Foreign Participation in U.S. Research and Development Asset or Liability? (1996) / Chapter Skim
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Foreign Participation in Privately Funded U.S. R&D
Foreign Participation in Privately Funded U.S. R&D
Pages 39-89
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The rapid growth of foreign participation in privately funded U.S. R&D has generated four major concerns related to the economic welfare and military security of U.S.
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consumers and compromise U.S.-based companies' access to key components and subsystems they require to make their products competitive with those produced abroad. In an effort to assess the validity and significance of these and related issues, the following discussion explores the causes, scope, and nature of growing foreign participation in privately funded U.S.
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Many analysts believe that existing or threatened nontariff barriers to trade, such as voluntary export restraints, buy-American procurement laws, and domestic-content requirements, have fostered the growth of foreign direct investment in production facilities and subsequently in R&D in some U.S. industries, including steel, automobiles, electronics, and telecommunications equipment.
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manufacturing industries, which account for nearly 90 percent of total U.S. industrial R&D expenditures, the growing importance of foreign direct investment has been even more pronounced.
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affiliates of foreign-owned firms as a percentage of all privately funded U.S.
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. Audio, video, and communications 8.4 Electronic components 2.0 Instruments and related products 4.4 Wholesale and retail trade 6.7 Services ~ 4.6 / Petroleum 4 ~ Primary and fabricated metals Computer and 2 5 office equipment , I 5.5 k~.~...~..~-~.-.~ -- ~-~ ~~..~ If.-..
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For the most part, data on foreign direct investment and on R&D spending by U.S. affiliates indicate that foreign parent companies have invested in areas in which they have a demonstrated competitive advantage (U.S.
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. In the automotive industry, affiliates accounted for less than 4 percent of total privately funded U.S.
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Japanese firms owned 50 percent or more of all freestanding R&D facilities in 6 of the 13 major industrial groupings defined by Dalton and Serapio. European firms owned the vast majority of facilities in six industry areas (Table 3.4~.
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affiliates of foreign firms in different industries. A1though there are important differences among industrial sectors, most affiliate R&D activity in the United States appears to have two major objectives: to help the local manufacturing affiliate and the parent company meet the demands of
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Rhone-Poulenc (FR) Research Triangle Park, NC 350 21.
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found that the most prevalent type of R&D activity among U.S. affiliates of foreign firms was applied research to derive new manufacturing technologies in the industry of the parent company.~7 Less prevalent (in descending order of importance)
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Only the biotechnology industry attached significance to the opportunities to take advantage of a favorable research environment and engage in basic TABLE 3.6 Reasons Cited by Technical Executives of Japanese-Owned Firms for R&D Investments in the United States (l=extremely important, 2=important, 3=neutral, 4=unimportant) Automotive Electronics Biotechnology Acquire technology Keep abreast of technological developments Assist parent company in 2 2 meeting U.S.
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research and technical talent to support the technology strategies of their parent companies (Dalton and Serapio, 1995; Kummerle, 1993a,b; Peters, 1991; Pisano et al., 1988; Westney, 1993~.23 These observations are consistent with the reliance of Japanese-owned firms in most industries on licensing technology developed overseas.24 Finally, although a lack of data makes it difficult to draw comparisons between European and Japanese affiliates in this regard, several of the newly established Japanese electronics R&D facilities in the United States appear to be focused on technology or research that is deemed critical to the long-term technology strategy of the parent company but is in an area in which the parent company does not yet possess significant capabilities (Kummerle, 1993a,b; Voisey, 1992~.25 INTERNATIONAL CORPORATE ALLIANCES A second major vehicle for foreign participation in U.S. industrial R&D has been corporate technical alliances.
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of U.S.-Japanese corporate linkages in six industrial sectors30 found that most of the alliances were concerned with the production or development of new products rather than with research. As the preceding discussion indicates, corporate technical alliances (whether national or international in scope)
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However, the history of cartelization in many industries during the first half of the twentieth century illustrates the potential costs to society of domestic or international alliances that result in monopoly abuse (Hexner, 1945; Stocking and Watkins, 19461. OPPORTUNITIES AND RISKS The committee finds little value in debating whether foreign participation in U.S.-based privately funded R&D, either through foreign direct investment or corporate alliances, is generally good or bad for U.S.
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research strength that are relatively new to the Japanese parent company yet are viewed as critical to the parent's long-term technology strategy (Kummerle, 1993a,b; Voisey, 1992; Westney, 19931. For the most part, however, data on foreign direct investment suggest that foreign parent companies have invested in U.S.-based high-technology assets in
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To a large extent, these differences reflect international variations in the composition of foreign direct investment and affiliate sales in the United States. For example, Swiss and German
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affiliates of foreign firms, by industry, 1992. SOURCE: National Science Foundation ( 1 9961; U
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The fact that the average R&D intensity of affiliates is currently lower than that of all U.S.-based companies and that international variations exist in affiliate R&D intensities does not, in the committee's view, shed much light on either the motives of foreign companies, "equity" issues in general, or, most important, the economic consequences of foreign direct investment (including investments in R&D)
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Affiliates of European-owned firms account for a significantly larger share of their parent companies' patenting activity than do affiliates of Japanese companies (Patel, 1995; Patel and Pavitt, 1991~.34 This is consistent with the findings of Roberts (1995a) , which show that major Japanese companies spend less than
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There is little reason to believe that the privately funded R&D conducted by U.S. affiliates of foreign-owned firms differs significantly from that of U.S.owned affiliates abroad.
