WherebusinesscomestolifeWherebusinesscomestolife

DavideCastellanid.castellani@henley.ac.uk

INNOVAMEASUREIVonlineFinalWorkshopTheimpactofinnovationonfirmsandregions

ForeignDirectInvestments,innovationandconnectivity

WherebusinesscomestolifeWherebusinesscomestolife2

FDIandlocalinnovation

Greenfield Brownfield

Direct

Indirect

Inward

Outward

Mode

Direction

Typeofeffects

WherebusinesscomestolifeWherebusinesscomestolife3

FDIandlocalinnovation

GF

Direct

Inward

• ForeignMNEsaregenerallymoreinnovativethanlocalfirms,hencewhentheyentertheyincreaseinnovation

• Buttheyneedtobuildcapacity,andthismay:

✓ requirehiringlocalinventors

✓ theseinventorsmayeventuallyhavemoreresourcestodoresearchandamoreconduciveenvironment,butitmaytaketimetoadjust

WherebusinesscomestolifeWherebusinesscomestolife4

FDIandlocalinnovation

GF

Direct

Indirect

Inward

• ForeignMNEscanaffectinnovationinlocalfirms

+ knowledgespillovers

+ backward/forwardlinkages

+ labourmobility

- marketstealing

- poachinginventors(warfortalent)

- disruptinnovationnetworks

➡ Intheshortrun,negativeeffectmayprevails

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FDIandlocalinnovation

GF BF

Direct

Indirect

Inward

Outward

• WhenenteringviaM&As,MNEsdonotneedtobuildcapacityandpoachinventors

• Theyjustneedtointroducebetterincentivesandmanagerialpractices

• Maybetheywilldismissthelessproductiveinventors/workers

➡M&Asmayleadtofastermanifestationofpositivedirecteffects

WherebusinesscomestolifeWherebusinesscomestolife6

FDIandlocalinnovation

GF BF

Direct

Indirect

Inward

• WhenenteringviaM&A,MNEsdonotneedtopoachinventorsanddisruptexistingteamsofinventors

• Marketstealingeffectsarelimited

➡Negativeindirecteffectsoninnovationmaybemorelimited

WherebusinesscomestolifeWherebusinesscomestolife7

FDIandlocalinnovation

“Itmaybeusefultodrawananalogybetweenlearningaboutforeigntechnologyandlearningaforeignlanguage.Imightlearnaforeignlanguagefromforeignerslivinginmycountry(“inwardFDI”),orImightlearnitbylivinginaforeigncountry(“outwardFDI”).Botharepotentiallyusefulandimportantmethodsofforeignlanguage(knowledge)acquisition,althoughthelatterperhapstendstobemoreeffective(itismorelikelytoinvolve“totalimmersion”).”Potterie,B.V.P.D.L.,&Lichtenberg,F.(2001).Doesforeigndirectinvestmenttransfertechnologyacrossborders?.ReviewofEconomicsandstatistics,83(3),490-497.

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FDIandlocalinnovation

GF BF

Direct

Inward

GF BF

Inward

Outward

Direct

Indirect

• Offshoringofinnovationisoftenseenasleadingto‘hollowingout’

• Instead,thereisampleevidencethatitcouldleadto‘reverseknowledgetransfers’

• ThesearethedirecteffectsofoutwardFDIonlocalinnovation

WherebusinesscomestolifeWherebusinesscomestolife9

FDIandlocalinnovation

GF BF

Direct

Indirect

Inward

GF BF

Inward

Outward

Direct

Indirect

• Eventually,these‘reverseknowledgetransfers’canspilloverontolocalfirms,thusleadingtoindirecteffectonlocalinnovation

DamioliandMarinarenotabletodistinguishbetweendirectandindirecteffectsspecifically,buttheirresultareconsistentwith:- greenfieldinwardFDIleadtoareductioninlocalinnovation,asleadinginventorsarepoachedtoworkinnewlycreatedMNEsubsidiaries

‣ thismaydisruptinnovationnetworksandnegativelyaffectinnovationinlocalfirms

‣ intheshort-run,poachedinventorsarelessproductiveinnewfirms(MNEsubsidiaries)

‣ inthemedium-run,positiveexternalities(includingknowledgespilloversandmobilityfromMNEstolocalfirms)mayoccur

- M&Amayhavesomepositiveeffectintheshort-run,sincetheydonotdisruptlocalinnovationnetworksanddonotinduceawarfortalent

- InnovativeoutwardFDImaybemoreeffectiveinproducingpositiveeffectsforlocalinnovation

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FDIandlocalinnovation

Theseresults• strikeamorenegativetonethanotherstudiesonFDIandlocalinnovation(e.g.Crescenzi,DyèvreandNeffke,2020;Crescenzi,GagliardiandIammarino,2015),butDamioliandMarin’sanalysis:- spansamuchshortertimethanCrescenzi,DyèvreandNeffke,(2020)

- isnotlimitedtoonecountryasinCrescenzi,GagliardiandIammarino(2015)

• alignwithevidenceonreversetechnologytransfer(Criscuolo,2009;Hsu,LienandChen,2015)andontheeffectofR&DoffshoringonproductivitygrowthofEUregions(CastellaniandPieri,2013)

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FDIandlocalinnovation

Policytakeaways- whenitcomestocontributiontolocalinnovation,M&AmaynotbeacurseandGFmaynotbeaboon

- negativeshort-runeffectsmaybecompensatedbymedium-run

- hollowingoutisnotthemorelikelyoutcomeofoffshoringofinnovation‣ ‘reverseknowledgetransfer’ishighlylikely

➡short-termismandpopulismdonotchimewellwithgoodinnovationpolicy

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FDIandlocalinnovation

• ThepotentialimportanceofbothinwardandoutwardFDIforlocalinnovationhighlighttheirroleasconnectorsofplacesacrossspace

• Innovationevolvesinverypathdependentandlocalisedpatterns,thanksthroughdenseaweboflocalinteractions(“localbuzz”)

• Thiscreateahighlypolarisedgeographyofinnovation,withonlyafewinnovationhotspots/clusters.

• Tobreakthispolarisation,places/clustersneedtobuild‘globalpipelines’thathelpthemtapintoknowledgebasesoutsidetheregionandmitigateagainstbothcognitivegapsandlock-ins.

• Placeswhichareleftoutcantryandconnecttothesehotspots

• Localbuzzcanbecomeredundantandneedtobefedwithknowledgeexternaltothecluster

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FDIandconnectivity

Aquaro,DamioliandLengyelshowthat• EuropeanregionsareindeedpartofadensenetworkofM&As

- thenetworkofinnovativeM&Asismoresparseandinternational

- thisisconsistentwiththeviewthat

‣ therearefewerplacestoconnecttointhecaseofinnovationactivities

‣ thesearelikelytobemoredistantandabroad

‣ EUregionscanuseM&Astoconnecttothesesourcesofknowledge

• InvestinginR&DiscrucialforEUregionstobeabletoconnecttotherestofEurope(andtheworld)

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FDIandconnectivity

TheanalysisinAquaro,DamioliandLengyelcouldbeextendedto:• drilldownintothenatureoftheinnovativevs.non-innovativeM&Anetwork,byhighlightingtheextenttowhichtheyconnectEUregionstomoreproximatevs.distantregions(e.g.othercountrieswithintheEUoroutsidetheEU)

• investigatewhetherthemoreperipheralEUregionsconnectdirectlytodistanthotspots,orratherusenationalorcontinental‘bridgingregions’

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FDIandconnectivity