Innovation in tow: R&D FDI and investment incentives

Abstract

Multinational corporations (MNCs) increasingly internationalize research and development (R & D), but the distribution of foreign direct investment (FDI) in R & D differs from that of general FDI. I use data on US MNC affiliates' investments abroad (2001-2008) to demonstrate that increasing value added predicts more future R & D FDI, as R & D FDI is an upgrade decision. I then use data on R & D investment incentives to show that, while governments spend resources on R & D incentives, these can be negative predictors of R & D FDI. The findings imply that government efforts are best directed at incremental encouragement of value-added activities, as efforts to jump to R & D FDI are misguided.