Determinants of International R&D Activities: Evidence from a Gravity Model

Firms not only produce or sell their products and services abroad, but increasingly also conduct research and development (R&D) at locations outside their home countries – a phenomenon referred to as the ‘internationalization of business R&D’. This chapter analyses the internationalization of business R&D for OECD countries and identifies specific home and host country characteristics that are conducive or obstructive to R&D expenditure of foreign affiliates. The analysis employs a recently compiled novel data set on R&D expenditure of foreign-owned firms in the manufacturing sectors of a set of OECD countries. The results point to the pivotal role of market size and of 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. In contrast, 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.