International Trade - Multinational corporations and technology transfer

Diploma Thesis, 2007

101 Pages, Grade: 2,3


Table of Contents

List of Abbreviations

List of Figures

List of Variables

List of Tables

1 Introduction

2 Globalisation and the Role of Multinational Enterprises
2.1 Internalisation of the Markets and Internalisation of R&D
2.2 Theoretical Approaches
2.2.1 The Horizontal Model of James R. Markusen
2.2.2 The vertical model of Helpman
2.2.3 Dependent and Independent Variables in Models of Regressions
2.3 Multinational Enterprises (MNE)
2.3.1 Specific Features of Multinational Enterprises
2.3.2 The Role of Multinational Enterprises for the International Trade

3 Research and Development of MNE in Foreign Countries
3.1 Motives for R&D in foreign countries
3.2 Choice of Location for R&D
3.2.1 Home-base-exploiting (HBE)
3.2.2 Home-base-augmenting (HBA)
3.2.3 Technology-seeking
3.2.4 Market-seeking
3.3 RTA-Index
3.3.1 HomeRTA
3.3.2 HostRTA
3.4 Advantages and Preconditions of R&D Activities in Foreign Countries
3.4.1 The OLI Framework of John Dunning
3.5 The Impact of Foreign Investment on Host Countries
3.5.1 The Approaches of Hymer and MacDougall
3.6 Transfer and Diffusion of Technology and Knowledge through FDI
3.6.1 Two Processes of Technological Change
3.6.2 Invention, Innovation and Diffusion
3.7 The Role of Spillovers in the Process of Technology Transfer and for FDI
3.7.1 The Spillover Effect
3.7.2 Case Study about the Costs and Benefits of FDI
3.8 Economical and Political Determinants of FDI in Developing Countries
3.8.1 The four competing Models
3.8.2 The Hypothesis of the Models
3.8.3 The Results of the Four Competing Models

4 Different Models of International Trade with Technology Transfer and R&D Activities in Host Countries
4.1 Model of Innovation - the Model of North-South Trade
4.1.1 Implication of the Model of Innovation
4.1.2 Adoption of the Model of North-South Trade
4.2 The Model of Innovation and Technology Transfer
4.2.1 Conclusion for the Model of Innovation with Technological Transfer
4.3 Multinational R&D Cooperation in Developing Countries
4.4 The Theoretical Choice Model of Navaretti and Carraro
4.4.1 Structure of the Game
4.4.2 Stages of the Game
4.4.3 The Propositions of the Model
4.4.4 The Empirical Analysis of the Model
4.4.5 Results and Relevance of the Game and the Empirical Analysis
4.5 Comparison of the Three Different Models and Conclusion for R&D of MNE

5 R&D Activities of MNE in Foreign Countries and in Germany
5.1 Research and Development of German MNE in Foreign Countries
5.1.1 Expenditures of R&D in Foreign Countries
5.1.2 Important Location for R&D Expenditures
5.1.3 The Emphasis of the Branch of Business of German MNE
5.2 Research and Development of Foreign MNE in Germany
5.2.1 Expenditures of R&D and Potentials of R&D in Germany
5.2.2 Germany - A Research Location
5.3 The Technological Efficiency of a Country

6 Summary



List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 4-1: Model of Innovation

Figure 4-2: Different combinations of labour in country N and S

Figure 4-3: The game tree

List of Variables

illustration not visible in this excerpt

List of Tables

Table 3-1: The allocation of the four different strategy types with RTA-Index

Table 3-2: The allocation of different types of strategy of MNE in Germany, USA and GB

Table 3-3: International diffusion of technology: Type of transaction and role of MNCs

Table 4-1: Assumption and results of the theory tested in the empirical model

Table 5-1: The parts on R&D potential of foreign MNE in Germany from 1993 to 1997

1 Introduction

The discussion about the role of multinational enterprises (MNE) which are transferring their technology to undeveloped and developed countries is one of the most interesting discussions in the international trade theory with its authors in the century of globalisation. Multinational Enterprises are generating and transferring technology know-how, knowledge and innovations of products and processes over national borders to foreign countries for making research and development (R&D) in especially chosen R&D locations.1 The focus of the following diploma thesis is to search what kind of role multinational enterprises play in a globalised and internalized world by focussing how they make research and development in foreign countries and especially in developing countries as the third world.

