Study on the relationship
between the localisation of
production, R&D and
innovation activities
Final Report
ENTR/90/PP/2011/FC
Prepared for
European Commission
DG Enterprise and Industry
Unit ENTR A4 – Industrial Competitiveness for
Growth
Prepared by:
Idea Consult
In partnership with:
Danish Technological Institute (DTI)
Vienna Institute for International Economic
Studies (wiiw)
September 2014
Single contact person:
Arnold Verbeek
Kunstlaan 1-2, bus 16
B – 1210 Brussel
T: +32 2 282 17 10
F: +32 2 282 17 15
[email protected]
www.ideaconsult.be
Relationship between the localisation of production, R&D and innovation activities
About ECSIP
The European Competitiveness and Sustainable Industrial Policy Consortium, ECSIP
Consortium for short, is the name chosen by the team of partners, subcontractors and
individual experts that have agreed to work as one team for the purpose of the Framework
Contract on ‘Industrial Competitiveness and Market Performance’. The Consortium is
composed of Ecorys Netherlands (lead partner), Cambridge Econometrics, CASE, CSIL,
Danish Technological Institute, Decision, ECIS, Euromonitor, Fratini Vergano, Frost &
Sullivan, IDEA Consult, IFO Institute, MCI, and wiiw, together with a group of 28 highly
skilled and specialised individuals.
ECSIP Consortium
p/a ECORYS Nederland BV
Watermanweg 44
3067 GG Rotterdam
P.O. Box 4175
3006 AD Rotterdam
The Netherlands
T. +31 (0)10 453 88 00
F. +31 (0)10 453 87 55
Email [email protected]
2
Relationship between the localisation of production, R&D and innovation activities
TABLE OF CONTENTS
List of abbreviations
4
Executive Summary
5
1/
2/
3/
4/
5/
Background and study setup
15
1.1
Policy context
15
1.2
Major trends in foreign direct investments, trade and R&D
16
1.3
Objectives, approach and deliverables
20
1.4
Guide to the reader
22
Theoretical background & analytical framework
23
2.1
Theoretical insights
23
2.2
Key concepts and definitions
27
2.3
Analytical framework
28
The Case studies: setup, implementation and findings
32
3.1
Preparation
32
3.2
Case study implementation
34
3.3
Cross-case analysis and limitations
35
Analytical discussion of the case findings
36
4.1
Case study findings: summary tables
36
4.2
Case study findings: Role of the company’s ‘environment’
42
4.3
Case study findings: role of internal organisational characteristics and considerations
47
4.4
Case study findings: co-location and impacts of location decisions on ‘home’ and ‘host’ countries
51
Key findings and main policy reflections
55
5.1
Key findings
55
5.2
Main policy reflections
58
Bibliography
59
Annexes
62
1/ Literature review
63
2/ Data analysis report
64
3/ Case study questionnaire
65
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Relationship between the localisation of production, R&D and innovation activities
List of abbreviations
B2B
B2C
BRICS
BRII
EC
ECIS
ECSIP
EFTA
EMCC
ERA
ERM
EU
EUR
FDI
GDP
KETs
MNE
NAFTA
OECD
R&D
RDI
SME
UNCTAD
US
USD
VA
Business to Business
Business to Consumer
Brazil, Russia, India and China
Brazil, Russia, India and Indonesia
European Commission
European Conference on Information Systems
European Competitiveness and Sustainable Industrial Policy
European Free Trade Association
European Monitoring Centre on Change
European Research Area
European Restructuring Monitor
European Union
Euro
Foreign Direct Investment
Gross domestic product
Key Enabling Technologies
Multinational enterprise
North American Free Trade Agreement
Organisation for Economic Cooperation and Development
Research and Development
Research, Development and Innovation
Small and medium enterprises
United Nations Conference on Trade and Development
United States
US dollar
Value added
4
Relationship between the localisation of production, R&D and innovation activities
Executive Summary
Objective and approach
While Europe maintains its leading position in inward and outward Foreign Direct
Investment, there are convincing indications that it is losing some of its attractiveness as
an investment location. European firms remain the most important global investors and,
increasingly, investments in offshore production facilities around the world can be
observed. As R&D and innovation activities strongly add value to the firm and its
geographical location, and as innovation is considered to be pivotal for industrial recovery,
it is important to understand the strategic considerations of firms with respect to the
geographical location of these activities. Particularly relevant in this respect is the
interrelation between manufacturing, R&D and innovation location decisions.
Therefore, the main objective of this study is to understand the drivers behind a firm's
decision on where to geographically locate production, and the influence of that decision
on the geographical location of the firm’s R&D and innovation activities.
This study focuses on offshoring of production and/or R&D and innovation, either within
or outside the firm, and mainly from a geographical perspective. It has been conducted in
four consecutive steps.
1) Extensive literature review to take stock of existing insights1.
2) Development of a conceptual framework (including the formulation of a series of
study assumptions) based on the literature review.
3) Collection and analysis2,3 of key data and indicators on offshoring/reshoring for both
production and R&D.
4) Selection, implementation of 10 case studies and the analysis of cross-case findings.
Selected cases
The selected case studies are situated in knowledge-intensive sectors and sectors with
competitive technology clusters. A ‘case’ is defined as a (co-)location decision/event
involving production, R&D or innovation, or a combination thereof. For confidentiality
reasons the identity of the studied cases (the companies) cannot be revealed, but some
basic characteristics can be provided.
Geographically, the selected firms have their headquarters in central and northern Europe
(e.g. in Germany, France, Belgium, Denmark, and Austria). One case concerns an Asian
firm that has located its R&D and innovation activities in Europe (EU inward investment).
In terms of sectoral spread, the case studies involve the semiconductor industry,
automotive, industrial technology, equipment, materials, construction, the production of
catalysts, air pollution control systems, and wind turbines. In terms of size there is a mix
of very large, large, middle-sized and few ‘small’ firms (two of the studied firms have less
than 250 employees).
1
2
3
The results of the literature review are presented in a separate report annexed to underlying report.
The following data sources have been examined: Eurostat FDI data, World Input-Output data, Eurostat and OECD data
on the activities on foreign controlled enterprises: FATS (foreign affiliates) and AMNE (activity of multinational
enterprises, Community Innovation Survey (CIS) data, EU industrial R&D Investment Scoreboard, EU Survey on
Industrial R&D Investment trends, European Restructuring Monitor data.
The results of the data analysis are presented in a separate repot annexed to underlying report.
5
Relationship between the localisation of production, R&D and innovation activities
Analytical framework
Offshoring refers to the process of relocation of jobs and processes to any foreign
country. Offshoring frequently concerns foreign direct investment and includes both
production and/or R&D and innovation activities. Equally important are re-shoring or
back-shoring activities, which refer to the return of production or R&D that was previously
offshored (outside Europe). When production offshoring or re-shoring is followed by R&D
offshoring or re-shoring, and there is functional interdependency between production and
R&D or innovation, one may speak of ‘co-location’ of these business functions. In this
study, decisions associated with offshoring, re-shoring, and/or co-location are referred to
as location decisions. In order to understand the location decisions of the selected
companies, an analytical framework has been developed to identify which factors drive a
firm’s decision to offshore production and/or R&D and innovation, how these factors
influence the location decision making process, and what the impact of the decision
ultimately is on the home and host countries. These driving factors can broadly be
classified into environmental and organisational factors.
Environmental factors:



