The returns to foreign R&D

Extant research on RD internationalization has not examined how effective foreign RD investments are in generating positive returns for the investing firms, in particular in comparison and conjunction with the effects of domestic RD investments. We examine the effectiveness of international knowledge sourcing through foreign RD in an empirical analysis of the productivity effects of foreign and domestic RD investments in a large panel of firms based in the Netherlands. We argue that foreign and domestic RD will exhibit complementarity in their effects on productivity, but that the roles of domestic and foreign RD depend on the relative position of the home country with respect to the global technology frontier and the related relative opportunities for knowledge sourcing abroad. We estimate a dynamic panel data model derived from a knowledge stock augmented production function framework allowing for productivity convergence and declining returns to RD. We confirm that for firms active in industries in which the home country is behind the global technology frontier, foreign RD provides positive returns and has a complementary relationship with domestic RD. For industries at the global technology frontier, in contrast, domestic RD is the primary source of productivity growth.