DOES THE FOREIGN ACQUISITION OF R&D ACTIVE FIRMS DAMAGE THE - PowerPoint PPT Presentation

DOES THE FOREIGN ACQUISITION OF R&D ACTIVE FIRMS DAMAGE THE DOMESTIC SCIENCE BASE? MARÍA GARCÍA-VEGA UNIVERSITY OF NOTTINGHAM PATRICIA HOFMANN UNIVERSITY OF HOHENHEIM RICHARD KNELLER GEP, UNIVERSITY OF NOTTINGHAM

MOTIVATION • Does foreign acquisition of R&D- active firms enhance or damage the science base of a country? • How does location, organization and output of R&D evolve following acquisition by foreign multinationals? • R&D active MNEs care about the efficiency of innovation production. • Brings about possible restructuring of R&D and increased innovation if MNE from technological frontier

OUTLINE • Theory • Empirical • Data • Methodology • Outcomes • Aggregation • Summary and Conclusions

THEORY • Partial equilibrium model of a domestically owned R&D active firm that gets acquired by a foreign owned firm. • What happens to its R&D? • Assume • Domestic firms differ in their characteristics – some are naturally better than others • Innovating firms have lower cost • Inventions require the employment of R&D scientists and engineers as well as management, lab technicians etc. • Not all domestic firms will innovate • Those that do will be better than those that do not • Cherry-picking of best domestic firms an outcome

THEORY • Following acquisition the MNE must decide if to do R&D, where and how to organise it • Prior to acquisition domestic firm and foreign MNE assumed to have a single R&D lab • Post-acquisition can close the lab in the acquired firm and centralise R&D or can leave the acquired lab in place and decentralise R&D globally • Outcome depends upon • The extent of knowledge transfers to the subsidiary (these increase the efficiency of scientists & engineers) • The extent of cost-savings from removal of duplicated effort (this reduces number of managers, lab technicians etc.) • Changes to the opportunity cost of innovation (highest for frontier MNEs as have advanced labs elsewhere)

THEORY • Centralised R&D structure most likely chosen by frontier MNE • Closure of acquired R&D lab • Within a decentralised R&D structure (the acquired lab is retained) • Reduction in employees with lower skills (lab technicians etc) • Knowledge transfer into the acquired lab – largest when MNE is technologically leading • Increase in employment of scientists and engineers – largest when MNE is technologically leading • Increase in innovation – largest when MNE is technologically leading

DATA • Yearly panel of Spanish firms from 2004-2009 • Designed as annual version of CIS; representative, unbalanced panel covering manufacturing and service sector firms • For each firm • Performance measures such as sales, employees etc. • Detailed R&D spending and employment • Measures of innovation output • Ownership and country of headquarters • 7,719 firms, 300 foreign acquisitions • Technical frontier defined as MNEs from Germany, US and Japan (JUG) – 104 acquisitions • 8 acquired firms start R&D we will ignore these

INNOVATION INPUTS

METHODOLOGY • Interested in post-acquisition changes compared to a unobservable counterfactual of non-acquisition • Our theory tells us that R&D active firms are not the same as inactive firms • Construct a counterfactual by choosing non-acquired firms that have similar observable characteristics • Use a standard difference-in-difference regression to model what happens after acquisition • R&D not the only motive for FDI (one reason to look at closure and employment) so we control for difference in tax rates relative to Spain

WHO IS ACQUIRED? • Cherry picking • More likely to be acquired if • Bigger - above 100 employees • Have higher labour productivity • If statutory corporate taxes are higher than Spain • Total innovation and patents do not matter • Higher internal R&D and lower external R&D • Already have global R&D (existing technology transfers) • Once finished matching exercise we can show that observable characteristics of the acquired and non- acquired are statistically similar (balanced)