Location characteristics refer mainly to cost factors (transport, labour, raw
materials, taxes and subsidies), social factors (political governance, political
situation, corruption, and work-force skills), scientific and technological
strengths, and political stability. Trade barriers also play an important role, while
environmental regulations may play a significant role in certain sectors.
Industry, sector and value chain characteristics and dynamics are crucial in R&D
and innovation and production location decisions. The value of being near an
ecosystem with suppliers or other plants in the same sector and facilities (for
reasons of e.g. short supply lines or knowledge spillovers) along the value chain,
does influence production location decisions (e.g. for SMEs, a location decision
may be based on the relationship with key clients).
Market considerations e.g. size and growth potential, are generally decisive for
production, R&D and innovation location decisions. The literature shows that
firms value proximity to important markets and key customers, and that market
characteristics also have an influence on R&D and innovation location decisions.
Subsequently, the market penetration strategy of the company is to a large
extent decisive whether local presence is required.rs
Organisational factors:


Strategic considerations refer to a company’s overall strategy with respect to
market entry and growth, product/market combinations, production organisation
(e.g. through lead factories or not), distribution and services etc. These features
are decisive for the location decisions of R&D, innovation and production.
Understanding the key strategic considerations and longer-term vision of a
company allows a better understanding of future location decisions.
Technology and innovativeness. Highly science & technology intensive firms and
highly innovative firms often require a more intensive collaboration between
production, R&D and innovation, and a more pro-active strategy towards
knowledge and technology sourcing. R&D location decisions are strongly linked
to access to strategic knowledge. The available ‘knowledge stock’ in the home
versus a potential host country, is an important factor in R&D and innovation
location decisions.
6
Relationship between the localisation of production, R&D and innovation activities

Product & production complexity. Both high product and process complexity,
and a high rate of new product introduction (market demand) have a strong
influence on the need to co-locate production with development activities
(sometimes also research activities). Similarly, in new complex markets that
require a high degree of customisation, proximity but also local research and/or
development capabilities might be needed.
Environmental and organisational factors lead firms’ location decisions with respect to
production, R&D and/or innovation. In policy circles there is increasing concern that when
manufacturing is offshored outside Europe, it is only a matter of time as to when R&D
and/or innovation activities will follow. This was explored in detail during the discussions
in the context of the selected case studies.
Concerning the impact of the production, R&D and innovation location decisions, there are
potential impacts at company level (turnover, employment, revenues etc.), but also at
regional and national levels, both in the home and the host country. Recent findings in
literature increasingly show that offshoring is not necessarily bad for the home country, at
least not on the longer run (e.g. Farrel, 2005; Añón Higón et al., 2009; Rabbiosi, 2009;
Criscuolo and Martin, 2009, Dachs and Ebersberger, 2013).
Key findings and messages
Based on their location ‘behaviour’, the 10 studied firms have been clustered (ex-post) in
3 groups. In Group 1 (‘no co-location’), composed of 5 cases, there is no functionally
related production and R&D co-location, meaning that production is not related
to/supported by ‘close-by’ R&D activities), despite the existence of offshore production
activity. Group 2 (‘partial co-location’) is composed of 2 cases where there is only partial
co-location (i.e. mostly development and adjustment capabilities are offshored close to
the production activity). In Group 3 (‘full co-location’) there are 3 cases where co-location
is functionally based (i.e. full R&D capability is co-located with production on the basis of
mutual reinforcement and support). The groups are further presented in the table below.
7
Relationship between the localisation of production, R&D and innovation activities
Table 1: Overview of key findings per ‘group’ of case studies
Group 1 ‘No co-location’
Group 2 ‘Partial colocation’
Group 3 ‘Full co-location’
No production – R&D colocation (cases 1, 6, 7, 8, 9)
Partial R&D – production
co-location (cases 4 and 5)
Production – R&D co-location
(cases 2, 3 and 10)
1. Knowledge ecosystem and
networks
2. Top-talent
3. Public support
4. Access to new
technologies
5. Cost levels (including
taxation options)
- Important for mainly
production location
decisions
1. Knowledge ecosystem
and networks
2. Access to new
technologies
3. Top-talent
4. Cost levels, including
taxation
1. Market/customer proximity
2. Knowledge ecosystem and
networks
3. Public support
4. Cost levels, including
taxation
- Mixed picture, value
chain is important, but
no particularities
Market
- Mostly not relevant
- Mostly not relevant
Product
and
production
complexity
- Product and production
complexity play a minor
role
- Product and production
complexity play a role of
importance
- Value chain of importance
(proximity to suppliers and
customers, depending on
B2B or B2C)
- Main driver (for
production, also
influencing R&D)
- Product and production
complexity play a major
role
Major
impacts
- Home: strategic
knowledge development
kept, strengthening of
existing ecosystems
- Host: not relevant
- Home: strategic
knowledge development,
build of new ecosystems,
spillovers
- Host: creation of local
absorptive capacity
- Home: spillovers, financial
flows
- Host: local employment
and knowledge
development, new
ecosystems
Pull or push
factors
(Ranked by
importance)
Value chain
Group 1: ‘no co-location’. The general picture for the group of firms that has not co-
located R&D with production on the basis of interfunctional reasons, is that R&D location
decisions are taken more or less independently from manufacturing, on the basis of
mainly three criteria: 1) strength of local ecosystems, 2) access to top-talent, and to some
extent, 3) access to public support schemes, including tax incentives. In one case
involving an R&D investment in Denmark, the attractive tax incentives provided by the
Danish government seem to have played an important role as well, in conjunction with
the strong knowledge ecosystem that was present (E&Y in collaboration with EuropaBio,
20144). The characteristics of the value chain in which companies operate do influence
production location decisions as well. This is less the case for R&D activities, however. In
these cases product and production complexity, nevertheless, does not always trigger
R&D de-localisation, often because of extreme standardisation or problem-solving
capabilities offered by e.g. lead factory staff. Strategic R&D remains central, often in
Europe. If speculating slightly, one could conclude that this type of companies is more
sensitive to cost-based incentives as manufacturing characteristics do not really require
R&D proximity.
4
E&Y and EuropaBio (2014), Biotechnology in Europe: The tax, finance and regulatory framework and global policy
comparison’
8
Relationship between the localisation of production, R&D and innovation activities
Group 2: ‘partial co-location’. The group of companies with partial R&D co-location and
mainly local development or adjustment activities, place less emphasis on the importance
of the market as a reason to co-locate. Instead they refer to similar reasons as Group 1,
like access to knowledge and ecosystems, and new technologies. The role of the value
chain characteristics and their position in this chain is less clear/uniform. In these cases
product and production complexity do play an important role; that is why local
development or adjustment is necessary. The impact of partial co-location on the host
country is limited, whereas the home country (Europe) still benefits from the presence of
strategic R&D (mainly strategic research) activities and the associated socio-economic
effects. These findings are in line with the existing theoretical insights and evidence (see
chapter 4 for more details).
Group 3: ‘full co-location’. For companies that have indicated a functionally interrelated
R&D and production co-location, key pull or push factors in terms of location are market
considerations, access to new emerging markets, and proximity to customers. Costs
factors and public support do also play a role in the making of the final location choice,
often within one country or region. Market demand, translated in high demand for
innovation, is the main driver influencing the need for co-location. These companies also
have a higher impact on the host country’s R&D capabilities and (local) economy.
Looking across the groups it can be observed that the access to a strong knowledge
ecosystem is a pull-push factor of common importance. For companies that do not colocate R&D with production (Group 1 ‘no co-location’), R&D location decisions are taken
based on the strength of local ecosystems, access to top-talent and public support.
Instead, for full co-location (Group 3 ‘full co-location’) market and manufacturing
proximity is crucial, while access to top talent is not explicitly mentioned as a factor of
importance. Access to new technologies appears to be a top driving factor only for firms
that offshore part of their development and adjustment capabilities (Group 2 ‘partial colocation’).
The existing body of literature on location decisions of production and/or R&D and
innovation, can be largely divided into the following two categories: a) the economist’s
perspective, which looks at location decisions from a locational ‘pull5’ perspective; and b)
the organisational scholars perspective, which examines location decisions from an
industry and firm perspective, and the cross-functional interdependencies between
production and R&D. Both categories have been explored in the case studies.
Environmental ‘pull’ factors have been pointed out by the interviewees of the case studies
as very important for a firm’s location decisions, both for production and R&D. The most
important pull factors valid for production location decisions are: proximity to customers
(market) and suppliers (value chain perspective), cost considerations, incentive schemes,
and business friendly administration. For R&D and innovation, the most important pull
factors are: access to R&D and innovation knowledge/technology ecosystems and
complementary competences, access to a skilled workforce, and to a lesser extent R&D
tax incentive schemes. Although all factors can work as ‘pull’ and ‘push’ simultaneously,
this is particularly true for the factor cost and available knowledge.
5
A ‘pull’ factor plays a role in the attractiveness of a certain location, often outside the home country/region. For
example, the low labour cost of a particular location might be very attractive for a firm and as such influence the
decision on where to locate existing or new activities.
9
Relationship between the localisation of production, R&D and innovation activities
In the tables below a summarising overview is provided of the most important pull factors
for respectively production and R&D activities, and the degree to which these factors have
played a role as ‘push6’ factor (i.e. ‘motivating’ the company to delocalise particular
activities from Europe to another country).
Table 2: Location factors and their importance for production location decisions
Location factors and their importance
Market considerations (emerging and growing
markets)
Access to clusters and ecosystems including
universities (knowledge and technology)
Cost considerations
Value chain considerations (proximity to
customers and suppliers)
Access to skilled workforce
Public support and incentive schemes
(including tax incentives)
Business friendly administration
Trade obstacles
Importance as ‘pull’
Importance as ‘push’
***
**
*
*
***
**
(to other countries)
***
*
(away from the EU)
**
**
**
*
**
*
**
*
Note: Low *, medium **, high *** combinations reflect the importance attached to these factors by the case
study interviewees.
Table 3: Location factors and their importance for R&D and innovation location decisions
Location factors and their importance
Market considerations (emerging and growing
markets)
Access to clusters and ecosystems including
universities (knowledge and technology)
Cost considerations
Value chain considerations (proximity to
customers and suppliers)
Access to skilled workforce
Public support and incentive schemes
(including tax incentives)
Business friendly administration
Trade obstacles
Importance as ‘pull’
Importance as ‘push’
**
**
***
**
*
**
**
**
***
***
**
*
*
*
*
*
(to other countries)
(away from the EU)
Note: Low *, medium **, high *** combinations reflect the importance attached to these factors by the case
study interviewees.
On the basis of the case study analysis and complementary literature review and data
screening, the following key findings and messages can be derived (for a more extensive
discussion please see chapter 5).
6
Whereas a ‘pull’ factor helps to attract firm activities to a certain location, a push factor might ‘motivate’ a company to
leave the home country/region and to move activities away. Usually firm location decisions are based on an assessment
of the interplay between push and pull factors.
10
Relationship between the localisation of production, R&D and innovation activities