In the first main part of the following work it will be described what kind of role multinational enterprise play in the century of globalisation. For a better understanding it follows a description what is exactly meant by the process of internalization of the markets and R&D. It will be discussed through theoretical analysis and models how the process to an internalization of R&D function. These will be explained through different theoretical approaches as the horizontal model of James R. Markusen2, the vertical model of Helpman3 and a model of regression which used independent and dependent variables for the analysis. At least in this chapter the specific features of a MNE will be explained by categorising multinational enterprises through different characteristics and afterward the role of MNE in the process of globalisation will be assumed for the international trade between different countries.

The second part will be searching what kind of motives exists for multinational firms to outsource their R&D activities in foreign countries. For this, it is important to say exactly what kind of factors the chose of a location influence. Another interesting point is to analyse what kind of different variation of strategy MNE need and try to follow, especially to define what the goal of MNE is and how they can make benefit through FDI. Furthermore it will be explained the RTA-Index of the company in the domestic market and of the country of destination. In this case it will be assumed what a high or low RTA-Index indicates for companies who want to realise investments in foreign countries. By defining and choosing a strategy for a multinational firm the advantages and preconditions for doing business in host countries and also the reason for technology transfer in foreign countries will be obvious and clear though using different models of innovation. But first the conditions of three different advantages has been met which has to be considered by foreign direct investors. These will be described by using the OLI framework of John Dunning. After that the impact of FDI on host countries will be explained with the approaches of Hymer4 and MacDougall.5 In this context the transfer and diffusion of technology and knowledge through FDI will be described. In this case the different processes of technological change will be explained by defining the processes of innovation and diffusion in MNE. Furthermore the role of spillovers in the process of technology transfer in foreign countries will be stated.

The third part is the main part of this diploma thesis and is focused on the comparison between three different models of international trade theory. They are trying to gives an explanation and results why companies transfer their technology in foreign countries. Further how MNE developed R&D activities out of their home country and which asset they have of different processes of technological change as innovation and diffusion. In this case, it will be explained what is exactly meant with spillovers and the spillover effect. For comparing the three models, first the model of North-South Trade will be introduced and analysed. Afterwards the model of innovation with technology transfer will be compared with the model of the North-South Trade. At least the theoretical choice model of Navaretti and Carraro6 will be introduced, analysed and compared.

The last part of this work will give some examples for R&D activities of German multinational enterprises in foreign countries and foreign multinational companies in Germany. It will be named the high of expenditures of German companies in foreign countries and which are the main important locations for R&D activities. The focus will also lie in which undeveloped countries German multinational firms are mostly located, how they transfer their technological knowledge and how high the expenditures for R&D are. At least it will be explained what kind of meaning the technological efficiency of a country have for foreign investors. It will be shown which indicators the technological efficiency of a country determine and what sign it give for the competitive ability of a country. This diploma thesis gives an overview how multinational enterprises invest in foreign developed countries and developing countries. Further it deals with the problematic in which ways multinational corporations transfer their technology and what kind of strategies they will use and which is the best one. It is from interest to explain what kind of motives MNE have of not producing and processing in their local area. With this, the change of external and internal knowledge in multinational firms plays an important role. This work should be made clear which countries MNE prefer for doing business and R&D. After describing and evaluating different approaches, theories and models with its economic and political determinants it can be summarized how foreign direct investments of MNE influence industries and local companies in host countries. Further, it will be given examples in which technology sectors a specialization follows because of the wish to improve the home based competitors’ advantages or still to have it at the same level.

2 Globalisation and the Role of Multinational Enterprises

For a better understanding how international trade between industries and companies in different countries has change during the last years it is good to know what exactly globalisation means in this case. Globalisation is defined as a form of an international strategy with cross border transactions of a company to become worldwide competitive ability through the use of location advantages and economies of scales.7 Further, it is an interesting question which results MNE bring for the market and how it influences the market in the globalisation process.

