Multinationals and the Globalization of R&D

María García-Vega, Patricia Hofmann and Richard Kneller

Concerned about their impact on the national science base, mergers or acquisitions (M&A) involving knowledge intensive firms from different countries often generate a strong reaction from politicians. A recent prominent example of this within the US was the reaction to the proposed merger between pharmaceutical giants Pfizer and Allergan. Both Democrat and Republicans politicians criticized its announcement, while President Obama denounced it as "unpatriotic". Nor are these concerns a peculiarly US phenomenon: the proposed takeover of Astra-Zeneca by Pfizer a few years ago, led to requests for guarantees for the retention of research jobs in the UK from the Prime Minister, the leader of the Opposition and the president of the Royal Society, as well an appearance by the chairman of Pfizer before a Commons Select Committee in the UK Parliament. But are these concerns well founded and what adjustments do occur to R&D following mergers and acquisitions between two R&D active firms?

In this Nottingham School of Economics working paper, published in the International Journal of Industrial Organization, GEP internal fellows Maria Garcia-Vega and Richard Kneller, along with their co-author Patricia Hofmann, investigate the effects on R&D of foreign acquisition in Spain. They first develop a theory of multinational (MNE) R&D to suggest the possible outcomes of FDI. Using a model which allows for complementarities in the knowledge between the foreign MNE and the Spanish firm's R&D they find a range of possible outcomes. Firstly, the fears of politicians that the domestic R&D lab will be shut might be realised if the MNE is better off concentrating its R&D elsewhere. This does not occur for all MNEs however, the effect is strongest when the MNE is close to the technical frontier. Empirically, they find that the greatest risk is if the MNE is from either the US, Germany or Japan. Politicians are therefore right to fear M&A activity from some, but not all MNEs.

Before they jump to ban or restrict FDI the research shows they need to take into account the other effects on R&D. If the domestic R&D lab is retained, the outcome is better if the MNE is from close to the technical frontier. The authors show empirically that all M&A leads to a decline in R&D expenditure, but these effects are smallest when the MNE is from the technical frontier. This occurs because the number of low-skilled workers in the subsidiary falls dramatically after acquisition. But, the MNE also begins to transfer its scientific knowledge to the domestic firm. MNEs from the technical frontier, transfer more scientific knowledge to the domestic economy and therefore require more scientists. As a consequence the efficiency of innovation improves: subsidiaries receiving the largest technology transfers and increases in employment of high-skilled researchers following acquisition see the largest increases in the number of patents. Again this points to the existence of knowledge complementarities across locations and is a positive benefit to FDI on domestic R&D.

International Journal of Industrial Organization, "Multinationals and the Globalization of R&D", by María García-Vega, Patricia Hofmann and Richard Kneller. https://doi.org/10.1016/j.ijindorg.2019.01.001

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