As product and production complexity increase, and the market demands fast
innovations, the propensity to co-locate manufacturing and R&D and innovation
activities increases as well.
Group 1 (‘no co-location’) clearly illustrates that despite being highly R&D intensive,
and despite having relative complex manufacturing process, there is no need for
physical co-location whereby R&D activities support manufacturing. For group 2
(‘partial co-location’) and 3 (‘full co-location’), different R&D activities, development
support in particular, are closely located to production activities for problem solving
and local market adaptation requests (e.g. as illustrated in the semiconductor and
catalyst production sectors).
On the one hand, the specific case study findings show that the assumption that once
manufacturing activities are offshored, sooner or later R&D and innovation activities
will follow as well, does not hold for all investigated sectors or firms and can thus not
be generalised. On the other hand, there are clear and strong indications that as
manufacturing and production complexity increase, or when the market is highly
demanding in terms of innovation intensity, the need to partially or fully co-locate
R&D and/or innovation with manufacturing increases as well7. This has also been
pointed out by the High Level Group on KETs in its 2013 status implementation report
(European Commission, 2013), thereby also referring to the increasing co-location
requirements in Asia, as also pointed out in several of the case studies. In Group 2
(‘partial co-location’) and 3 (‘full co-location’) we see that different R&D activities,
development support in particular, are closely located to production activities for
manufacturing support and local market adaptation requests. Manufacturing
complexity and market demand hence are clear driving forces behind full or partial
co-location.

Consideration of the co-location of some of the activities in the R&D spectrum (partial
co-location) provides a more detailed and fine-tuned insight, and a more accurate
reflection of reality.
The on-going debate on R&D, innovation and production co-location can be
strengthened by a more detailed perspective on which R&D and innovation subactivities in particular are more sensitive to ‘co-location’. The spectrum of R&D
activities contains research (to develop basic innovations), platform, application and
process development (aiming to develop product platforms and/or adjust products to
regional markets and customers), and production support (aiming to solve technical
problems and ensure continuation of manufacturing). Depending on the activities
involved, different degrees of co-location can be observed in light of market, product
and production characteristics and demands. Previous research (Simon et al., 2008)
indicates that full-co-location, where all R&D phases take place at the manufacturing
site, only occurs at long established locations that serve as knowledge centres for an
entire sector, reflecting the shift of an entire industry locus or value chain.
7
As also illustrated by the results of a survey targeting more than 100 managers from 54 manufacturing companies
(McKinsey, 2012)
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Relationship between the localisation of production, R&D and innovation activities
The case study findings indeed confirm that the location of (strategic) research
activities is strongly driven by access to strong knowledge ecosystems (composed of
top research and technology development centres) and top-talent. Once embedded in
such an ecosystem, assuming its worldwide excellence is maintained, it will be
difficult if not impossible for a firm to unplug from that ecosystem. The story is
different when it concerns development activities, the location of which is largely
dictated by product and production complexity and market demands. In other words,
the drivers behind the location of R&D and innovation activities, in terms of colocation with manufacturing, strongly differ.

