Multinational Firm Innovation and Affiliate Sourcing Decisions

The paper studies the effect of R&D investments by parent multinational corporations (MNC) and their affiliates on the decisions of those affiliates to purchase intermediate inputs across different locations. We first develop a theoretical model of R&D and sourcing decisions to provide potential mechanisms and to guide our empirical analysis. Our fixed-effects regression results imply that, first, higher affiliate R&D expenditures are associated with a higher share of the affiliate’s purchases from local firms. Second, higher R&D expenditures by affiliates in other countries (i.e., those under the same parent firm but located in a different foreign country) are associated with a higher share of affiliate purchases from those countries. Third, we find that the affiliate’s R&D expenditures are negatively correlated with the purchase share from the parent home country and from the parent firm.