The Globalization of Research and Development
Association for the Advancement of Science Colloquium on Science and Technology Policy
Washington, D.C.
April 2000

This article is based on a lecture given by Ms. Carnes in April 2000 at the American Association for the Advancement of Science 25th Annual Colloquium on Science and Technology. It summarizes findings of Globalizing Industrial Research and Development, a report by the Commerce Department’s Office of Technology Policy. The report’s authors are Dr. Donald Dalton and Manuel Serapio.

Globalization of the R&D Enterprise

	“While the United States remains the world’s leader in R&D, many countries now make important contributions to the global pool of science and technology.”

In the years following World War II, the United States dominated science and technology.
In 1950, the United States contributed about 40 percent of world’s gross domestic product (GDP), and carried out about 70 percent of the world’s research and development (R&D). In the past few decades, however, there have been tremendous changes brought about by the steady global spread of the research enterprise. In contrast to its dominant position in the post-war years, in 1997, the United States contributed 27 percent of world GDP, and carried out about 40 percent of the world’s R&D. While the United States remains the world’s leader in R&D, many countries now make important contributions to the global pool of science and technology.

Nations everywhere—including newly industrializing countries—have recognized the linkages between technological innovation, and economic growth and job creation. In pursuit of technology-based growth and development, many of these rapidly industrializing countries are implementing policies designed to acquire technology from the advanced industrial nations. These include demanding transfers of technology in exchange for market access, hosting visiting experts, and establishing laws and guidelines that encourage technology inflows. In addition, many countries are emphasizing the development of indigenous technological capabilities. They are increasing R&D investments, establishing research institutes and key technology programs, forming government-industry partnerships, boosting technical manpower development programs, planning for manufacturing modernization, and building information superhighways. As a result, technological capabilities are increasing around the world.

Globalization of Private R&D Investment

Against the backdrop of a technical enterprise that is increasingly global in nature, private R&D investment is also going global. R&D spending by foreign owned companies in the United States and the spending of U.S. companies abroad both approximately tripled from 1987 to 1997.

	“private R&D investment is also going global.”

Foreign-owned company R&D investment grew from $6.5 billion in 1987 to $19.7 billion, accounting for nearly 15 percent of total company funded R&D in the United States in 1997. In the high-tech sector, R&D investments by foreign companies now account for one out of every four dollars spent on corporate R&D in the United States. At the same time, U.S. company-funded R&D overseas grew from $4.6 billion in 1986 to over $14 billion in 1997.

Along with these investments, the number of foreign company research facilities in the United States also has grown dramatically. In 1992, there were just 250 foreign company research facilities in the United States, many of them newly established. By 1997, the United States was home to 715 foreign company R&D facilities owned by 375 parent companies. U.S. companies’ foreign facilities also increased during this period to 186 foreign facilities, up from 108 in 1994.

Foreign Company R&D Investment in the United States

In terms of spending, four countries dominate foreign private R&D investment in the United States, with Switzerland leading in the value of its investments, followed closely by Germany, Japan, and the United Kingdom. [Figure 1]

Figure 1:

R&D Expenditures and Employment for U.S. Affiliates of Foreign Companies

Country	1993 ($ millions)	1997 ($ millions)	R&D Workers, 1996 (thousands)
All Countries	14,199	19,690	115.7
Switzerland	2,423	3,382	15.4
Germany	2,209	3,282	17.4
Japan	1,801	3,195	16.7
United Kingdom	2,211	3,102	19.6
Source: Bureau of Economic Analysis, Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies a).

Japan’s investments in the United States have grown significantly, increasing from $407 million in 1987 to $3.2 billion in 1997. Reflecting their growing technical capability, Korean companies have increased their R&D investments in the United States substantially, from $55 million in 1993 to $351 million in 1996.

Reflecting Japan’s strong position in leading-edge technology, Japanese companies have the most R&D facilities in the United States, 251 of them. Germany is second with 107, followed by the U.K. with 103, and France with 44. Again, as an indicator of their rapidly growing technological capabilities, the number of U.S. R&D facilities owned by Korean parent companies has more than doubled from about a dozen in 1992 to 32 in 1998.

	“It should come as no surprise that foreign-owned R&D centers are clustered near centers of U.S. research excellence”

It should come as no surprise that foreign-owned R&D centers are clustered near centers of U.S. research excellence, for example in pharmaceuticals, biotechnology, communications technology, and software. California, and especially Silicon Valley, have attracted the most foreign-owned R&D facilities. Foreign drug and chemical companies have located around New Jersey, a center for U.S. drug company research. Foreign R&D centers have come to the Research Triangle in North Carolina, a U.S. center of excellence in biotechnology. Other foreign R&D centers have come to Boston to be near the area’s computer companies and the Massachusetts Institute of Technology. [Figure 2] Major reasons why foreign companies invest in the United States include acquiring U.S. technology, keeping abreast of U.S. technological developments, and assisting parent companies in meeting the needs of American customers.

Figure 2:

Where Does the Investment Go?

State	Number of Facilities
California	188
New Jersey	67
Michigan	41
Ohio	40
North Carolina	34
Massachusetts	34
Source: Compiled by the Office of Business and Industrial Analysis

Investment patterns have varied from country to country. European firms have tended to establish large central laboratories covering many technologies. In contrast, Japanese electronics companies have focused their R&D on a single technology at each site in the United States.

	“foreign pharmaceutical and biotechnology companies represent half of all privately funded R&D in drugs and medicines in the United States.”