Specific location characteristics can have a strong ‘pull’ effect on R&D, innovation
and/or production location decisions. For R&D, access to top-knowledge and talent
prevail; for production, market proximity, value chain, and cost considerations prevail.
When considering the location of new investments, or the relocation of existing
activities, a wide spectrum of factors play a role. These factors may have a ‘push’ or a
‘pull’ effect, i.e. they can either motivate the company to move away from the home
country and/or motivate the company to choose for a certain location (‘pull’). A
location decision is usually taken at the complex interplay between pull and push
factors. The case studies point out that firms ‘follow the action’, that they are pulled
towards particular locations as a result of new market development or the need to
look for new knowledge. The most important pull factors for production location
decisions are: proximity to customers (market) and suppliers (value chain
perspective), cost considerations, incentive schemes, and business friendly
administration. For R&D and innovation, the most important pull factors are: access
to knowledge/technology ecosystems and complementary competences, access to
skilled workforce, thereby complemented by R&D tax incentive schemes. The size of
the market is also important for the location of development activities, as the costs of
adaptive R&D can more easily be recovered in larger markets with stronger demand
and consequently larger revenues.

Government incentives are not often the primary decision making factor when it
comes to making new investments. However, they do play an important and often
decisive role in choosing between investments in equally suitable locations.
A recent study (European Commission, 2013b) on the international market distortion
in the area of KETs has concluded that several competitor countries provide
significant incentives (grants, fiscal, loans and free land) in order to attract EU
investments in KETs manufacturing. The study indicates that for all investment
decisions concerned, an equally suitable location in Europe was possible, but that
investment incentives were decisive for the respective decisions made (being outside
Europe).
This case study results, however, do not provide clear evidence that investment
incentives provided by a certain region or country, are the primary and/or triggering
factor for re-locating existing manufacturing or R&D activities, or investing in new
locations. Other factors like political stability, market characteristics, infrastructure,
knowledge ecosystems and talent, are often of higher importance as a triggering
factor to consider new investment options. Investment incentives, nevertheless, play
a decisive role in the final decision between two or more equally suitable and
interesting investment locations, as also illustrated in the above-mentioned study.
12
Relationship between the localisation of production, R&D and innovation activities
The impact of offshoring or co-location of production and R&D activities on the home
or host country varies in terms of type of impact and in terms of intensity over time.

The case study results point out different impacts on both the home and host
country. In the home country several companies have indicated that because of
offshored activities, the level and intensity of EU activities could be maintained.
Knowledge transfer back to the home country has been another often heard effect,
especially in case of R&D offshoring. For the host country, offshoring brings along a
number of impacts as well, ranging from new employment creation to the
development of new or the strengthening of existing R&D or production ecosystems.
The impacts should be considered from different perspectives and over a longer time
frame, thereby not ignoring the fact that in the short-run there might be negative
effects, like job losses. In the long-term, the effects might be positive (sustaining
and/or expanding business level activities in the home country).
How can policy makers support?

In view of the significant heterogeneity of the selected case studies it is not possible
to make strong recommendations. There is nevertheless a common set of emerging
issues that deserve further (continued) policy attention:

First of all, monitoring focused on particular groups of firms is important. In
particular, closely following the activities of firms in highly R&D intensive sectors
and the developments in their markets is essential. The case study results show
that product and production complexity, and market demand, drive the need to
co-locate development and manufacturing activities, with an increasing risk of colocation of strategic research activities over time as well, in case the industry
locus shifts. In that respect, the Group 2 companies (‘partial co-location’) are
very relevant as they have co-located and offshored part of their development
activities, but still have development and strategic research activities in Europe.

Secondly, Europe should keep focusing on excellence, in terms of available
knowledge, research infrastructure and human capital. Strategic R&D investment
decisions are strongly driven by stocks of knowledge and technology, and access
to human capital. The presence of world class ecosystems is key to keep R&D
and innovation activities in Europe and to attract new investments from abroad.
For this to happen, skills are essential, particularly maintaining a high level of
education and training also as a way to attract the best talent to Europe.
Strengthening Europe’s scientific and technological base by achieving a European
Research Area, in which researchers, knowledge and technology circulate freely,
reflects this point very well. The efforts towards the realisation of the European
Research Area and the bundling of resources should be maintained.

Thirdly, the case studies confirm the role of the market and the characteristics of
market demand in location decisions for production and R&D. This emphasises
the importance of deployment and manufacturing in Europe in light of a potential
strong European market. In view of the key role that the market plays in
offshoring and location investments, the achievement of the full potential of the
European Single Market, through an improved and harmonised legislation is
essential to allow companies to turn the Single market into a ‘local’ one.
Furthermore, supporting the creation of new markets through public
procurement and lead market creation initiatives deserves priority, especially
there where Europe has a strong scientific and technological base and
commercial deployment is required.
13
Relationship between the localisation of production, R&D and innovation activities