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General Accounting Office study (199Ob) concluded that foreign direct investment in the U.S.
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Most technology transfer within international corporate alliances in the aircraft and biotechnology industries, for example, has consisted of exports of U.S. technology to other countries (Mowery, 1988b; National Research Council,
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Switzerland Japan United Kingdom 1 980 1 985 1 991 Receipts (Technology oudiows) FIGURE 3.1D AeI1~[e myth Ed bcensing Sac payments Ed mceipl~ by county of Ukim~e BeneOci~ Owner 1980, 1983, Ed 1991.
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Analysts generally agree that foreign direct investment in and technical alliances with foreign firms have resulted in a net export of technology by U.S. companies.
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This opinion is based on the high degree of risk and uncertainty associated with the development and commercialization of any new technology, and on the highly complex process firms undertake when deciding to invest in a particular technology or set of R&D assets. Asymmetries of Access The debate over the costs and benefits of foreign participation in privately funded U.S.
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.38 Despite these trends, however, significant impediments to foreign direct investment remain in a number of major economies. For example, in Germany and Japan, complex cross-shareholding and bank-holding arrangements continue to impede foreign acquisitions of indigenous companies (Organization for Economic Cooperation and Development, 1992a; U.S.
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. Japan, in contrast, invests more than 20 times as much in other countries as it permits in foreign direct investment within its own borders.
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73 joint ventures and alliances have been self-imRegardless of its origins, for many Americans Japan's impenetrability to foreign direct investment raises serious questions about the merits of continuing to provide foreign investors free entry into the United States. Moreover, in some quarters, the access problem contributes to growing skepticism regarding the effectiveness of international economic negotiations in this area.
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Given the global leadership position occupied by many foreign-owned firms in many areas of dual-use technology, foreign direct investment and international corporate alliances can improve DOD access to innovative technological capabilities important to national defense. For example, Sony Corporation's 1989 acquisition of the U.S.
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dual-use technology base. First, when foreign firms acquire or establish U.S.-based companies in high-technology industries that serve both civilian and military markets or enter into technical alliances with U.S.-owned companies in these sectors, militarily sensitive technology may be more easily transferred (intentionally or not)
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Exon-Florio does not require foreign investors to notify CFIUS of proposed investments, although fear of forced divestiture at a later date may motivate foreign investors to notify CFIUS in advance of any transaction. The ExonFlorio amendment has also been criticized because it does not require foreign investments in nonpublicly traded companies to undergo CFIUS review (Graham and Krugman, 1995; U.S.
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Because of the limited data available, it is difficult to draw general conclusions about the risks to national security posed by denied, delayed, or monopolypriced access to private technological capabilities, all of which can result from foreign direct investment or mergers and acquisitions. Several observers believe that in the niche defense markets, current monitoring efforts and enforcement of U.S.
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Economic Security Closely related to the above concerns is the broader question of whether foreign direct investment may help foreign-owned firms acquire monopoly control of established and emerging commercial technological capabilities critical to U.S. long-term economic growth and development.
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Still, inventories of foreign acquisitions of U.S. high-technology firms offer little if any insight into the relative importance of the technological capabilities acquired, let alone the cumulative effect of these purchases on the nation's capabilities in a given area of technology.
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The evidence suggests that in general, the technological contributions of foreign-owned firms through affiliates or technical alliances vary from industry to industry. Thus, in some industries, foreign firms are net exporters of technology; in others, they are net importers.
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During the past decade, America's trading partners have liberalized their policies on foreign direct investment- the most important avenue of access to privately funded R&D activities abroad—making them more similar to those of the United States. Nevertheless, significant impediments to open access the product of structural barriers, public policies, or collusive or discriminatory corporate practices remain in some major economies.
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affiliates of foreign-owned firms come from the Annual Survey of Foreign Direct Investment in the United States, conducted by the Department of Commerce's Bureau of Economic Analysis. The Survey of Industrial Research and Development, conducted by the Bureau of the Census for the National Science Foundation, provides data on the total amount of privately funded U.S.
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6. For documentation of the growing interest and involvement of U.S.-owned multinational companies in the advanced technological capabilities of foreign firms and foreign countries see, for example, Dalton and Serapio (1995)
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See U.S. Department of Commerce, Survey of Current Business, May issue, various years, for data regarding the share of foreign direct investment accounted for by foreign acquisitions of existing U.S.-based firms and that accounted for by the establishment of new U.S.-based companies by foreigners.
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Florida and Kenney also note that these laboratories "are designed to generate and harness new sources of knowledge, which leverages existing corporate technological capabilities and enhances long-range corporate development efforts." 19. Dibner et al.
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If any of the firms involved in a joint venture are foreign-owned, the home country of that firm must accord national treatment to U.S. firms with respect to antitrust treatment of similar joint ventures in the country.
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Differences in the industrial composition of European and Japanese foreign direct investment may be one determining factor. The fact that direct investment by the Japanese is more recent in most U.S.
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foreign direct investment in Japan compared to Japanese foreign direct investment in the United States, Japanese multinationals accounted for 92 percent of total U.S.-Japan lE-l (U.S. Congress, Office of Technology Assessment, 1994)
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