The Contribution of International R&D to Firm Profitability

Increased globalisation and competition caused more and more firms to relocate part of their R&D activities to foreign countries. This recent trend towards the internationalisation of R&D is motivated by expected gains through a better access to new knowledge, markets and more efficient production technologies. On the other hand, additional costs, e.g. for organising and coordinating dispersed activities, arise from the decentralisation of corporate R&D. Up to now, the empirical literature provides no evidence whether benefits do outweigh the financial and organisational costs of these international ventures. This research tries to fill this gap. Thus, the main question this paper tries to answer is whether international R&D activities increase firms' future profitability. In order to shed light on the relationship between international R&D activities and firm’s profitability, we compare firms that have both domestic and international R&D with firms that perform R&D only at the home country as well as with firms that do not carry out own R&D activities. Since the internationalisation of R&D is a growing phenomenon in a sense that not only more firms are going abroad but that also the number of foreign R&D centres has raised for many firms, we furthermore evaluate how the degree of internationalisation affects profitability. The degree of internationalisation is measured by the number of countries in which a firm performs R&D abroad. Our research makes use of information that is provided within the Mannheim Innovation Panel (MIP). The MIP is the official annual innovation survey among German firms, and it is the German contribution to the European-wide harmonised Community Innovation Surveys (CIS). Based on more than 1300 observations, we first of all find that firms performing R&D in year 2005 make significantly higher profits in future years than firms without innovation activities. However, the stimulating effect on profitability is about twice as high for firms with domestic and foreign R&D compared to firms that perform R&D only in their home country. We can therefore conclude that firms which innovate globally are not only able to realise the benefits of these international ventures but that they are also able to limit the costs and risks. We furthermore provide evidence that firms with internationally more dispersed R&D operations achieve higher return on sales. However, a moderate number of R&D locations abroad (2-3 countries) seems to be most conducive to profitability. Firms with four or more R&D locations abroad seem to achieve lower profitability gains than medium centralized firms, but the profitability is still about twice as large as the one of firms performing solely domestic R&D.

Peters, Bettina and Anja Schmiele (2011), The Contribution of International R&D to Firm Profitability, ZEW Discussion Paper No. 11-002, Mannheim.