Foreign knowledge activities and home country innovation: does global innovation hollow out or strengthen the home base of US MNCs?

Although many studies have analyzed how the foreign employment and manufacturing activities of firms impact their domestic operations, one value chain activity that is noticeably absent in these studies is innovation. In this paper, we explore how the foreign knowledge activities of firms impact their domestic innovativeness. We instrument for changes in foreign activities using foreign GDP and technology growth rates interacted with lagged firm-specific distributions of assets and patents across foreign countries. The empirical results from a comprehensive panel of US MNCs and their worldwide operations that have been merged with USPTO patent data from 1989-2009 reveal that on average, higher value-added activities in foreign markets positively impact the domestic innovativeness of US firms. Estimations suggest that increasing foreign R&D activities by 10% is associated with a 2.8% increase in domestic innovation while increasing foreign patenting activities by 10% is associated with an 8.1% increase in domestic innovation by US firms. These results remain after controlling for industry fixed effects, firm fixed effects, the exports of firms, and the impact of foreign imports into the home market. The results also show significant increases in domestic innovation for firms when their home country industry technologies are leading or lagging in the global industry.