Fourthly, there is no doubt about the importance of strong incentive packages,
and a global level playing field for manufacturing and RDI investment activities.
Government incentives can make the difference when a company has to decide
between two potential locations with equal strengths. Further coordination is
needed on two levels. First, there is coordination needed among Member States
and regions in order to provide coordinated incentive packages and financial
impulses to companies that are of crucial important to European industry and
society. This links closely to the modernisation process for State Aid. Secondly,
on an international scale, as has also been argued by the KETs High Level Group
(Status Implementation Report, July 2013), there is a clear need for bilateral and
multilateral trade negotiations to be used to address the transparency of third
countries State Aid.
14
Relationship between the localisation of production, R&D and innovation activities
1/
Background and study setup
1.1
Policy context
In 2010, the Commission adopted the flagship initiative “An Integrated Industrial Policy
for the Globalisation Era” (COM(2010)614) in the context of the Europe 2020 strategy for
smart, sustainable and inclusive growth. This initiative sets out a fresh approach to
industrial policy, emphasising the importance of industry for the economy of the European
Union (EU). It focuses on strengthening industrial competitiveness to underpin growth
and jobs and to enable the transition to a low-carbon and a resource-efficient economy.
In October 2012 the Commission adopted an Update of the Industrial Policy flagship
initiative in its Communication “A Stronger European Industry for Growth and Economic
Recovery” (COM (2012)582 final). The Communication proposed a new partnership
between the EU, Member States and industry. The main goal is that of favouring the
recovery of industrial investments and a reversal of manufacturing's share in EU GDP.
After an extensive public consultation, the Commission proposed to jointly focus
investment and innovation on six priority action lines: advanced manufacturing
technologies (for clean production); key enabling technologies8 (micro- and
nanoelectronics, advanced materials, industrial biotechnology, photonics, nanotechnology
and advanced manufacturing systems); bio-based products; sustainable industrial and
construction policy and raw materials, clean vehicles, and smart grids. The
Communication includes policy proposals to enhance performance in global markets. It
proposes that EU companies would be supported and accompanied in their
internationalisation process in order to increase the share of internationally active small
and medium-sized enterprises (SMEs) that are located in the EU. The Council and the
European Parliament strongly endorsed this approach, requesting its implementation and
further development9.
A comprehensive international investment policy contributes to the objectives of smart,
sustainable and inclusive growth, as set out in the Europe 2020 Strategy. The EU future
investment policy is outlined in the Commission's Communication “Towards a
comprehensive European international investment policy” in 2010 (COM(2010)343 final).
The EU's investment policy is focused on providing EU investors and investments with
market access and with legal certainty and a stable, predictable, fair and properly
regulated environment in which to conduct their business.
The current industrial policy, as set out in the Industrial Policy Communications of 2010
and 2012, remains in place but it has been prolonged and reactivated by a recent
Communication in January 2014 (EC, 2014). The new Communication stresses the
importance of full and effective implementation of industrial policy in the EU and focuses
therefore on concrete measures, such as:
 Continue deepening the mainstreaming of industrial competitiveness in other policy
areas to sustain the competitiveness of the EU economy, given the importance of
8
KETs are the technologies of the future, which have application in multiple industries in emerging and traditional
sectors. The EU KET strategy is outlined in the Communication A European Strategy for Key Enabling Technologies – A
bridge to growth and jobs (COM (2012) 341).
9
Council of The European Union, “Conclusions on A stronger European industry for growth and economic recovery”,
December 2012
(http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/intm/134116.pdf)
15
Relationship between the localisation of production, R&D and innovation activities
the contribution of industrial competitiveness to the overall competitiveness
performance of the EU.
 Maximizing the potential of the internal market by developing for ex the necessary
infrastructures, market surveillance and product safety, standards to accelerate
innovation, and completing the internal market for services as a major contributing
factor to industrial competitiveness.
 Offering a stable, simplified and predictable regulatory framework favourable for
entrepreneurship and innovation by for ex updating the Small Business Act,
implementation of REFIT, follow-up to Top Regulatory burdens, regulatory fitness
checks, cumulative cost assessments, and a new initiative on Growth-Friendly Public
Administration.
 Using financial resources at disposal (€2.3 billion COSME programme to support
entrepreneurship, over €100 million of European Structural and Investment Funds
(ESIF) available for regions to finance investments in industrial competitiveness;€80
billion of the Horizon 2020 Programme available for financing the commercialisation
of research.
 Easing the access to affordable production inputs.
 Pursuing industrial modernisation through investment in innovation, resource
efficiency, new technologies, skills and access to finance.
 Supporting SMEs and entrepreneurship through a number of proposed actions, such
as updating the Small Business Act and reinforcing the Entrepreneurship Action.
 Accessing third country markets through harmonisation of international standards,
open public procurement, patent protection and economic diplomacy.
About 13% of EU SMEs are internationally active outside the EU through trade,
investment or other forms of cooperation with foreign partners. With the Communication,
"Small Business, Big World – a new partnership to help SMEs seize global opportunities"
the European Commission proposed a new strategy aimed at helping SMEs to expand
their business outside the EU. The objective is to establish a more coherent and effective
EU strategy for supporting SMEs in international markets. The Communication has
proposed to achieve this by reinforcing business support services, improving the
coordination and use of existing resources including the Enterprise Europe Network. Thus,
SMEs have better access to more relevant information and assistance in their attempts to
enter new markets or search for the right local partners. Successfully concluded trade
negotiations substantially improve the framework conditions for entering the concerned
national markets.
1.2
Major trends in foreign direct investments, trade and R&D
Location decisions of companies and associated investments are reflected in several
macro-economic statistics, like FDI statistics. In 2013, global FDI inflows reached an
estimated USD 1.46 trillion, a level comparable to the pre-crisis average (UNCTAD,
2014)10. The EU remained the largest source and destination of FDI in the world (EC,
2014)11. FDI flows have nevertheless decreased since the economic crisis started in 2007
with a short-lived revival in 2011 (see Figure 1). This declining trend can be observed for
10
11
Global Investments trends monitor UNCTAD, No. 15.
http://ec.europa.eu/trade/policy/accessing-markets/investment/
16
Relationship between the localisation of production, R&D and innovation activities
intra-EU as well as extra-EU flows (the FDI flows towards the ‘new’ EU1212 Member States
remained relatively stable). The most significant destination countries of EU27 outward
FDI are the US, the United Kingdom, the Netherlands, Luxembourg, Switzerland, Belgium
and Germany. On a sectoral level, medium-high and high-tech sectors are attracting the
largest share of FDI, both intra-EU as extra-EU.
Figure 1: EU27 FDI flow and stock (in EUR 000)
Source: Calculations based on Eurostat data:
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database (bop_fdi_main)
International trade is another interesting indicator closely related to location investments,
as companies often start their international activities with export, followed later by
establishing a foreign production facility to supply the local market 13. The following trends
(based on calculations from the World Input-Output Database) related to export and
value added trade14 are visible (see Figure 2):

From the four major competing regions (i.e. EU27, NAFTA 15, East Asia16 and China17),
EU27 has by far the largest exports.

China and the EU27 show large differences between gross and value added trade
figures (up to a factor of 1.5) (see figure below). For the EU, the reason for the large
difference in gross and value added trade is the strongly interwoven production
networks, hence the strong intra-firm trade; for China it is the strong embeddedness
in global production networks (Chinese firms are frequently responsible for a lot of
assembly trade).
12
EU Member States who entered between 2004 and 2012. Croatia became a member of the EU on the 1st of July 2013.
Croatia is not included in the data discussed here.
http://ec.europa.eu/trade/policy/accessing-markets/investment/
OECD “Trade in value-added describes a statistical approach used to estimate the source(s) of value (by country and
industry) that is added in producing goods and services for export (and import). It recognises that growing global value
chains mean that a country's exports increasingly rely on significant intermediate imports (and, so, value added by
industries in upstream countries). The Trade in value-added approach traces the value added by each industry and
country in the production chain and allocates the value-added to these source industries and countries.”
http://www.oecd.org/sti/ind/whatistradeinvalueadded.htm
US, Canada and Mexico.
Japan, South Korea and Taiwan.
Containing China and the two special administrative regions Hong Kong and Macao.
13
14
15
16
17
17
Relationship between the localisation of production, R&D and innovation activities
Figure 2: Structure of the gross and value added (VA) exports by country in 2011 (bn. USD)18
Source: WIOD, own calculations
When further analysing these trade patterns, one can observe that trade activities
between EU Member States are very important, mainly due to the presence of companies
in multiple countries and the geographically dispersed value chains (see Figure 3). The US
is an important destination for European exports. While Asian countries (e.g. China and
India) have not yet reached the same level as the EU and the US, their importance and
performance is rapidly increasing.
18
Trade between countries of a region is included. Croatia is not included in the WIOD database and thus the EU28
aggregate could not be calculated. See Annex Table 8 and 9 for the industry correspondences.
18
Relationship between the localisation of production, R&D and innovation activities
Figure 3: EU28 gross imports and exports of the higher tech manufacturing sector in 2012 by
partner (bn. EUR)
Source: Comext
R&D and innovation data also provide interesting insights with respect to trends in
geographical locations of RDI related investments. Some observations:

On the basis of R&D internationalisation patterns 19 (based on own calculations from
Eurostat and OECD) it can be observed that R&D internationalisation is very intense in
small countries but less so in large ones. Between 2003 and 2011, R&D
internationalisation increased considerably in most new EU Member States. In the
large EU-countries, R&D internationalisation remained rather stable, whereas 80-95%
of the inward business expenditures on R&D were concentrated in medium-high to
high-tech manufacturing sectors.

Innovation collaboration patterns (based on own calculations from the Community
Innovation Survey) of innovative firms show that high-tech manufacturing companies
are much more active in terms of cross-border cooperation. About 25% of the highertech firms cooperate with partners in the EU, EFTA or EU candidate countries, 12%
with partners in the US and 8% with partners in China and India (see Figure 4).
19
R&D internationalisation patterns are measured as foreign affiliates R&D expenditures (i.e. inwards BERD) divided by
total business R&D expenditures (domestic plus foreign).
19
Relationship between the localisation of production, R&D and innovation activities
Figure 4: Innovation cooperation of firms in high tech EU28 industries by partner-region relative
to all process and/or product innovative firms
Source: Community Innovation Survey 2008 and 2010

Collaboration with China and India increased during the crisis, while US partnerships
remained stable and cooperations among EU Member States even decreased. This
indicates that for R&D activities, China and India are growing in importance (a pattern
also confirmed through the case studies). Vertical R&D cooperations with customers
and suppliers are common and account for 40% of all cooperations.

