The lab and the plant : offshore R&D and co-location with production activities

The literature has highlighted that the propensity of MNEs to co-locate offshore R&D labs with their production plants can vary substantially according to firm and industry characteristics. In this paper, we apply a novel two-stage estimation procedure that allows us to tease out this heterogenous behaviour and investigate the factors that are associated with a higher propensity to co-locate production and R&D activities abroad. Using data on 1,483 greenfield international investments in R&D activities made by 855 firms in 587 cities worldwide, we uncover that the strength of the colocation effect is indeed highly heterogenous across firms. In particular, it is higher among firms with less international experience and geographical dispersion of international activities, as well as with a lower share of intangible assets. These results are consistent with the idea that co-location is a substitute for firms’ ability to coordinate complex and dispersed organizational structures, and that firms relying relatively less on codified knowledge can use co-location of offshore R&D and production to facilitate knowledge transfer across activities