Multinational enterprises with a high globalisation affectation react by a changing environment area with worldwide standardisation and adaptability in their local area. From the point of view of an economist the word “globalisation” is define as a “globalisation of the markets”.8 Since 1990, in this context globalisation will be described as internalisation of the markets and has become a more and more powerful meaning.9

Internalisation of the markets has the meaning of arise of economic overlapping over national borders above.10 Multinational companies are playing a very important role in pushing forwards the internalisation process for the future. With a continuing increase of environment conditions and a higher barrier of technology access multinational firms have to developed their processes and products over national borders for placing their position next to their strongest competitors. Multinational enterprises are playing also an important role for pushing forward the process of internalisation of research and development in foreign countries. It also can be said that:

“Economic globalization implies a growing interdependence of locations and economic units across countries and regions. Technological change and multinational enterprises (MNEs) are among the primary driving forces of this process”.11

2.1 Internalisation of the Markets and Internalisation of R&D

The internalisation of R&D is mainly based on the internalisation of the turnover and the high of production of MNE. For defining how attractive the domestic or foreign country for R&D could be it has to be allocating the power and the development of R&D of the multinational company. The description of choosing a location or production process and also the motives for firms to take part on the internalisation process could be explained through theoretical approaches and models. Most famous author for these theoretical models is the economist James R. Markusen. He explains what kind of motives MNE have for transferring technology in foreign countries or having international activities.12

2.2 Theoretical Approaches

The empirical research makes a difference between two different models; the horizontal model of James R. Markusen13 and the vertical model of Helpman14. But with empirical evidence, the horizontal model can explain the reasons for activities of MNE much better and in detail. Helpman and Markusen are two of some authors from international trade theory which have constructed models in which horizontal MNE arise endogenously in equilibrium. They have combined the ownership and location advantage but have leaving aside the question of internalization.

In the following section the model of Markusen and the model of Helpman will be described and afterwards the differences between the two models will be explained.

2.2.1 The Horizontal Model of James R. Markusen

This model gives a description of companies which are doing the same business activities at different production areas. With this, these activities are given advantages of scale for the firm and for the trade costs and also they reduce the production of MNE through different factor resources, especially for human capital and high qualified workers. In this context the concentration of foreign direct investment lie in developed countries with high income.15

In Markusen`s model multinational enterprises will choose production locations in both countries, in foreign countries and in the local market. The headquartered company should not be seen as a competitor for the MNE affiliate in the host country. The input of the MNE should be added to the value of the MNE affiliate in the host country and should not have the conversely effect.

The models of Horstmann and Markusen16 have the result that horizontal multinational enterprises arise endogenously. It can be summarized that MNE are supported in equilibrium when firm-level fixed costs and also costs of transport and tariffs are relatively large in comparison to the plant-level scale economies. The model of Markusen17 supports the theory that multinational enterprises exist in equilibrium more likely if they are located in large countries. Furthermore they prefer countries which have similar relative factor endowments. This was mentioned in the model of Brainard18 which will be not described in detail in this text.19

2.2.2 The vertical model of Helpman

Helpman´s model is one of a vertical integrated model. It was constructed in that way that those firms have a single production facility when they can set up a location in a different country than the headquarters. In this model firms will never open more than one production facility because of the absence of tariffs and transport costs.20

In this model it will be described how foreign direct investments will change by a different high of factor costs in different countries. The author of the model says that direct investments will delegate from the countries with low human capital to the countries with high human capital. No direct investments will happen if there is no motive for production in different countries, for example if they have the same high of factor costs. Different factor intensity, especially human capital intensity and the fragmentation of activities of the company which implies the separation of headquartered firm and the production location are playing in vertical multinational firms an important role.21

All in all, it can be said that most activities of multinational enterprises have focus on developed countries with high income. In this case the explanation about the horizontal model have gain acceptance. Firm orientated economies of scale and a step forward in knowledge of R&D are more important than different factor intensities between countries. But in practise it is an important criterion for choosing the location of production.