The 2013 EU R&D Survey on Industrial R&D Investment Trends finds that two thirds
of the respondents among EU – based top R&D companies20 consider the most
attractive location for R&D to be their home country. The US, Germany, China and
India are considered the most attractive locations for R&D outside the home country.

According to the 2013 EU Industrial R&D Investment Scoreboard, the EU is an
important region for knowledge intensive greenfield FDI, both as source and
destination (findings are based on data on greenfield FDI undertaken over 2003-2012
by the world’s top 1,500 companies ranked by their investments in R&D, in 2012). Top
R&D investors located 41% of their total number of FDI in R&D in the BRICS, 22% in
the EU (intra-EU flows excluded) and 8% of R&D projects in the US.
These ‘facts and figures’ provide a good insight as to where the ‘action’ seems to take
place. Europe, the US and the BRIC countries (mainly China and India) are popular
locations for foreign investments. China (and to a lesser extent India) is also gaining
importance as a production location but also an R&D and innovation location.
1.3
Objectives, approach and deliverables
1.3.1
Study objectives
It has been observed that the EU maintains its leading position in inward and outward
Foreign Direct Investment (FDI), but that it is losing some of its attractiveness as an FDI
destination. Inflows from outside the EU are dominated by advanced economies (such as
the US and Switzerland), but emerging economies are gaining relative weight. EU firms
are the most important investors in the world. It has been observed that the major drivers
of FDI inflows are the European single market, the Euro and, in the case of west-east
flows, cost advantages. Investment on the innovation process is pivotal for industrial
20
172 companies out of the 1000 EU-based companies included in the 2012 EU Industrial R&D Investment Scoreboard.
20
Relationship between the localisation of production, R&D and innovation activities
recovery, so understanding the role of R&D and innovation (RDI) in a firm's offshoring
and geographical dispersion of the value chain at EU level is of major importance.
The main objective of underlying study is to understand the drivers behind a firm's
decision on where to geographically locate production, and the influence of that decision
on the geographical location of R&D and innovation activities.
More specifically, the study examines:
1. Existing evidence on the drivers determining the choice of the production location
by a firm and, in particular, the role of RDI in that decision.
2. Impact of the production location decision on the RDI activities, and in particular
the level and the geographical location of RDI activities of the firm.
3. Consequences deriving from the decisions regarding the location of firms’ RDI, as
well as the impact on RDI in the home economy and/or on access to markets.
1.3.2
Approach and deliverables
First, a focused literature review has been conducted to provide an overview of the
patterns, drivers, sectoral differences and impacts on home/host countries of RDI and/or
production decisions. Based on the results, a analytical framework has been developed
containing the various building blocks that are important when exploring and
understanding (co-)location decisions.
Second, existing data on FDI, production, trade and RDI internationalisation were
collected and assessed. Besides macro-level data, micro-level data was also considered,
e.g. company restructuring events obtained from the European Restructuring Monitor
(ERM) from the European Monitoring Centre on Change (EMCC). Data analysis has guided
the case selection process, and has as such provided a good framework for further
analysis.
In order to gain more detailed insight into the decision-making process behind (co)location decisions on RDI and/or manufacturing activities, a series of case studies have
been conducted. The literature (phase 1) and the data assessment (phase 2) contributed
to the case study selection process (phase 3). In total, 10 case studies have been carried
out. After the completion of the individual case studies, the study team proceeded with
the cross-case analysis. The entire study has been implemented between November 2013
and June 2014.
The overall approach and deliverables are illustrated in Figure 5.
21
Relationship between the localisation of production, R&D and innovation activities
Figure 5: Overall study approach
1.4
Guide to the reader
This final study report is composed of five chapters. Chapter 1 provides the overall study
background by reflecting on the policy context, the major trends in foreign direct
investment, trade and R&D spending, and the overall setup of the study. Chapter 2
discusses the main theoretical insights with respect to offshoring and location decisions
and presents the analytical framework. Chapter 3 outlines the case study setup and
implementation of the cases. Chapter 4 discusses the main results of the case studies in
the perspective of the derived study assumptions and the literature findings. Finally,
chapter 5 discusses the main findings and the potential implications thereof for future
policy making in the area.
The report is accompanied by two ‘stand-alone’ annexes. The first concerns the results of
the literature review, whereas the second discusses the results of the data analysis
including the main trends and findings that could be derived.
Each of the case studies has been reported to the European Commission in a specific case
study report. For reasons of confidentiality, these individual case study reports are not
publicly disclosed.
22
Relationship between the localisation of production, R&D and innovation activities
2/
Theoretical background & analytical framework
2.1
Theoretical insights
In understanding the determinants or drivers behind location decisions, there are largely
two streams of literature originating from: 1) Economists (including economic geography),
and 2) Organisation Scholars. Economists mainly look at the location ‘problem’ from the
perspective of ‘locational pulls’, such as access to local technologies and know-how. From
an organisation perspective, the focus is mainly on industry- and especially firm-specific
(strategic) considerations, and cross functional interdependencies within the firms
(Ketokivi, 2006; Ketokivi, 2009).
Production and service activities can both be offshored to a foreign location. There is
agreement in the literature that production activities were among the first to be
offshored, combined with distribution and sales (OECD, 2011). R&D, innovation, and
decision-making activities more generally, have increasingly internationalised as well.
The phenomenon of R&D internationalisation is more recent. R&D and the accumulation
of knowledge were long regarded as activities that are bound to the home countries.
However, during the last two decades, the internationalisation of business R&D activities
has accelerated strikingly. In particular, between 1995 and 2003, R&D expenditure of
foreign affiliates increased twice as fast as their turnover or their host countries’
aggregate imports, which renders R&D activities of foreign affiliates one of the most
dynamic elements of the process of globalisation (OECD 2008). Until recently, the main
actors and recipients of cross-border R&D expenditure were developed countries.
Especially in Asia, emerging economies like China or India became attractive host
countries of R&D internationalisation, but other developing, low-income countries also
increasingly engage in the relocation of R&D activities (Dossani and Kenny, 2007).
For companies that face global competition there is no simple answer to what is the
optimal way of configuring one’s business. There are at least four dimensions in the
configuration options for a company, with ‘costs’ being one of the most decisive factors
(Johansen et al. (2012). They are as follows:
1. The organisation perspective in which some companies are characterised as
footloose with a high degree of outsourcing, whereas others are categorised as
rooted companies with a low degree of outsourcing;
2. The complexity of the company and its markets from a narrow focus to a wide
range of products, markets, processes;
3. The competence of a unit along the value chain from narrow to wide;
4. The perspective of sourcing activities, from costs to markets to knowledge.
Production location decisions do largely depend on the characteristics of the value
chain(s) within which a company operates. As these value chains have become more
global, the decision-making processes have become more complex, and the role, and
often location, of production and R&D have also become more global. A deepening of the
value chain can be seen on three levels (De Backer et al., 2013). First, there is geographic
deepening which means that more countries and actors are involved in the value chain.
There is also an increasing participation of emerging economies in these global value
chains. Second, there is the sectoral deepening. Global value chains no longer only
concern manufacturing but also increasingly encompass services. And third there is
functional deepening, meaning that not only production and distribution but also R&D and
innovation are included in the global dimension. The increasing globalisation of value
23
