From Learning to Partnership: Multinational Research and Development Cooperation in Developing Countries

Abstract:     
Do multinationals cooperate in research and development with local firms in developing countries? This paper explores the theoretical underpinnings and provides new empirical evidence of R&D cooperation between firms with asymmetric endowments of knowledge.

Barba Navaretti and Carraro analyze the determinants of interfirm agreements between industrial and developing countries for research and development (R&D) - that is, between firms with asymmetric endowments of knowledge. They develop a model in which a multinational has two options: (1) setting up a subsidiary and competing with a local firm in a duopoly, or (2) implementing an agreement and sharing monopoly profits. The two firms, if they choose the agreement, may also cooperate in R&D. The model shows that:
° The choice of cooperating in R&D is influenced by the intertemporal preferences of the developing country firm, the relative efficiency in R&D of the two firms, and the extent of knowledge spillovers.
° The choice of cooperating in R&D increases both the profitability and stability of the agreement, stability because it affects the long-term trust between the partners.

The empirical analysis is based on a data set of international arm's length agreements, part of which involve joint R&D. Testing the two-choice model supports some of the key theoretical results and assumptions. R&D agreements are particularly likely to emerge when firms are operating in knowledge-intensive industries (where nontangible assets, like knowledge, are large relative to tangible assets), when the partners have a nonhierarchical contractual relationship (they all contribute to the R&D effort), and when technological asymmetries between home and host countries (as proxies of knowledge endowments of the contracting firms) exist but are not too great.

This paper - a product of the International Trade Division, International Economics Department - is part of a larger effort in the department to examine the impact of foreign direct investments on developing countries.

Working Paper Series