The vertical model is good for consideration of process in firm intern internalisation. The development of vertical multinational firms is just seen in undeveloped countries. With the same factor resources of industrial countries and similar activities of firms in more than one location, there is seen a focus on R&D activities and a joint use of R&D potentials by MNE in spite of following the horizontal model.22

As a result there is a significant increase of reciprocal penetration of national research potential and also a penetration of markets with similar products of MNE. This is described in an empirical study about the firm intern internalisation process of US- American companies. It was found out that how lower the trade costs, the salaries for low qualified workers and the income tax rate for companies in the domestic countries are the more imports will chose the subsidiary in foreign country out of the headquartered multinational firm.23 There are some factors on which depends the internalisation of R&D of MNE. Here are listed the main reasons for internalisation:

- an early relationship in research and development activities on the leading market
- an early relationship to the lead user
- intensive team work and exchange between production and R&D activities
- enter into an alliance between the firm intern R&D activities and the intern science and research , especially bundle up of know how

Important for the decision making process of choosing a location for a multinational firm is that the hole production process has to be allocate, further to think in processes and not to neglect the site of demand in comparison to the side of supply.24

2.2.3 Dependent and Independent Variables in Models of Regressions

The decision of producing in foreign countries and doing R&D activities in multinational enterprises are dependent on a lot of factors. For making a future prognoses of development activities of multinational enterprises it can be utilize dependent and independent variables in models of regression.25 Dependent Variables

A Dependent variable is defined through the local production of subsidiaries in the place of destination.

On the one hand the production process increases with:

- the size of the market in both countries
- the relative human income in the domestic market (native country)
- the trade cost of imports of the foreign market

On the other hand the production process decreases with:

- the size differences between countries
- the high of barriers of investments

And for the case that the branches of business are different: It can be said that the production process increases with:

- Economies of scale at firm level (R&D activities, the power of activities of the headquarter of the company, intensity of marketing mix) Independent Variables

Independent variables are defined through different factors as:

- The size of the country
- The factor resource of the countries
- The trade costs
- The barriers of investments
- Due to the conditions in a particular line of business, specific variables (advantages of economies of scale at firm level and factor level, R&D activities).26

Because of the differences of dependent and independent variables in every country, it is questionable if a comparison is possible or not for giving a good future prognoses for the development of the activities of MNE in foreign countries.

It is from interest to know in which industries and local firms MNC tend to be important or want to establish their sales and production activities. From the micro perspective MNE tend to be important in firms which are characterized through intangible, firm- specific assets. With this it is meant the knowledge capital of a company which implies proprietary rights on specific product and process know-how and trademarks.

From the macro perspective MNE tend to be important in firms and industries which have the following four characteristics. These industries and firms should be have a high level of R&D relative to sales, innovated and technical complex products, a high level of product differentiation with advertising activities and a large share of skilled and technical workers in their workforces. As we have seen there are a lot of dependent and independent variables which are influencing the decision process of MNE to be active in technology transfers in host countries. Some of the empirical studies explain that there is a positive correlation between the level of direct foreign investments and the existence of trade costs and trade barriers. For example Brainard27 has found out that the share of sales of foreign affiliates in the sum of the affiliate’s sales and exports have a positive correlation to transport costs and trade barriers.28 That’s an interesting point and implies that if the transport costs and trade barriers in foreign countries are lower than in the local market it will give a positive reaction to higher FDI activities in the future through MNE from abroad.

2.3 Multinational Enterprises (MNE)

This diploma thesis gives an overview how multinational enterprises invest in foreign developed countries and developing countries. Further it deals with the problematic in which ways multinational corporations transfer their technology and what kind of strategies they will use and which is the best one. But before that, two important questions should be mentioned which are asked of most economic researchers.

“What circumstances lead a firm to serve a foreign market by exports versus foreign production”?

“Why might chose the firm direct investment versus some type of alternative mode of entry”?29

This two main question should be answered at the end of this diploma thesis by evaluating the different theories about economic and political factor which influence FDI of MNE. After the analysis of different researched models these questions could be answered with the support of empirical evidence. But first of all the different characteristics of a MNE will be explained.

