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
• bservable characteristics of the acquired and non-

acquired are statistically similar (balanced)

PROBABILITY OF R&D BEING CLOSED

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

• 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

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 R&D measure: Total Ph.D. 5-year Undergrad degree 3-year Undergrad degree Without higher 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

Aggregate Patent Index Exit Between firm Within firm

• Within firm - the

increase in patents keeping constant the weight of the firm

• Between firm – the

increase in the weights keeping constant the patents + cross effect (correlation between patents and weights)

• exit – comparing exits to

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 expenditures Total innovation 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