Rethinking FDI Promotion:New EU Member States on a bumpy road to Lisbon

PhD Project by

Sergey FilippovUNU-MERIT (Maastricht, NL)

GLOBELICS Academy, Lisbon

Outline of the Presentation

•Background•Conceptual idea•The new EU member states•Methodology•Conclusions

•Research in Progress

MNCs are the major players in innovation processRank Company Sector R&D (€ m),

2005

1 Ford Motor, USA Automobiles & parts 6 781.92

2 Pfizer, USA Pharmaceuticals 6 308.88

3 General Motors, USA Automobiles & parts 5 679.86

4 DaimlerChrysler, Germany Automobiles & parts 5 649.00

5 Microsoft, USA Software 5 581.52

6 Toyota Motor, Japan Automobiles & parts 5 423.93

7 Johnson & Johnson, USA Pharmaceuticals 5 350.94

8 Siemens, Germany Electrical comp. & equipment 5 155.00

9 Samsung Electronics, South Korea Electronic equipment 4 612.61

10 GlaxoSmithKline, UK Pharmaceuticals 4 564.13

Source: European Commission. 2007. Monitoring Industrial Research: The 2006 EU Industrial R&D Investment Scoreboard

MNC context

•MNCs are evolving from hierarchical structures towards network-based systems, where subsidiaries have distinct strategic roles and scope.

•“Devolution of power” facilitates knowledge and technology spillovers.

•R&D internationalisation. Manufacturing units gain R&D function. Establishment of stand-alone R&D labs.

Host Country Policy Context

•FDI promotion tends to neglect foreign affiliates already established in a host economy

•Importance of innovation policy is generally acknowledged, but it is still in infancy and, moreover, foreign affiliates are not explicitly targeted.

Multi-Level Policy & MNCs

National Regional (EU)

World

FDI Policy Investment incentives

State Aid rules

WTO

Innovation Policy

IPMs Lisbon Agenda

Corporate Strategies

Affiliates HQ level

Research Question

•How foreign affiliates become innovative? What are the determinants of the innovation dynamics in foreign affiliates?

•How can host country policy stimulate innovation in affiliates (in general and in new EU member states in particular)?

Objective

•In order to enhance innovation process in the host economy it is crucial to understand characteristics and determinants of innovation dynamics of foreign MNC affiliates

• Innovativeness of foreign affiliates depends on:▫position in MNC network▫characteristics of host country innovation

system▫host country public policy

Focus of research

Affiliates of Multinational Companies

Source: UNCTAD 2005

New Member States of the European Union

New EU member states• Strong presence of MNCs (=FDI stock), especially in

medium high tech.Characteristics of host country innovation system:

• Legacy of socialist S&THost country public policy:

• Impact of accession to the EU, two levels of policy-making

• Birth of national innovation policy (+ Lisbon Agenda)• National investment promotion agencies (CzechInvest,

PAIZ, ITDH) target higher value added FDI • R&D-related FDI is a means to achieve Barcelona

Target.

Share of foreign affiliates in BERD

3.43.4

14.1

19.019.122.1

23.724.7

4545.346.6

72.1

62.5

0

10

20

30

40

50

60

70

80

IE HU CZ SE UK NL CN DE PL SK US IN JP

Sources: UNCTAD 2005

•Western Europe 51 %•USA / Canada 22 %•Central & Eastern Europe 6 %•India 4 %•China 2 %•Other Asian countries 3 %

Foreign Investors’ Preferred Areas for R&D Activities

(Ernst & Young’s European Attractiveness Survey 2005)

Methodology•Qualitative analysis•Literature review + Conceptual part•Desk study: policy documents, searching

explicit links between FDI and Innovation (positive approach)

•Survey: a sample of foreign affiliates in several sectors: life sciences, automotive, electronics

•Case studies of selected companies•Designing a policy framework (normative

approach)

Expected Results

•Academic contribution▫Foreign affiliates in NIS▫Transition economies on the way to

knowledge-based economy

•Policy side▫A policy framework on coherency between

Innovation policy and FDI promotion

Research in Progress

•Life Sciences in the Czech Republic▫Pharmaceutical▫Biotechnology

R&D intensityR&D as % sales

Capex as % sales

Dividends as % sales

Operating profit as % sales

Pharmaceuticals and Biotechnology

14.9 4.9 6.4 20.2

Software and Computer Services 10.4 3.9 2.3 19.6

Technology Hardware 8.2 5.6 1.2 8.4

Source: UK’s 2006 DTI R&D Scoreboard Volume 1

Importance of R&D link to

Pharmaceuticals Semiconductor technology

Telecommunications technology

Pre-clinical

Clinical research

Process techno-logy

Product develop-ment

Hardware Software

Lead market Low Very high Low Very high Low Very high

Science / research system

Very high High High Low High Low

Production Low Low High Low High Low

Source: Reger et al. (1999),

Mode of entry / Functions /Policies

Acquisition Greenfield

Manufacturing

A B

Manufacturing + R&D

C D

R&D E F

Obrigado !