1 DOES EXCELLENCE IN ACADEMIC RESEARCH ATTRACT FOREIGN R&D?*

This paper examines the role of nations ’ academic research strengths in attracting foreign R&D by multinational firms. We hypothesize that a firm’s propensity to perform R&D in a host country is positively affected by the country’s academic research strengths. However, firms are expected to be heterogeneous in their response to the strength of the science base due to differences in their absorptive capacity to utilize scientific knowledge. We find support for these hypotheses in an analysis of foreign R&D activities in 40 host countries and 30 technology fields, by 178 leading European, US and Japanese firms during 1995-1998 and 1999-2002. Controlling for a wide range of host country factors, the number of relevant ISI publications in a technology field by scientists based in the host country has a substantial positive impact on the propensity to conduct foreign R&D. Further, the effect of academic research is much larger in magnitude for firms with a stronger science orientation in thei