2.3.1 Specific Features of Multinational Enterprises

Most of the multinational enterprises are engaged in direct foreign investments (FDI) in host countries. But before the characteristics of a MNE will be explained it is from interest to give a definition what is exactly meant by foreign direct investments through MNE. FDI are defined as:

“Investments in which the firm acquires a substantial controlling interest in a foreign firm or set up a subsidiary in a foreign country”.30

Furthermore there will be made a decision between vertical and horizontal investments. Horizontal investments are defined through foreign production of services and products in foreign country. It can be compared with the produced products and services of a company of the local market and it does not only mean investments in servicing, distribution and wholesaling. On the other hand vertical investments are characterised through fragmenting of the production process geographically by special stages of the production process. But it can be said that from the quantitative view the horizontal investments are more important than the vertical investments in foreign countries. FDI has grown rapidly in the last centuries and it was found out that horizontal investments are mostly done in foreign countries in which they have relatively low trade barriers, the same per capita income and similar relative factor endowments.31

Multinational enterprises are marked through four main characteristics which will be described in the following part.

- Technical characteristics:

In this context the technical features will be comprised. Companies are called international if they are doing business across national borders, having foreign subsidiaries and if they undertake foreign direct investments (FDI).32 Direct Investments are defined as all activities in foreign countries in which the company has the majority of participation of the nominal capital.33

- Performed characteristics:

This feature described the accrued benefits of a firm in foreign countries, especially the high of turn over, the asset and the kind of achievement. But the value and size of the achieved performance are afflicted with problems because of the weight given to evidence.

- Structural characteristics:

In this feature it will be decided between the high of the organisational structure and the strategy of multinational enterprises to delimitate the high of internationality. Degree and form of the foreign activities are standing in the focus of the economic consideration. Also in the focus are the degree of the internalisation and the specific management requirements. Structural characteristics make a difference between international, multinational, global and transnational companies. The multinational strategy of multinational enterprises is to concentrate on national markets and on the formation of foreign subsidiaries and branches. Furthermore, they want to reach a stable increase of the value process in the subsidiary and to develop the products locally is one more criteria. But MNE have to fight against barriers as a high standard of adaptation and a low advantage of specialisation in multinational branches.34

- Behaviour oriented characteristics:

Main characteristic on this approach is the international think of the management. But this definition is hardly representative because of demarcation dispute.35 These four main characteristics have given a good overview how MNE can be categorized on different levels.

2.3.2 The Role of Multinational Enterprises for the International Trade

Multinational enterprises dispose about different R&D locations and production areas out of their domestic market of the local branch. They are transferring the knowledge between the locations from one side to the other side of the firm. The following listed activities are some of the main R&D activities with which MNE deal:

- R&D activities and orders across national borders and with this the generation of innovation over national borders
- Licensing
- R&D cooperation
- R&D-Joint Ventures and Strategic Alliances
- Hiring of foreign labour, skilled personal
- Trade with R&D services
- Intern patent application across national borders36

The exchange of technological knowledge between the production locations is not rivalry and with this, it is a chance to improve the competitive ability and technological efficiency of a country. One requirement is that the company make own R&D activities in the domestic market, that they have intern technology know how and as a result R&D activities will give a growing turn over and an increase of selling products.37 These three factors are the requirement for competitive ability and technological efficiency of a country.38

Since the 1980 the internalisation process of research and development and the knowledge transfer to foreign countries have seen a steady increase. It will be obvious how important it is to have a strategic and technological cross-border cooperation of multinational enterprises and what kind of important role they play in a globalise world with international trade. Also private and public institutions, universities, R&D centres and national companies play an important role for foreign and international technological and economical team work.39

3 Research and Development of MNE in Foreign Countries

3.1 Motives for R&D in foreign countries

The internalisation in research and development activities of multinational enterprises in foreign countries will mostly determined through three main motives. But the main notion of why internalization takes place is that internalisation in R&D is preferred to costly and uncompleted contracts as an arm-length agreement because of the possibility that the agreement will be broken through one of the parties of the agreement.40

- Opening a new foreign market and adaptation on the process in the country of destination.

With this motive the MNE want to reach a relocation of the product innovation and process innovation from the branch to the subsidiary. Furthermore they have the goal to saturate the foreign market and the foreign demand through technological and innovative products.

