Multinational companies (MNCs) are at the heart of two key trends in globalisation: the fragmentation of production and the internationalisation of innovation. MNCs manage complex production networks across multiple countries. They also conduct the vast majority of research and development (R&D) at the frontier of scientific knowledge, and they enable the spread of new technology across borders.
This raises several policy questions. In particular, thinking about MNCs can help to shape our understanding of the current climate of trade disintegration including Brexit and the China-US trade war, as well as regional agreements on deep integration such as the Regional Comprehensive Economic Partnership (RCEP), which encompasses 15 Asia-Pacific countries and around 30% of global GDP.
Questions for developed economies include: how does offshoring production affect MNCs’ innovation prowess, and does R&D abroad come at the expense of R&D at home? For developing countries, what attracts MNC production and innovation to fuel capital and knowledge exchange?
From a global perspective, how does the map of world R&D shape global growth? And what are the implications for trade, foreign direct investment (FDI) and innovation policy in rich nations, in emerging markets and within multilateral agreements?
While much is known about the global organisation of MNC production, how MNC innovation is organised around the world is not well understood. It has been argued that MNCs headquartered in rich countries offshore lower-skill manufacturing to poorer countries, retain skill-intensive R&D at home, and deploy home-grown technology advances across their affiliates.
Yet anecdotal evidence points to increasing MNC innovation abroad, in both advanced and emerging economies. For example, while leading German car producer BMW has long sourced components from China, in 2018, it also unveiled a large R&D centre in Shanghai specialising in digital services, autonomous driving and automotive design. Similarly, in 2017, Mercedez-Benz opened its sixth R&D lab in Seattle, primed as a digital hub for cloud computing.
Lessons from Germany
In my recent research with Anna Gumpert, Cristina Rujan and Monika Schnitzer, we study the global innovation activity of German multinationals (Gumpert et al, 2025). As the world’s third biggest exporter, a global innovation leader and home to many MNCs, Germany provides an ideal case study to explore our questions.
We establish new facts based on detailed data on MNCs’ networks of affiliates and patent development. We distinguish between basic (science-based) and applied (not science-based) patents, and introduce a new patent measure of countries’ comparative advantage in innovation across technology areas. This then allows us to develop a model where companies simultaneously choose the locations and scale of manufacturing, innovation that lowers marginal costs, and ‘basic’ innovation that improves future profitability.
Consistent with the model, we find that bigger MNCs file more patents, of higher quality, at home and in more foreign countries both with and without affiliates. MNCs more frequently pursue basic innovation than applied innovation abroad, but they co-locate it with production less frequently. This evidence lends support to multilateral agreements that span trade, investment and innovation policy.
Key takeaways: MNC patent activity
Our study makes use of data from Deutsche Bundesbank and the European Patent Office. Comprehensive records of patent counts and citations provide informative metrics for the quantity and quality of successful research. They also make it possible to distinguish between basic and applied innovation, and allow us to capture MNCs’ innovation in countries both with and without affiliates.
For each German parent company, we use the location of its subsidiaries and patent filers to identify patents developed at home, abroad in a country with an affiliate, and abroad in a country without an affiliate. We distinguish between basic R&D that advances fundamental knowledge and applied R&D that adapts fundamental knowledge to production uses. We also quantify patent quality using the number of forward citations by subsequent patent applications.
Our findings highlight interdependencies in MNCs’ production and innovation, with several policy implications. In particular, offshore production and innovation complement one another. So too do basic and applied innovation, as well as innovation across countries.
This supports national reforms and multilateral integration that span trade, investment and innovation policy to reduce the costs of both production fragmentation and cross-border investment, while also promoting R&D. This alleviates concerns in developed countries about offshore innovation displacing domestic innovation and reinforces incentives to attract FDI to developing countries.
Our results also recognise the potential for cutting-edge research in both advanced and emerging economies to contribute to global growth, where the former have comparative advantage in basic innovation, and the latter in manufacturing and synergistic applied innovation.
Intuitively, a German pharmaceutical company may pursue fundamental scientific discovery (for example, new chemical reaction) in technologically advanced nations like Switzerland or the United States, but then conduct applied product or process innovation (for example, designing a new combo-vitamin pack or reducing gas dissipation in operations) alongside production in developing countries with favourable manufacturing costs like China.
How do MNCs optimise production and innovation across countries?
To develop a better understanding of MNCs’ global production and innovation strategies, we model firms that choose both the location and scale of their production, basic innovation and applied innovation to maximise total profits.
Firms may pursue each R&D type in multiple countries, either alongside a production affiliate or by subcontracting innovation to another party. The returns to innovation are additive across countries, with applied innovation raising profits immediately by lowering marginal production costs and basic innovation increasing future expected profits (for example, by facilitating future applied innovation).
In our framework, site-specific innovation costs rise with innovation intensity and inventor wages, but applied R&D is less costly when co-located with production.
Our analysis delivers a number of policy-relevant predictions:
- First, more productive multinationals are more likely to innovate and to do so more intensively.
- Second, more productive MNCs are more likely to conduct R&D both at home and abroad in more countries, both with and without a subsidiary.
- Third, MNCs innovate more intensively in countries with lower inventor wages and, if these vary across sectors, follow countries’ comparative advantage for innovation in different technology areas.
- Finally, MNCs are more likely to co-locate production with applied innovation, compared with basic innovation.
Analysis of the data reveals that German MNCs with higher global sales are more likely to file patents. Conditional on patent activity, bigger MNCs generate more patents that receive more citations on average. Larger firms are also more likely to innovate both at home and offshore.
Along the extensive margin, bigger MNCs have a higher probability of innovating in at least one foreign country, innovate in more countries on average, and file patents both in locations with and without an affiliate. Bigger MNCs also develop a greater share of their patented technologies abroad.
German MNCs also respond to cross-country differences in comparative advantage in innovation. For example, MNCs are more likely to research energy and transport technology in Germany, computer and telecommunication technologies in the United States, measurement and medical technologies in Switzerland, and machine tools and metallurgy in Austria.
Each of the patterns above hold when we distinguish between MNCs’ basic and applied innovation activity. At the same time, firms are more likely to co-locate applied R&D with production, compared with basic R&D. This provides a rationale for the simultaneous rise in applied patents filed in less developed countries with attractive manufacturing wages, and in basic patents in more advanced economies with unique scientific talent.
Policy implications
Our findings shed new light on the design of global trade, investment and innovation policy. They inform the scope for multilateral agreements that span tariff reductions, investment promotion and intellectual property rights protection, especially as developed and developing countries occupy different segments of global value chains and engage differently in technological innovation and adoption.
Our work also points to complementarity in innovation activity across countries. This may alleviate concerns about the impact of offshore innovation. It also implies that improved opportunities for production offshoring can provide incentives for innovation both at corporate headquarters and abroad, enabling countries at different stages of technological development to engage with R&D.
Finally, MNCs’ global operations may shape the impact of technological leaps such as automation on the global distribution of production, innovation and adoption, shaping economic growth across countries.
