Do R&D investments in weak IPR countries destroy market value? The role of internal linkages

Research Summary The growth of emerging economies has attracted R&D investments by multinational enterprises, but firms have struggled to protect their knowledge assets in these environments with weak intellectual property rights protection. Knowledge misappropriation may be reduced if firms use cross‐unit R&D teams to strengthen intra‐firm interdependencies and control. We examine the relationship between such internal linkage strategies, foreign R&D investments, and firm market valuation in a dynamic market valuation model for 117 leading multinational firms. While foreign R&D investments are positively associated with market value, IP risks in host countries reduce it. The latter effect disappears if firms have developed a pronounced internal linkage strategy in weak IP environments. Linkage strategy bears costs and, in the absence of IP risks, is negatively associated with market value. Managerial Summary The growing market potential of emerging economies has led to an increase in research & development (R&D) activities there by multinational firms. A known challenge to multinational R&D investors in these economies is the weak protection of intellectual property rights (IPR). Firms may seek to reduce the risks of local knowledge spillovers and IPR infringement by actively embedding internal linkages in the organization of R&D and relying on cross‐unit international R&D teams. We examine the consequences of such an internal linkage strategy for the performance effects of firms’ investments in weak IPR countries. Based on an analysis of 1763 cross‐border R&D investments by 117 leading multinational firms, we find that a firm's market value is negatively affected by new R&D investments in weak IPR countries, but that such a negative influence can indeed be mitigated if the firm's R&D organization embeds internal linkages. Consistent with this observation, we demonstrate that firms with an internal linkage strategy are able to limit local knowledge outflows in weak IPR environments. However, if an internal linkage strategy is applied in strong, rather than weak, IPR environments, it bears substantial costs and negatively affects performance.