Regulatory institutional distance and the United States multinational corporations' research and development investment decisions

Abstract

AbstractResearch and development (R&D) investment of multinational corporations (MNCs), as a part of MNCs' foreign direct investment (FDI) decision, has been studied for both the importance of the location for the MNC's strategy, and for the host country's benefits from the spillover effects of investment in R&D. The R&D investment decision is often influenced by the macroeconomic environment and the institutional framework of the host country. In this article, we argue that it is not just the level of regulatory institutions in the host country but also the regulatory institutional distance between the home and host countries that influences the R&D investment decision. We use the R&D expenditure data of U.S. majority owned firms' affiliates in various countries to analyze two things. First, we study the effect of regulatory institutional distance on the decision to invest in R&D in the host country. Second, we analyze if the regulatory institutional distance influences the intensity of R&D expenditure. We find significant empirical support for our hypotheses that underscores the importance of regulations for attracting R&D investments from MNCs.