- Acquisition of technological know how

This motive deals with the acquisition of technological know how and high qualified workers in foreign countries. Also the use of internal and external source of knowledge is one more criteria for multinational enterprises to make research and development far away from their domestic market. It is also the goal to have an exchange of the new earned knowledge between the MNE and the subsidiary. One advantage for a good cooperation and an intensive knowledge transfer would be closed distances between the two companies.41

- R&D activities as a side effect of the process of internalisation

Foreign direct investments are mostly reached through a take-over by a company or a merger. It is more significant for MNE to concentrate on a few locations and to make research activities in the location of the subsidiary. Reason for this are the combined business enterprises and the linked activities in the economic value process and also of the closed combined innovation process of a company. This is the explanation that R&D activities are called a side effect of the process of internalisation.42

3.2 Choice of Location for R&D

The choice of the location and the motives of multinational enterprises to deal with research and development in foreign countries are determined mostly through the technological strength and weaknesses in the domestic market and also in the local market.43 Fundamentally it will be decided between four different strategies which are used by the choice of the location of MNE:

- Home-base-exploiting (HBE)
- Home-base-augmenting (HBA)
- Technology-seeking
- Market-seeking

The different proceedings for choosing a location will be described in the following text.

3.2.1 Home-base-exploiting (HBE)

In this strategy their will be utilize the44 technological and firm specific advantages in the domestic country for achieving innovation advantages in the country of destination. It will be obtain through direct adaptation of the product and production processes in the weak foreign country. The goal is to be competitive against other foreign companies.45

3.2.2 Home-base-augmenting (HBA)

In this strategy multinational companies want46 to appropriate the complementary knowledge and abilities in foreign countries to increase the home based advantages of R&D and to profit through the present external effects at the current location. The technological competitive advantages in the home country will be augmented through the so called “centres of excellence”. These “centres of excellence” are described through the concentration of technological strong and competitive actors in a specific technological field in foreign country.47

With empirical evidence, the RWI48 and ISI49 have found out interesting results about applications for patents of multinational enterprises through patent data’s in US-studies. They have found out that the majority of the companies undertake their foreign direct investments and innovative activities in technological fields in which they have also a home based technological advantage.50

Confirmed will be this through a study of Patel and Vega, Le Bas and Sierra51. It can be said that the internalisation of R&D in multinational enterprise will not only happened because of the wish to compensate the technological weaknesses in the home country. It will be signalled that the foreign direct investments and R&D activities will be transferred in countries with a high technological standard. This makes the home-base- augmenting strategy to the most important strategy additional to the home-base- exploiting strategy. Especially Germany will be used by foreign multinational enterprises because of the high qualified skilled workers as engineers and natural science. This would mean to use the home-base-augmenting strategy by foreign multinational enterprises in Germany.52

The strategy asset-exploiting means an adaptability of the products and processes in the specific country of destination. Further to take into consideration the demand of innovative products for the multinational enterprise, so that they can use the innovation advantages in the technological weaken market.53 The strategy asset-augmenting is using the appearing spillovers54 to enlarge the own knowledge and to reach new possibilities through research institutions in foreign countries. The strategy home-base- exploiting is a dependence on the traditional perspective about the internalisation process of R&D in MNE and mean with this to do direct foreign investments. But the strategy home-base-augmenting has become in the last twenty years more and more relevance. Reasons for this are the significant increase of the cost for research and development and because of the growing complexity of the technological research. Further, one more reason is the growing requirements on the transfer of technological knowledge and with this the increase of the cost for skilled workers. Another reason could be the increasing requirements on the industrial industry. For standing in competition they have to create new products and process innovations in much shorter time than some years before.55

With this, it can be said that the concentration of the R&D activities lie on the “centres of excellence” which means in technological high development countries. Furthermore, it is possible that the both strategies asset-exploiting and asset-augmenting could exist in some case additional or extra.56

An example for the high technological sector would be the semi-conductor industry in which the USA has a share of 40 per cent by measuring on the patent applications. Germany plays in this case not really an important role.

In this context there are two more strategies which will be described shortly in the next section. There are called technology-seeking and market-seeking.

