Multinational enterprises, MNEs, have a prominent role with regard to the R&D that is conducted in the Swedish business sector. Has an increased internationalisation of R&D entailed a shift of R&D activities within Swedish MNEs from parent companies in Sweden to their affiliates abroad? What are the factors influencing the location of R&D in various countries within MNEs?
The R&D carried out in the Swedish business sector is heavily concentrated to a few firms, mostly multinational firms, Swedish multinationals (MNE) or foreign-owned firms. Among Swedish MNE still more than half of the R&D activities take place in Sweden. Unlike the employment within Swedish MNE, there has been no shift in R&D expenditures from the Swedish parents to the affiliates abroad. Instead the activities have increased in the same proportion in Sweden and abroad.
The R&D in Swedish MNE that take place abroad is carried out by a few enterprises in a small number of countries, mainly high-income countries. Recently, however, we have observed a substantial growth of R&D expenditure in low-income countries, such as China and India. Compared to employment R&D is much more concentrated to a few countries. Lately yet, both R&D and employment have been more widely spread among countries.
Primarily two reasons have been put forward as explanations to why Swedish multinationals locate some parts of their R&D abroad. The first is to adjust their products and processes to specific preferences and needs on the market in another country (home-base exploiting strategy). The second is to benefit from knowledge and technologies developed in another country by placing some of its own R&D there (home-base augmenting strategy). We find empirical support for both reasons in our econometric analysis of the localisation pattern of R&D within Swedish MNE.
Other factors that appear to influence where Swedish MNE decide to place their R&D are how strong the protection of intellectual property rights is in a country, the country’s relative endowment of skilled labor, and how far from Sweden the country is located. The negative impact of distance might be interpreted as: the further a country is from the headquarter; the harder it is to direct and coordinate affiliate activities there. The results from our econometric analysis correspond fairly well with what is found in surveys where multinationals are asked about the factors affecting the location of their R&D.
Historically, multinationals have had a tendency to locate its entire R&D in close connection to the headquarter. In recent year the R&D in multinationals have been more internationalized. This has led to that R&D to a larger extent has been carried out in affiliates abroad. In Swedish MNE this process does not seem to have gone so far that the R&D done in Sweden can be explained completely by our econometric model. Still, the share of R&D in Swedish MNE carried out in Sweden, everything else equal, is clearly higher than abroad. Moreover, the share of the R&D expenditure in the parents in Sweden has not fallen in the 2000s. This indicates that the conditions to do R&D in Sweden seem to be relatively advantageous; the supply of qualified and well-educated labor is good and the institutional framework is favourable. However, this is not a situation that can be taken for granted in the future, which means that there is room for policy to keep it.
Serial number: PM 2014:15
Reference number: 2012/007