The gravity of cross-border R&D expenditure

While up to the 1990s, R&D was still `an important case of non-globalization´ (Patel and Pavitt, 1991), the internationalization of business R&D activities has accelerated significantly during the last two decades. R&D activities of foreign affiliates have become one of the most dynamic elements of the process of globalization. Until recently, the main recipients of cross-border R&D expenditure were developed countries, though new players have emerged lately, particularly in Asia. Against that backdrop, the paper applies a recently compiled novel data set on R&D expenditure of foreign-owned firms in the manufacturing sectors of a set of OECD countries and identifies specific home and host country characteristics that are conducive or obstructive to cross-border R&D expenditure of foreign affiliates. Results point at the pivotal role of market size, cultural, physical and technological proximity for R&D efforts of foreign-owned firms. Moreover, the analysis demonstrates that sufficient human capital and strong indigenous technological capabilities in the host country tend to be conducive to R&D activities of foreign affiliates. On the contrary, a rich human capital base in the home country is obstructive to the process of R&D internationalization. Geographic distance turns out to be a strong deterrent.