Foreign direct investment and internationalization of R&D: the case of BRICS economies.

Abstract

Foreign direct investment (FDI) is increasingly seen as an important source for achieving greater and faster economic growth and technology accumulation in many developing countries. There has been a good number of studies over the years on different aspects of FDI such as its impact on economic growth, its contribution to technology diffusion and human capital formation in the local economy, the factors that determine different level of flow of FDI to different countries, trade and technology development, and its costs and benefits (e.g. OECD, 2002; Wei, 2005; Chakraborty and Basu, 2002; Rajan, 2005). Some of these studies suggest that not only the volume and nature of FDI flow varies greatly across the emerging and less developed economies, but also their ability to absorb and benefit from them and how effectively they use FDI to enhance their national productive systems varies greatly. In this context, what is interesting to study is the increasing trend of locating and organising R&D by foreign companies in emerging market economies through FDI, particularly in the large emerging economies in Asia such as China and India. It appears that increasingly internationalization of R&D is considered an important vehicle to maintain competitiveness in the globalised economic environment. Because of this the attitude of large multinational corporations and other businesses have been changing towards the types of R&D operations being carried out outside their home base. This is illustrated by the development in recent years particularly in China and India, and to a lesser extent in other emerging market economies. Increasingly, not only the volume of R&D has increased but also the degree of complexity and higher value added. What this may mean is that a country that has a relatively functioning NSI can attract FDI in R&D that often TNCs were not willing to engage in the past. It seems clear that FDI for R & D and knowledge transfer means that the relationship between the TNCs and the local subsidiaries is changing. This has implication for economic development. The change may not be because the TNCs have changed their main logic for moving across the world, it may be related to the new stature achieved by continental-sized economies such as India and China. In other words as the NIS’ in these countries are relatively stronger and becoming more mature, they are able to manage and absorb the FDI flow better for achieving their socio-economic development goals. In this paper we will examine and analyse the domestic and external factors that are contributing to the increasing volume and complexity in international R&D inflow. We would argue that the capacity to attract international R&D is directly related to the degree of functioning of an economy’s national innovation system. That is, the weakness or strength of NIS influences the nature and volume of international R&D inflow through FDI. For this, we take the case of BRICS economies – Brazil, India, China and South Africa (excluding Russia). We aim to generate comparative insights by taking into account differences in the NIS across these countries and how that impact on the nature and shape of FDI in R&D in these economies. In this paper we also attempt to examine whether there are emerging sectors that are being opened by BRICS economies with changes to regulatory arrangements and incentives to attract international R&D flow thorough FDI. Conversely, we would also attempt to examine it from the side of the companies, corporations and their home base constraints that impel them to engage in internationalization of R&D through FDI. In other words, we would attempt to understand whether FDI is playing a significant role in specific sectors such as Telecom or IT in BRICS countries, particularly in China and India contributing to a dramatic shift in the world economy