Multinational R&D labs, here or there?

R&D labs of large corporations, together with academic institutions, tend to be the most important seeds when you want to establish an innovation cluster, aka ecosystem. However, why such R&D labs are located here or there? How can you attract them? Local and national level policy makers can now have a clue.

In fact, the Government-University-Industry Research Roundtable (GUIRR) of the U.S. National Academies, commissioned a survey to find out the factors influencing the locations of R&D facilities, to base policy discussions upon a structured set of data rather than anecdote and case studies. Over 200 multinational companies, across 15 industries, were then approached. Respondents to the survey were high-level R&D personnel involved with R&D location decisions, being asked to avoid general and their own perceptions. Moreover, when asking about location, questions were in terms of employees rather than mere money investment. Finally, respondents were instructed to pick the site most central to their firm’s R&D strategy, as a reference to their answers.

Location Strategies
The primary objective of the survey was to identify and rank the importance of factors that drive firm decisions on the location of R&D facilities. Factors included were:

1. Sponsored research at universities or research institutes.
2. Research collaborations with other firms.
3. Internet-based companies acting as a broker between firms seeking R&D solutions and R&D researchers.
4. Locating close to universities.
5. Locating close to highly qualified R&D personnel.
6. Locating close to competitors.
7. Locating close to customers.

Of greatest importance and significantly different from all other drivers is factor n. 5: being close to highly qualified R&D personnel. Factor n. 7, locating close to customers comes next in importance. Those factors which can be grouped under research collaborations, whether through sponsored research, collaborations with other firms or locating close to academic institutions are next in importance. They are not significantly different from one another.
Finally, least important factors are being close to internet based brokers and competitors.
In addition, it is probably worth noticing that there are not substantial differences between the responses of U.S. and Western European firms.

About Recent or Planned Sites
The second goal of the survey was to determine the relative importance of factors in deciding where to place recent or planned R&D facilities and how the importance of these factors depends on whether facilities are inside or outside the home country or in a developed or emerging economy. The factors included in the discussion with the companies were:

1. This was part of an overall expansion of my firm’s R&D effort.
2. This was an acquisition of an existing R&D site.
3. This was to establish or support research relationships with other firms.
4. This was to establish or support research relationships with local universities or research institutes.
5. This was to support needs of existing production facilities.
6. This was a relocation of my firm’s R&D effort.

Results say that the most likely characteristic of R&D site is part of an overall expansion, factor n.1. In contrast, it is very unlikely that the site is due to relocation, factor n.6. In particular, the site in a developed economy is more likely to be an acquisition than is a site in an emerging economy. Whereas, the site in an emerging economy is more likely to be meant to support research relationships with local universities or research institutes than is a site in a developed economy. This could be explained with the fact that these companies have already established networks with universities in developed economies, but they are in the process of developing those networks in emerging economies.

Factors in the Selection of that Site
Coming to the factors considered in locating R&D facilities in that particular country, the following statements were given:

1. There are highly qualified R&D personnel in this country.
2. There are university faculty with special scientific or engineering expertise in this country.
3. We were offered tax breaks and/or direct government assistance.
4. In this country it is easy to negotiate ownership of intellectual property from research relationships.
5. Exclusive of tax breaks and direct government assistance, the costs of R&D are low in this country.
6. The cultural and regulatory environment in this country is conducive to spinning off or spinning in new businesses.
7. It is easy to collaborate with universities in this country.
8. There is good protection of intellectual property in this country.
9. There are few regulatory and/or research restrictions in this country.
10. The R&D facility was established to support sales to foreign customers.
11. This country has high growth potential.
12. The R&D facility was established to support production for export to other countries.
13. The establishment of an R&D facility was a regulatory or legal prerequisite for access to the local market.

In addition, the survey procedure included several comparisons, such as home country versus sites outside the home country or sites outside the home country and in a developed economy versus sites in an emerging economy or responses of USA versus Western Europe-based firms.
In terms of establishing R&D facilities in emerging economies, quite interestingly, tax breaks and/or direct government assistance, factor n.3, are among the least important reasons. Seven factors are generally equivalent in level of importance, meaning that deciding in which emerging economy an R&D site should be located can be a complex process. However, growth potential of output markets stands out from the rest, factor n 11.
Moving to establishing R&D facilities in developed economies, tax breaks become a bit more prevalent. On the other hand, costs are not important, even if respondents disagree that these are low in developed countries. For the remaining factors, two stand out as being particularly important: protection of intellectual property and quality of R&D personnel. All the others are not significantly different, saying that site selection is a complex process in developed countries too.
When selecting the home country, tax breaks and costs are clearly the two least important drivers. Whereas, the quality of R&D personnel and the protection of intellectual property are the most significant ones. Results tend to be very similar to those for developed countries that are not the home country. Therefore, the question is not playing at home or in a foreign country, rather locating the R&D activities in a developed economy versus an emerging economy.

Takeaways

• Not surprisingly, decisions on site location from the company point of view are complex. Therefore, local, regional or national level authorities can have a though job when trying to attract multinational R&D facilities.
• Locating here or there is not a matter of home or another country, rather, a developed or a developing country.
• In an emerging economy the most important factor for selection of the site is the growth potential of the country. That tends to explain why China and India attract the most of them. Costs are of less importance than a number of other factors.
• In developed economies the most important factors are the quality of R&D personnel and the strength of intellectual property rights. The role of universities and university faculty follows. Costs are not a deterrent.

So, local authorities, policy makers, government institutions and so on… Are you ready to update your strategies?