3.2.3 Technology-seeking

This strategy describes the technological acquisition of the technological stronger foreign country. By using this strategy the technological domestic weakness should be compensate through building-up of R&D activities in the country of destination or through the acquisition of high-standard technological companies.57

3.2.4 Market-seeking

Analogous to this strategy, the country of destination and also the domestic country do not dispose about the technological strong. The motive of an acquisition is not to acquire the foreign company. Furthermore the goal is the entrance into the market and to reach an external growth process. The research and development activities of multinational firms in foreign countries are more seen as a by-product through the acquisition of the company.58 But in the praxis the strategies home-base-augmenting and home-base-exploiting are more often used than the other ones, market-seeking and technological-seeking.

3.3 RTA-Index

The RTA-Index59 for patents of companies and countries measures the relative strength and weakness of companies and countries in specific technological fields. This can be defined through the following formal description.

illustration not visible in this excerpt60

3.3.1 HomeRTA

The HomeRTA61 measures the part of patents of a company in a technological field of the domestic country in relation to the part of all patents which have done the place of invention in the domestic market.

3.3.2 HostRTA

The HostRTA62 measures the part of patents of the country of destination in a technological field in relation to the part of all patens in all technological fields.63

As described in the text above, a declaration of the four different strategies will be handled through the size of the RTA-Indices. RTA > 1 shows the specialisation in a technological field and explained the relative strength of the company in this field. A RTA-Index < 1 shows in contrast to that the relative weakness of a company in a specific technological field. The allocation to one of these strategies will be more obvious through the following table 3-1 which will be shown next.64

Table 3-1: The allocation of the four different strategy types with RTA-Index

illustration not visible in this excerpt

Source: See Patel und Vega (1999), p. 152.

As a résumé it can be said that the strategies asset-augmenting and asset-exploiting are the strategies which dominate the other both. Studies of Le Bas and Sierra65 have determined that the majority of multinational firms are doing their technological activities in foreign countries in these areas of business where they have strength in the home country.66 With this they develop their technological fields in foreign countries in which they are strong in the domestic market.67 But on the other hand it is also seen that a part of the companies are doing research and technology activities abroad in areas of business where they are week in the home country. This is the case when the specialisation index of a specific technological field has the value less than one.68

All in all the strategy asset-augmenting dominates the other strategies with the RTA- Index of HostRTA>1. That means that the home based technological advantages of the MNE in R&D define the technological ability and competitiveness in the domestic market. And it shows the new addition of technological knowledge in the foreign country which gives the company a global competitive ability. The more bounded and closer the competences for R&D, the conditions of the production process and the position of the product at the market are the more attractively is it for MNE to have a location for R&D activities. With this, it lies on the conditions applying to the locality if a multinational firm will build a foreign location. Which strategy is used in Germany will be shown in the following table 3-2.69

Table 3-2: The allocation of different types of strategy of MNE in Germany, USA and GB

illustration not visible in this excerpt

Source: Bas and Sierra (2002)

As it is shown in table 3-2, it will be clear that the strategy asset-augmenting is dominated over the others with a share of patents of 54.6 per cent in Germany. This includes the augmentation of the home based advantages. With this, Germany has after Great Britain and before the US the second highest share of patents. They are using with preference the strategy asset-augmenting. The logical coherence of this argument will be that in Germany multinational enterprises are prefer location in technological fields with strong knowledge in which they have also an advantage in home based research location.70 For doing R&D activities in foreign countries and that it makes sense for the company multinational firms have to make special advantages to their own.

3.4 Advantages and Preconditions of R&D Activities in Foreign Countries

To make research and development activities in foreign countries MNE must arise some special advantages in superior technology and lower cost in the production process.71 Normally for companies which have decided to produce in foreign countries it will accrue higher cost and a lot of advantages and also disadvantages by investments in R&D activities out of their host country. For that it is necessary to identify the advantages and conditions under which foreign direct investments will take place. One of the most popular authors is Dunning72. He has suggested that three conditions need to be present for a company to have the motivation for investments out of their local country. His work is known under the name Dunning´s OLI framework73 whereas OLI framework stands for ownership advantage, location advantage and industrialization advantage.74

It can be said that foreign MNE will not find it profitable to enter into the domestic market if they are not different to local markets and if they cannot be competitive with domestic firms. For doing business in another country there are a lot of different costs, for example communications and transport costs, higher cost for labour, barriers due to language in foreign countries, access to the foreign costumers, being outside the local business and also government network is not easy to reach. These are only a few examples what a MNE have to take into consideration when they will choose the way of foreign production. But for the following section the OLI framework of Dunning will be further explained by categorizing what is exactly meant by the three advantages. It is also called the “eclectic theory” and has got wide application about the theory of the firm and is derived from Coase75 and many followers.