PROBABILITY OF R&D BEING CLOSED • Lots of R&D closure 47% of non-acquired firms • 117/300 acquired firms close R&D. Rate of closure is 39%, but acquired firms are on average better than the average non-acquired • The type of acquired firms that close R&D are also different • No evidence that acquisition increases that risk in matched sample • Unless MNE from frontier in which case risk is 106% higher than for the counterfactual of not acquired • Political fear that FDI erodes the domestic science base has some basis Probability of stopping R&D (internal R&D ceases) Foreign acquired 0.252 Frontier acquired 0.726*** Non-frontier acquired 0.060 Observations 1,258 1,258 Firm controls Yes Yes

EXPENDITURES • 72% of total R&D on internal R&D (10% external); technology transfers 1% of total R&D • Internal R&D spending falls by 24% for frontier MNEs and by 48% for non-frontier MNEs • Technology transfers for frontier MNEs rise by 192%, 349% and 4156% • They decline for non-frontier acquired firms by 24% Total Internal R&D Technology Transfers Frontier acquired Year of acquisition 0.062 -0.275*** 1.072*** One year after 0.093 -0.305 1.503*** Two years after 0.812** 0.146 3.751*** Non-frontier acquired Year of acquisition -0.455 -0.672* 0.647 One year after -0.021 0.049 -0.274* Two years after 0.001 -0.148 0.131 Observations 611 611 611

EMPLOYMENT • Change in the composition of employment in frontier acquired firms • PhD rise 8% in year of acquisition and 41% one year later • Those with no HE, decline 17% and then 40% • In non-frontier a decline of those with PhD (12%) Employees in Internal 5-year 3-year Without R&D measure: Total Ph.D. Undergrad Undergrad higher degree degree education Frontier acquired Year of acquisition -0.092* 0.076*** -0.083** -0.028 -0.188*** One year after -0.160** 0.025 0.035 -0.107 -0.509*** Two years after 0.205 0.341** 0.341** 0.636*** 0.206 Non-frontier acquired Year of acquisition -0.143 -0.176 -0.156 0.160 -0.039 One year after -0.074 -0.002 -0.150 -0.010 0.007 Two years after -0.132** -0.232*** -0.092 0.064 -0.072 Observations 611 611 611 611 611

PATENTS • Measure is number of patents • Both types of acquisition increase the rate of patenting • The increase for frontier MNEs is the largest • Also find evidence that acquired labs with more technology transfers*PhD employees have the most patents Innovation output measure: No. of patents Frontier acquired Year of acquisition 0.018 One year after 0.122*** Non-frontier acquired Year of acquisition 0.029* One year after 0.041

EFFECT ON DOMESTIC SCIENCE BASE • Complex set of changes to location, organisation and output, that also depends on the type of acquirer • To understand how this impacts the domestic science base we quantify the effect of these changes at the aggregate level by constructing a technology index • Aggregate patent index is a weighted sum of patents by individual firms • Within firm - the increase in patents Within keeping constant the firm weight of the firm • Between firm – the Aggregate increase in the weights Between Patent keeping constant the firm Index patents + cross effect (correlation between patents and weights) • exit – comparing exits to Exit average firms

EFFECT ON DOMESTIC SCIENCE BASE • Result depends on the weights • Internal R&D (expenditure in domestic R&D) lab versus total (includes technology transfer) • For internal the decline in domestic expenditures (between effect) dominates positive within effect. Exit has small negative effect • Using total innovation expenditures between effect and within effect are positive Weights given by Effect from… Internal R&D Total innovation expenditures expenditures Frontier -1.03% 11.35% Non-frontier -0.66% -0.25% Overall -1.69% 11.10%

SUMMARY AND CONCLUSIONS • Attempt to answer what happens to the domestic science base following acquisition-FDI • We find that there are effects on: • Location • negative when MNE is from frontier • Expenditures • in total more strongly negative for non-frontier MNEs • Technology transfers for frontier MNEs • Employment • Skill upgrading for frontier MNEs • Outputs • Strongest for frontier MNEs • Aggregate effect if you focus just on domestic spending suggests declines to domestic science base • Technology transfer is an important aspect of FDI and when included the domestic science base increases