SI Seminar with Frank Neffke

We study the impact that Research and Development activities of foreign firms have on the likelihood that a region will accelerate its innovation output. Using nearly four decades worth of US patent data, we show in a matched difference-in-differences estimation framework that the initiation of research and development by foreign multinationals has a positive causal effect on local innovation rates. This effect materializes through two channels: knowledge spillovers to domestic firms and the attraction of new foreign firms to the region. However, not all multinationals generate equal benefits to the local economy. In spite of their advanced technological capabilities, technology leaders tend to generate fewer spillovers than technologically less advanced multinationals. Such lead firms tend to engage in fewer alliances and exchange fewer workers with domestic firms. Moreover, they tend to locate in regions that have lower absorptive capacity than lower ranking firms. We attribute this to differences in the balance between costs and benefits of local spillovers between foreign firms, highlighting the importance of considering corporate strategy when examining clusters.