Localization and Overseas R&D Activity: The Case of Taiwanese Multinational Enterprises in China

Abstract

This study investigates the determinants of overseas research and development (R&D) and the influences of various aspects of localization on affiliates' R&D intensity. Using a dataset of Taiwanese multinational enterprises (MNEs) in China, the empirical estimations find that MNEs with a larger firm size, more R&D expenditure, and a higher outward foreign direct investments intensity tend to undertake R&D. Host regions' characteristics, particularly market size and R&D resources, do matter for attracting MNEs to conduct R&D locally. Crucially, affiliates' R&D intensity is related to the degree of localization. The degree of market localization and localization of the R&D network has a positive association with affiliates' R&D intensity. From the perspective of R&D policy, a country with healthy R&D infrastructures helps attract the establishment of R&D labs of MNEs.