1 See Reger (1999), S.1 f.

2 See Markusen (1984).

3 See Helpman (1984).

4 See Hymer (1984).

5 See McDougall (1984).

6 See Navaretti and Carraro (1996).

7 See Schachner (2001), adapted from Gabler Wirtschaftslexikon, p. 1383.

8 See Riedl (1999), pp.9-10 ff.

9 See Oppenländer (2000), p. 299.

10 See Riedl (1999), p. 9.

11 Narula (2005), p. 318.

12 See Belitz (2004), p. 3.

13 See Markusen (1984).

14 See Helpman (1984).

15 See Belitz (2004), p. 3.

16 See Horstmann and Markusen (1992).

17 See Markusen (1984).

18 See Brainard (1993a).

19 See Markusen (1995), p. 176.

20 See Markusen (1995), p. 175.

21 See Belitz (2004), pp. 3f.

22 See Belitz (2004), pp. 4 ff.

23 See Belitz (2004), p. 6.

24 See Reger (1999), p. 141.

25 See Belitz (2004), p. 5.

26 See Belitz (2004), p. 5.

27 See Brainard (1993c).

28 See Markusen (1995), p. 172.

29 Markusen (1995), p. 170.

30 Markusen (1995), p. 170.

31 See Markusen (1995), pp. 170f.

32 See Riedl (1999), pp. 11 f.

33 Riedl (1999), p. 12.

34 See Riedl (1999), pp. 11 f.

35 See Riedl (1999), p. 18.

36 See Narula (2005), p. 320.

37 See Belitz (2004), p. 1.

38 See Narula (2005), p. 319.

39 See Narula (2005), p. 320.

40 See Ethier (1986), pp. 805-833.

41 See Belitz (2004), p. 12.

42 See Belitz (2004), p. 13.

43 See Belitz (2004), p. 14.

44 In that context also named asset-exploiting.

45 See Belitz (2004), pp. 12 f., and also see Narula (1995), p. 326.

46 In this case also named asset-augmenting.

47 See Narula (2005), pp. 327 ff.

48 RWI= Rheinisch-Westfälisches Institut für Wirtschaftsforschung

49 ISI= Frauenhofer-Institut für System- und Innovationsforschung

50 See Belitz (2004), p. 14.

51 See Patel und Vega (1999) and Le Bas and Sierra (2001).

52 See Narula (2005), p. 329.

53 See Narula (2005), p. 328.

54 A definition of spillovers will be given later in the text.

55 See Narula (2005), p. 328.

56 See Narula (2005), p. 333.

57 See Belitz (2004), p. 14.

58 See Belitz (2004), p. 14f.

59 RTA= Revealed Technological Advantage.

60 P ij- Number of the patents of the company or the country of destination i in the technological field j

61 RTA-Index of the company in the domestic market.

62 RTA-Index of the country of destination.

63 See Belitz (2004), p. 15.

64 See Narula (2005), p. 330.

65 See Le Bas and Sierra (2002).

66 See Patel und Vega (1999), p. 149.

67 See Narula (2005), pp. 330f.

68 See Le Bas and Sierra (2002), p. 13.

69 See Belitz (2004), p. 17.

70 See Belitz (2004), p. 17.

71 See Hymer (1976).

72 See Dunning (1977).

73 See Dunning (1977) and see Dunning (1981).

74 See Markusen (1995), p. 173.

75 See Coase (1937).

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International Trade - Multinational corporations and technology transfer
Technical University of Chemnitz  (Finanzwissenschaften)
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International, Trade, Diplomantenseminar
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Janine Körner (Author), 2007, International Trade - Multinational corporations and technology transfer, Munich, GRIN Verlag,


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