Detecting which firm-specific characteristics impact market-oriented R&D

This paper investigates which firm-specific characteristics lead multinational enterprises (MNEs) to increase their R&D expenditure in host countries as a way of expanding their business into local markets (market-oriented R&D). The literature that addresses this topic is quite limited because of the difficulty of separating market-oriented R&D expenditure from knowledge-sourcing R&D expenditure in the data. We argue that determining the relationship between local sales and R&D expenditure is a better way to identify whether MNEs are investing market-oriented R&D than is separating the two types of R&D. For connecting firm-specific characteristics, local-market sales, and R&D expenditure together, we adapt two-stage regressions. By employing data from Taiwanese multinationals from 2003 to 2006, we found that if an MNE moves its technology toward capital-intensive products, it increases its R&D expenditure to promote its sales in the local markets in the host country.