This Policy Brief presents a statistical portrait of US MNCs’ global innovation system and the technological, organizational, and labor market factors that have changed the system in the last two decades, as discussed in our previous research. The evidence points to an international division of R&D labor akin to the well-documented global value chains in goods production, in which particular R&D activities are located in regions where innovation in those domains appears most efficient. As is usually the case when the benefits of specialization and gains from trade can be realized, this transformed system brings broad-based opportunities by increasing the innovative capacity of US companies. In the context of the productivity slowdown in the advanced industrial world, these benefits should be welcomed, as they appear to offer a plausible pathway to increase productivity growth.
Several challenges could limit these benefits from the globalization of R&D, however. The global rise of economic nationalism poses a potential risk to progress in this area, particularly if the United States retreats from international trade policy leadership, for example. The aggressive use of tariffs under the Trump administration is already signaling to companies that the US government no longer supports the internationalization of commercial activities. It may take years to measure the impact on global R&D activity with any precision, but it is not difficult to imagine current rhetoric resulting in a decrease in overseas R&D activity by US MNCs or, potentially worse, decreasing integration and collaboration between US MNCs’ domestic R&D labs and their foreign affiliates.
In addition, some important developing countries are resisting effective protection of intellectual property rights and openness to foreign direct investment (FDI), preventing MNCs from taking full advantage of these nations’ potential as R&D sites. As the locus of R&D effort shifts from manufacturing to services and digitally traded services become a greater component of global consumption, global trade in services must be liberalized to achieve progress in innovation. The global effort to restrict (or tax) international data flows is another potential impediment. Because movement of skilled workers is a vital element of this system, rising opposition to immigration is another risk. Finally, growing US-China tensions pose a special challenge because of the important role these two economies play in the system. Certain public policies are needed to strengthen intellectual property rights, encourage labor mobility, and liberalize trade in services so that innovation can flourish to improve living standards and fuel economic progress.innovation multinationals
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