and engineering graduates abroad (even in India and China) can help to raise living standards in the United States.

Firm-level data collected by the US Bureau of Economic Analysis (BEA) on what happens when an individual firm expands its R&D activities abroad illustrates why these assumptions are wrong. Our research has employed panel regression methods with data on all US MNCs over a 20-year time period. We have included firm fixed effects that hold constant everything that is unique about a given firm, isolating how its employment in the United States and the other variables change when it increases its outward foreign direct investment (FDI). Thus all the characteristics that define a given firm—such as the industry it operates in, its size, its relative market power, etc.—are controlled for and do not confound the results. We also include year fixed effects, which hold constant everything external to the firm in a given year, thus removing any potential impact of recessions and booms. This approach controls for everything unique about a firm and looks at changes within each firm over time, rather than drawing conclusions based on observed behaviors across very different firms.

Figure 1 summarizes the relationship between US MNC R&D activities at home and abroad. These results draw on firm-level data from 1990 through 2009, covering over 1,500 US MNCs and their more than 10,000 affiliates.

figure1-moran20140218

Our results show that foreign expansion of R&D is positively and significantly associated with the expansion of R&D, capital expenditures, exports, sales, and employment in the United States. Outward expansion of R&D by US MNCs is a complement to, not a substitute for, domestic activities.2

To illustrate various ways in which R&D overseas helps to raise US living standards and benefit the United States economically in other ways, we have investigated some case studies. GE Healthcare’s Magnetic Resonance Imaging Laboratory team operating between the Niskayuna, New York campus and the Munich, Germany campus is one example. The team jointly operates four whole-body scanners that have created innovations in magnetic resonance imaging (MRI), allowing exceptional anatomic investigation involving the brain, spine, and musculoskeletal system. The synergy between the two research centers has generated benefits that flow back to the United States. GE’s Munich labs provided the initial insights that led to 32-channel, then 64-channel, then 128-channel imaging. This research is now incorporated into the high end premium MRI equipment that is designed and built in the United States

Another example can be found in the R&D operations of Caterpillar, the world’s largest builder of construction equipment, which demonstrates how North-South complementarity takes place. Caterpillar’s principal R&D Proving Grounds are in Peoria, Illinois. In recent years Caterpillar has constructed several R&D centers outside the United States, including a research campus in Chennai, India. The Caterpillar engine lab in Peoria operates two shifts with hundreds of channels of temperature, pressure, and emissions data to map diesel performance and emissions. These streams are sent overnight to Chennai, where the data are analyzed and returned to Illinois ready for the US engineers when they come to work the next morning. The cost for the engine tests would be much greater if Caterpillar instead had a third shift working in the United States, making the company’s overall R&D process less efficient and leaving less room for US engineers to exercise their comparative advantage. Use of the growing Indian talent pool lowers the cost of the integrated test operations.

The division of labor across countries used by Caterpillar is consistent with other evidence within multinational firms. Oldenski (2012)3 has shown the US MNCs offshore their relatively more routine tasks but keep the most complex and nonroutine tasks in the United States, creating more highly skilled, high-wage jobs in the United States, not less (Oldenski 2014).4

A different case study, also involving GE Healthcare, demonstrates the way that R&D facilities outside the United States may stimulate the development of goods and services for markets that do not have the same characteristics as the US market, enabling US MNCs to expand market share overseas. Within the GE Healthcare global R&D network, GE engineers working on high-end electrocardiogram (ECG or EKG) systems in India were eager to create a product designed and made affordable for India’s largely rural and poor population. The resulting ECG machine is highly portable, can be easily carried by jeep to a patient’s home, has a two-button operation that makes training faster, and can operate on battery in villages where electricity is not dependable. This portable ECG machine costs a fraction of the high-end ECG with very little reduction in capability for most uses. GE headquarters now markets this simplified ECG machine around the world.

In addition, Caterpillar engineers in Chennai carried out the design work for a more affordable side-shift loader that Caterpillar now sells around the world, more in developing countries and in the European Union than in the United States (where this design is seldom used).

In conclusion, US policymakers should recognize that measures to hinder or slow the globalization of R&D by US MNCs will stifle R&D by those multinationals in the United States. Such measures would also lower investment, job creation, and exports at home, while leaving the US companies less competitive in global markets.

Notes

1. National Science Board. 2014. Science and Engineering Indicators 2014. Washington.

2. Gary C. Hufbauer, Theodore H. Moran, and Lindsay Oldenski. 2013. Outward Foreign Direct Investment and US Exports, Jobs, and R&D: Implications for US Policy. Policy Analysis in International Economics 101 (August). Washington: Peterson Institute for International Economics.

3. Lindsay Oldenski. 2012. The Task Composition of Offshoring by US Multinationals. International Economics, no. 131 (December).

4. Lindsay Oldenski. 2014. Offshoring and the Polarization of the US Labor Market. Industrial and Labor Relations Review (forthcoming).