Relationship between the localisation of production, R&D and innovation activities
chains and the dispersion of production facilities are reflected in the number of
multinational manufacturing enterprises in Europe, which has increased considerably from
2001 to 2007. The overall increase in the location of multinational enterprises is especially
apparent in Germany, France and the Czech Republic.
The role of the market
It is coherent to conclude that market considerations constitute the overall most
important factor for production location decisions. When firms locate their production
facilities they consider how a given location would affect their market potential (in terms
of size, growth and access). Proximity to key markets and customers is by far the most
important market consideration. The size of the market is also identified as a key location
factor of R&D activities (e.g. Athukorala and Kohpaiboon, 2010; Dachs and Pyka, 2010).
Frequently, R&D activities of MNEs accompany and support their production activities by
adapting products and production processes to local demand patterns or consumer
preferences. These costs of adaptive R&D can more easily be recovered in larger markets
with stronger demand and consequently larger revenues.
The role of (labour) cost
An important factor in production location decisions is labour cost. The wage level of
employees constitutes a pull factor21 for the host country as lower labour costs attract
production facilities (Defever, 2006; Py & Hatem, 2009; UNCTAD, 2009). The authors also
analysed the role of education levels in production location choices and conclude that the
general level of education in a given location is less important than cost factors. Labour
costs can both work as & push and a pull factor (Javalgi, 2009; Mankiw and Swagel,
2006).
In contrast, labour costs of R&D personnel are found to have an ambiguous role in R&D
location decisions. For instance, Kinkel and Maloca (2008) and Athukorala and
Kohpaiboon (2010) find a positive effect between labour costs and R&D offshoring. Kumar
(2001) demonstrates that the lower relative cost of qualified R&D personnel in the host
country is attractive for R&D efforts of US and Japanese affiliates. Cost differences appear
to gain importance when firms consider locating R&D and innovation activities in
emerging economies, or when firms have to choose between two similarly attractive
locations (Cincera et al., 2009). Furthermore, internationalisation of R&D is also linked to
a potential negative distance effect by additional co-ordination cost, the cost of
transferring knowledge over distance, and a loss of economies of scale and scope when
R&D becomes more decentralised (Sanna-Randaccio and Veugelers, 2007).
The role of ecosystems and clusters
Globalisation forces many companies to integrate location decisions and marketing
strategies to gain a comparative advantage (Canel and Das, 2002). Supply chain
uncertainty concerns firms’ relations to potential suppliers. It involves the punctuality,
accuracy, and quality of the deliveries from the supplier, as well as the length of the
relationship with the supplier: the less uncertainty in supplier deliveries the better, as
firms want to avoid shutdowns that significantly affect operations. Supply chain
uncertainty also involves a level of demand uncertainty. Firms want to forecast the
21
A ‘pull’ factor plays a role in the attractiveness of a certain location, often outside the home country/region. For
example, the low labour cost of a particular location might be very attractive for a firm and as such influence the
decision on where to locate existing or new activities.
24
Relationship between the localisation of production, R&D and innovation activities
demand for their goods and the size of their customer base accurately (Bhatnagar and
Sohal, 2005). An efficient supply chain is an essential prerequisite for firms’
competitiveness: firms do not locate their companies solely based on supply chain
uncertainty, but the possibility of creating efficient supplier relationships are necessary for
firms to locate at a given location. It seems that firms seek an ecosystem with efficient
suppliers and other plants within the same sector. The existence of production facilities
from other sectors do not contribute to such an ecosystem, as the ecosystem has to be
constituted of relevant partners from the same sector.
Access to top knowledge ecosystems and the possibility of benefiting from sizeable
knowledge spillovers is a crucial factor for the location decision of R&D activities. In
particular, firms that want to utilise localised knowledge spillovers have to be present
where they occur. Hence, R&D activities may be relocated to host countries whose
technological specialisation or leadership is of particular interest for the learning potentials
it offers to technologically lagging firms and the knowledge transfers it enables. Erken and
Kleijn (2010) demonstrate for a set of 13 OECD countries that inward R&D expenditure of
foreign affiliates is strongly attracted by the stock of private knowledge of the host
country and the potential for knowledge spillovers it offers. Cantwell and Piscitello (2002)
point at the role of geographic concentration of innovative activities for the prevalence
and size of knowledge spillovers and show that the presence of technology clusters
fosters the generation of new knowledge and technology (in terms of the number of
patents granted to foreign-owned firms). Additionally, spillovers as a determinant for R&D
location decisions point to the importance of the quality of university research as a driver
of R&D internationalisation at the country level (e.g. Belderbos et al., 2009).
Host country characteristics
Another significant group of factors affecting production and R&D location decisions are
the national and regional characteristics of the host country . Brush et al. (1999) provide
an interesting grouping of production location factors by network nodes, access to factors
of production, and national and regional characteristics (see table below).
Table 4: Overview of production location factors
Network nodes
Proximity
Proximity
Proximity
Proximity
to
to
to
to
important markets
key customers
key suppliers
other facilities
Access to factors of
production
Access to raw materials
Access to energy
Access to capital
Access to local technology
Access to skilled labour
Access to low cost labour
National and regional
characteristics
Access to protected markets
Tax conditions
Regional trade barriers
Government subsidies
Exchange rate risk
Language, culture, politics
Advanced infrastructure
Labour practices and regulation
Environmental regulation
Source: Brush et al., 1999
These national and regional characteristics include a wide range of issues, such as tax
conditions, government subsidies, advanced infrastructure, environmental regulation and
labour practices and regulation. For production location decisions, tax conditions are one
25
Relationship between the localisation of production, R&D and innovation activities
of the important factors that can act both as a pull and a push factor 22. While lower
overall tax levels or even specific tax incentives to attract FDI to potential host countries
can act as a pull factor, higher taxation levels in the parent country is a push factor. For
R&D and innovation location decisions, skilled workforce and the quality of education
systems are essential (Thursby and Thursby, 2006; Kinkel and Maloca, 2008; European
Commission, 2010).
In particular, in the face of skills shortages and a growing demand for engineers and
scientists in the home country, firms frequently go abroad with their R&D. A shortage of
highly skilled science and engineering talent in the US explains the relocation of product
development to other parts of the world. Similar pull-effects of human capital are
identified by Erken and Kleijn (2010) who show that strong human resources in science
and technology in the host country are powerful location factors for international R&D
activities. Dachs and Pyka (2010) demonstrate that geographical proximity between host
and home country is conducive to cross-border R&D investments, while Belderbos et al.
(2009) show that the probability of conducting R&D abroad increases with geographic
proximity.
Finally, based on the previously cited literature, it is clear that public policy also shapes
the attractiveness of regions or countries for overseas R&D activities. There is consensus
in the literature that governments that want to attract R&D of foreign MNEs should focus
on the economic fundamentals rather than grant special incentives to foreign-owned
firms. Governments should provide a healthy business environment, political stability,
good public infrastructure, reasonable tax rates, and a stable legal system, including the
protection of intellectual property rights. In addition, they should also ensure science,
technology and innovation policy measures like public subsidies for R&D performing firms,
measures to foster co-operation between firms and universities or measures to foster
university education can significantly shape locational advantages and influence
internationalisation decisions of firms in R&D (Steinmueller, 2010). Special incentives to
foreign-owned firms are not an appropriate instrument to attract R&D of foreign-owned
