National companies benefit from the foreign business of competitors

Technological progress is essential for the international competitiveness of a country. In a new KOF study, Spyros Arvanitis, Luca Mircea, Florian Seliger and Martin Wörter (Arvanitis et al. 2018) carry out a descriptive and econometric analysis of the contribution of foreign R&D operations by Swiss companies to increases in innovation and productivity within Switzerland. The researchers take “foreign R&D operations” to refer to research and development (R&D) activities carried out by foreign subsidiaries, R&D cooperation with foreign companies or research institutions and the placing of R&D contracts with foreign operators. They are able to measure R&D operations both “directly” through information contained in surveys and also “indirectly” based on patent data. R&D operations exert an influence on other companies through so-called knowledge spillovers. These involve a flow of knowledge through various channels to competitor businesses, which take this knowledge on board and exploit it as part of their own efforts at enhancing innovation.

The descriptive assessments of the innovation panel show first and foremost that in particular large companies have foreign R&D operations, since presumably only these companies are able to deploy the necessary resources. In addition, all R&D operations are heavily focused on EU countries. Operations are centred above all on other companies (and not on universities and research institutes), i.e. Swiss companies cooperate with foreign companies or place R&D contracts with foreign companies.

Businesses interested above all in cutting costs

Although the researchers show in their study that the knowledge element of foreign R&D operations can make an important contribution to domestic innovation, the resource aspect (i.e. cutting costs by outsourcing R&D operations) is much more significant for Swiss companies than the knowledge aspect (i.e. close involvement with universities and other knowledge-intensive companies in foreign regions).

Within the economic part of the study the authors investigate, amongst other things, the effect of spillovers on the number of new patents applied for by a company. New patents mark the transformation of the technological know-how required for their development into the knowledge capital of a company. The authors show that the effect is positive and that the spillover effect propagates exclusively from patented inventions of other companies that were created with the involvement of foreign inventors (with which a competing business has carried out international R&D operations).

Interestingly, this effect is not limited to new patents overall, and to new patents developed with foreign inventors, but also operates for patents developed exclusively by Swiss-based inventors. This means that also companies with an exclusively national focus to their R&D efforts (resulting exclusively in patents developed in Switzerland) benefit from the internationalisation of R&D by other companies.

In addition, the authors investigate whether there is any link between a company’s knowledge capital (to which its own patents contribute) and its innovation. This correlation is positive, as may be expected. However, this is also attributable to the element of the knowledge capital that is developed with the assistance of foreign inventors through international cooperation, R&D operations and R&D orders (international knowledge capital).

This knowledge is essential for the market success of new and innovative products. This means that initiatives to promote international cooperation between inventors increase not only knowledge capital but also the innovative depth of new products, resulting in higher turnover. The accumulation of knowledge capital is associated with high costs, which can only be covered if new, innovative products are developed and marketed.

Positive productivity effects, under certain circumstances

In actual fact the authors only identify positive productivity effects for international knowledge capital when new products are developed at the same time. The size of the company is a further condition for positive productivity effects of international knowledge capital, since larger companies can take advantage of international sales channels and more comprehensive marketing options, which have a positive effect on the marketing of innovative products. In addition, high R&D costs can be offset against higher levels of sales by larger companies, which means that products can be offered for sale relatively cheaply.

For most companies, which tend to be smaller on average, the authors identify positive productivity effects also for knowledge capital associated exclusively with inventions by Swiss-based inventors. This results in a kind of “division of labour” between these smaller companies and the major companies with an international focus. Finally, thanks to the spillover effects mentioned above, all companies benefit from the international operations of major companies, thus including smaller companies with a more national focus.

International cooperation important

On an economic policy level, the authors consider above all international cooperation in relation to the development of new technologies to be a key factor in generating knowledge spillovers, from which also smaller companies with a national focus can benefit. International cooperation can involve both classic cooperation between businesses as well as cooperation between personal networks of employees, or cooperation with individuals based abroad who have particular know-how that is not available in Switzerland.

International cooperation also increases technological know-how, enabling companies to understand the technologies of other companies and combine them with their own. However, it must be remembered that smaller companies are exposed to a higher risk in relation to the development and marketing of new technologies as they often lack important resources. This should be taken into account within economic policy in order to enable smaller firms to benefit from spillovers.