Subsidiary research and development, and the local environment

Multinational enterprises (MNEs) increasingly seek to optimise their global innovative capabilities by incorporating subsidiary-specific advantages in different countries. But how important are the different location advantages for subsidiary investments in research and development? This paper adds to our understanding of the effects of commonly cited location advantages by analysing the degree to which they actually influence the incidence and level of subsidiary R&D. We developed hypotheses from the existing literature on location advantages, multinational R&D, and innovation incentives, and tested them in relation to an empirical data set containing over 2000 responses from subsidiary managers in seven countries in Europe. Four aspects of the local business environment were investigated: competitive conditions, supply conditions, scientific institutions, and government support. We found that only the presence of scientific institutions has a consistent, positive effect on the incidence and level of subsidiary R&D. Government support has a positive effect on the incidence of subsidiary R&D, but not its level. However, highly competitive environments have a negative effect, at least in small countries.