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Attracting R+D investment from multinational corporations

The Spanish government seems willing to encourage foreign investment in R+D. It would not be a bad strategy since the R+D expenditures of Spanish companies is quite low, but experts say Spain must undertake major reforms to attract foreign investment

XAVIER PUJOL GEBELLÍ | DECEMBER 16TH, 2010

It is well known that large corporations can act as an engine of economic growth. And it is also recognized that there are different levels of investment that some of these big companies can provide at a given moment to a particular country. It may be that a company is enticed by low labor costs or is interested to team up for the development of a specific product, service or research line. Between these extremes there exists a multitude of other formulas in this increasingly globalized market.

Data released by Spain’s Ministry of Science and Innovation (MICINN) indicates that 20.5% of Spanish companies performed innovation activities in 2009, according to estimates by Spain’s National Statistics Institute (INE). In a statement, the MICINN said that the data "shows that despite the destruction of businesses in Spain during the economic crisis of 2009, the percentage of firms that innovate has held steady, thus reinforcing the commitment of industry to innovation as a pillar of productivity and competitiveness.” The document, however, does not specify the amount of economic activity derived from innovation, although it does estimate that the sale of new products or technologies rose a modest 2.18% from 2008 to 2009.

The role of multinationals

Jaume Valls Pasola, a professor at Barcelona’s Pompeu Fabra University, argues in a paper published by the MICINN that there exists a "great difficulty" to quantify the investment of multinational companies through their subsidiaries based in Spain, an aspect that greatly limits the ability the deduce the amount of foreign capital dedicated to innovation. It is a different task, he wrote, to assess the weight of investment in R+D, which is currently experiencing a period of decentralization. However, he added, it continues proving difficult to establish a precise quantification.

According to UNCTAD, the United Nations trade and development agency, most of the global private sector budget devoted to R+D is concentrated in some 700 multinational companies. These account for about 95% of the total private sector R+D budget and, in some specific cases, these companies far exceed the investment made by many countries.

700 multinationals account for about 95% of the world’s private sector R+D investment Valls Pasola highlights from the cited document that increasingly MNCs are internationalizing their R+D investments, opening the door for other countries to attract these investments under different formats. Thus, subsidiaries dedicated to more or less sophisticated production processes are opening R +D departments, which occasionally can be linked to local universities and research centers. The open-mindedness that some large companies have incorporated through new so-called “open innovation” concepts has even allowed for the creation of joint university-business entities with public and private capital that go far beyond mere burden sharing. This is the case, for example, of the chemical giant BASF and Harvard University, which have applied this concept in a new institute focused on R+D.

Attraction factors

Given the potential benefits of attracting and, especially, retaining the R+D activities of multinational companies in the form of technology transfer and its influence on the surrounding communities (from academic institutions to local suppliers), the MICINN launched a study of the experience of companies that form part of Spain’s I+E Innovación España (Innovation Spain). The study sought to identify the key factors behind the attraction and retention of foreign R+D investment with the aim of contributing to improving the design of future policy in this area. Companies in this foundation are: Alstom, Arcelor-Mittal, Ericsson, Hero, Hewlett-Packard, Sony and ThyssenKrupp Elevator. All of them operate in Spain and have R+D departments in their Spanish subsidiaries. Overall, about 40% of these companies’ investment budgets goes toward R+D.

The MICINN study notes, however, that the average R+D expenditure for these corporations’ local subsidiaries is much higher. In 2007, the study reads, "subsidiaries spent an average of €2,955,783 on innovation, compared to €686,827 by Spanish companies." Moreover, it continues, "while Spanish companies have reduced by 7.72% their average expenditure in innovation between 2003 and 2007, the (multinational) subsidiaries have increased such spending by 25.44% over the same period." The aim would be to capture this increase by foreign firms while promoting economic development areas around them.

According to the results of the study, multinationals are positive about Spain’s market potential and its relationship with Latin America, and the availability of academic staff, technicians and scientists, as well as a governmental science policy which, on paper, is aligned with corporate interests. However, the study says that foreign corporations want stronger action in the form of public aid and investment in R+D, are wary of the ability to attract talented researchers and do not find enough top-notch research centers in Spain. The weight of the bureaucracy, the lack of research clusters and the excessive distance between academia and business, along with other minor factors, hamper the interest of multinational subsidiaries to invest in R+D on Spanish soil.

FROM THE ASSEMBLY LINE TO THE LAB
The presence of multinational companies in Spain took an unexpected turn with the country’s entry into the European Union. Many companies then saw an opportunity to reduce their production costs by opening plants in Spanish territory. Catalonia, in the mid-1980s, developed particularly well in this sense with tax policies that encouraged the arrival of foreign capital that, in turn, created jobs. Most companies, however, opted for the establishment of subsidiaries associated with production and assembly with little capacity to influence decisions in the parent company. Over the years, a considerable part of companies chose to seek new locations, particularly in Eastern Europe. In Spain, those companies which require a highly skilled workforce have stayed and opened doors to collaboration in R+D objectives predetermined by the parent company but that are developed in communities such as Catalonia, Madrid and the Basque Country.

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