Investment patterns and motives for those investments also can vary from industry to industry. For example, foreign pharmaceutical and biotechnology companies represent half of all privately funded R&D in drugs and medicines in the United States. These industries account for the largest number of foreign R&D facilities in the United States (116 facilities), and also have the largest facilities in terms of staff size. These facilities are dominated by German, Swiss and British companies. Foreign investment in U.S. R&D in drugs and biotechnology has been characterized by acquisitions of and mergers with U.S. firms. Foreign company investment strategies in these industries focus on acquiring U.S. technology and on keeping abreast of U.S. basic research in these fields. European biotechnology firms also find a more favorable research environment here, partly because of restrictions on genetic engineering in their home countries.

In another example, Japanese companies dominate foreign automotive R&D facilities in the United States, owning 31 out of 54. Japanese automotive companies conducted little R&D when they first started their operations in the United States. Instead, they focused on meeting U.S. emissions requirements, and on scanning the regulatory environment. They also benchmarked their vehicles against American cars, and monitored U.S. automotive design and styling trends. That is changing. The Japanese automakers have expanded their R&D activities in the United States, as they have expanded their U.S.-based auto production. They focus increasingly on advanced concept design, joint research, and vehicle prototype production. They also are concerned with helping their parent companies meet U.S. customer needs.

The electronics, computer and telecommunications industry is the most diverse in terms of corporate interest and strategies. Foreign companies in this industry with U.S. research facilities range from giant European telecommunications equipment makers to small, single technology labs operated by Japanese companies. Japanese R&D facilities far outnumber those of other countries in computers, semiconductors, and software. More than a quarter of private spending on R&D in communications equipment, audio, and video in the United States comes from foreign companies. Most of the foreign-owned R&D electronics facilities based in the United States conduct applied research, develop new applications for existing technologies, or work to tailor products to U.S. customer needs.

	“more than half of U.S. company R&D investments abroad are made in five countries”

U.S. Company R&D Investment Overseas

Turning to U.S. companies, more than half of U.S. company R&D investments abroad are made in five countries: Germany, the U.K., Canada, France, and Japan. In addition, in recent years, U.S. companies have increased their R&D spending in newly industrialized countries such as Singapore, Brazil, China, and Mexico. [Figure 3] Most U.S. research centers based abroad are in Europe, 88 of them. Japan is home to 45 U.S. research facilities, and 26 are located in Canada.

Figure 3:

U.S. R&D Expenditures in Emerging Markets By Majority Owned Foreign Affiliates

Country	1992 ($ millions)	1997 ($ millions)
Israel	24	209
Mexico	76	132
Taiwan	54	87
Hong Kong	13	84
Singapore	112	73
Source: Bureau of Economic Analysis

U.S. R&D overseas is concentrated in drugs (one-third of overseas investment), automotive (about one quarter), computers, and electronic components. Nevertheless, while the amount of U.S. private R&D abroad has increased, most leading-edge R&D on a company’s core technology is still performed at home. Nearly 90 percent of R&D expenditures by U.S. companies still are spent at their facilities in the United States.

U.S. company motives for investing overseas include: developing new or customizing existing products for the local market; supporting their local manufacturing, sales, and service facilities in the host country; tapping the skills of foreign R&D personnel and the work at foreign centers of R&D excellence; monitoring technological developments abroad; developing new science and technology; and participating in joint ventures and cooperative research projects.

	“Just as their foreign counterparts do, U.S. companies locate facilities near foreign centers of research and technology excellence.”

Just as their foreign counterparts do, U.S. companies locate facilities near foreign centers of research and technology excellence. U.S. automotive companies have substantial R&D investments in Germany, a leader in automotive technology. U.S. drug industry investments are concentrated in France and the U.K. Japan is home to the largest concentration of U.S. R&D centers abroad, for example, with U.S. facilities located in Tsukuba (Science City), a center for electronics and pharmaceutical R&D. U.S. companies have established R&D centers in Singapore for electronics; Korea for semiconductors and electronics; in Zurich, Switzerland for optoelectronics; and in Cambridge, England, and Bangalore and Hyderbad, India for computer software.

The United States in a Global R&D Enterprise

Overall, the globalization of industrial R&D has had a positive effect on U.S. competitiveness and economic growth. The United States is a highly desirable location for R&D investment which brings benefits at the regional level in terms of employment and learning opportunities. For example, foreign-owned companies employ more than 115,700 R&D workers in the United States. Also, new products and processes from foreign investments spill over to U.S. companies and stimulate the formation of new, spin-off companies. These foreign facilities have also increased U.S. access to foreign innovation.

Nevertheless, these global R&D patterns pose challenges to U.S. producers. There are a growing number of strong regional contenders, and highly effective niche competitors. Clearly, more countries are developing the capacity for world class research, and even competitors from smaller countries are developing high impact patents, and commercializing products based on them. Future competitive challenges may come not from low-cost producers, but from low-cost innovators.

	“To ensure that the United States maintains its technological preeminence, we must make a sustained commitment to science and technology, and related infrastructure investment.”

To ensure that the United States maintains its technological preeminence, we must make a sustained commitment to science and technology, and related infrastructure investment. This includes developing the advanced science and technology infrastructure that attracts global technology leaders to our shores and promotes the establishment, growth, and competitiveness of local firms.

We must continue to invest in R&D, and rapidly integrate new knowledge and technology from all sources into our firms, and into products, processes, and services We must increase our access to the growing global sources of innovation, and protect our intellectual property
worldwide. Perhaps most important, we need to maintain our world class capabilities for educating American scientists and engineers, and attract the world’s best scientists and engineers to the United States.

The globalization of industrial R&D shows no signs of abating. Our challenge is finding ways to tap the incredible dynamism of the global R&D enterprise, retaining U.S. company leadership in building new industries, and stimulating growth and high-wage job creation in the United States.