firms although public support for R&D can create important additionalities and can help to
leverage R&D efforts of firms, including foreign-owned firms.
About R&D, innovation and production co-location
The debate on R&D, innovation and production co-location is a complex one which will
certainly benefit from a further refinement and breakdown of R&D activities and an
opening of the R&D ‘black box’. This is important in order to be sufficiently precise in the
discussion on R&D location decisions, which may affect R&D as a total overall function, or
just a sub-activity. The location of ‘Research’ can be different than the location of
‘Development’. Depending on the type of production (routine versus non-routine),
development can be more or less closely (also physically) connected to production. Simon
et al. (2008) distinguish between five phases in the R&D process: research, platform
development, application development, process development and production support (see
figure below).
22
Whereas a ‘pull’ factor helps to attract firm activities to a certain location, a push factor might ‘motivate’ a company to
leave the home country/region and to move activities away. Usually firm location decisions are based on an
assessment of the interplay between push and pull factors
26
Relationship between the localisation of production, R&D and innovation activities
Figure 6: Five phases in the R&D process
Source: McKinsey, op. cit. Simon et al., 2008
There is a difference in the need to locate the different phases of the R&D process in
proximity to the market or to production. Basic research activities often occur at central
research facilities whereas application development processes which require more marketspecific insights may be more closely integrated with the production/R&D networks of key
customers.
Furthermore, in terms of R&D and production co-location, as early as 1994, Kenney and
Florida investigated the organisation and geography of Japanese R&D of Japanese
electronics and biotechnology firms. The results indicated some significant location
flexibility of basic research. This was, however, not the case for applied research and
production engineering, for which the results suggested that close proximity to
manufacturing is required. Other studies for Japan confirm this result of co-location of
R&D and production (i.a. Aoki, 1990; Imai, 1991; Nonoka, 1992; Mariani, 2002). Ambos
(2005) found similar results for German MNEs when investigating FDI in industrial R&D.
There is a tendency for German MNCs to “cluster R&D in close proximity to offshore
production facilities”. Based on theoretical considerations and insights gained from two
cases studies, Ketokivi (2006) maps the interdependencies between R&D and
manufacturing. Both industry- and firm-specific considerations need to be taken into
account when deciding on co-location. Ketokivi and Ali-Yrkkö (2009) confirm that high
product and process complexity and a high rate of new product introduction (‘clock
speed’) strongly steers co-location of R&D and production.
2.2
Key concepts and definitions
In the literature on internationalisation and location of production and R&D and
innovation activities, one comes across different terms and concepts often pointing to the
same phenomenon. Two oft-used concepts are ‘outsourcing’ and ‘offshoring’ (OECD,
2006). Whereas outsourcing refers to the relocation of jobs and processes to external (to
the company) providers regardless of the provider’s location, offshoring refers to the
relocation of jobs and processes to any foreign country without distinguishing whether the
provider is external or affiliated with the firm. Outsourcing may therefore include job
relocations both within and between countries, whereas offshoring refers only to
international relocations. The underlying study focuses on offshoring of production and/or
R&D and innovation, either within or outside the firm, and mainly from a geographical
perspective.
27
Relationship between the localisation of production, R&D and innovation activities
Offshoring activities can take different forms. Frequently they concern FDI, of which one
can distinguish (Peng, 2011; Ekholm et al., 2003) horizontal FDI (duplication of home
country activities in the host country); vertical FDI (upward or downward moves in the
value chain in the host country while different parts of the value chain are located in
different countries; and export-platform FDI (investments in host countries in order to
export to that country and other adjacent countries). FDI encompasses both production
and R&D offshoring, although the latter takes place in different forms (such as contracts,
cooperation projects etc.).
Equally important, finally, is reshoring or back-shoring, referring to the return of
production or R&D that was previously offshored. When production offshoring or reshoring is followed by R&D offshoring or re-shoring, and there is a functional
interdependency, we may speak of true co-location of production and R&D and/or
innovation activities.
In this study, decisions associated with offshoring, re-shoring, and/or co-location, will be
referred to as location decisions.
A more detailed literature review is presented in a separate report, Annex 1 to this report.
2.3
Analytical framework
On the basis of the undertaken literature review (partly presented above and further
documented in a separate report), a conceptual framework has been designed in order to
guide the analytical work in the case studies. The framework consists of the various
building blocks that are important to consider when exploring and understanding the
location decisions of the case-companies. In what follows, we briefly discuss the various
building blocks and their interrelation. The framework is represented in Figure 7 below:
Figure 7: Location and co-location decisions: an integrated framework
A. Environmental factors (external: push or pull)
1. Location
characteristics
B. Organisational factors (internal)
1. Strategic considerations
2. Industry,
sector &
value chain
3. The
market
2. Technology and
innovativeness
3. Product and production
complexity
C. Location decisions & impact
Production location, R&D
location, and co-location
Source: the authors
28
Relationship between the localisation of production, R&D and innovation activities
Location decisions are taken in a broad environmental context with numerous ‘pull’ and
‘push’ factors (as explained in the theoretical background), often outside the sphere of
control of the company. The environmental context includes location-, industry-, and
market specific factors. Companies continuously seek to adapt their strategy and
operations to the environment. Environmental factors can both work as pull or push
factors (like cost levels, tax climate, regulations, etc.), i.e. they may pull companies to a
certain location or push them away from a certain location. The organisational
characteristics contain strategic, technology, innovation, and product considerations and
characteristics, mostly under the sphere of management control. The matching or
adaptation process, finally, leads to a set of location decisions with respect to the location
of production and R&D and innovation, including the possibility of functionally related colocations (i.e. co-location where R&D is related to a specific production site). These
decisions subsequently have an impact on different levels both in the home and the host
country.
A. Environmental factors
1. Location characteristics
Location characteristics first of all concern cost factors like transportation costs, labour
costs, raw materials, taxation structure, R&D and other types of subsidies. Cost factors
are linked to other important issues such as ‘access’ to e.g. raw materials, energy and
(human) capital. Second, national or regional characteristics, like environmental and social
factors, such as political governance, political situation, corruption, general education level
(skilled workforce), scientific and technological strengths, and political stability also play a
role of importance. Societal factors, such as environmental issues like regulation with
respect to waste treatment, recycling, pollution, renewable resources, etc. will play a
significant role in certain sectors. The following assumption has been explored23 through
the case studies:

Location factors can work both as ‘push’ and ‘pull' factors for RDI and/or production
location decisions.
2. Industry, sector and value chain
A second group of factors concerns industry and sector characteristics, including the
characteristics of the overall value chain. The value of being near an ecosystem of
dependable suppliers or other plants in the same sector and facilities along the value
chain, do influence production location decisions (e.g. for SMEs, location decision may be
based on the relationship with key clients). Firms consider issues like co-ordination, such
as how to integrate their production and distribution facilities, but they must also analyse
the configuration aspects of linking facilities along the value chain (coordination costs). It
is thus important to understand the industry characteristics and dynamics and link these
to the location decisions of a company, both for production and/or R&D. The following
assumption has been explored:

23
Industry, sector and value chain characteristics/development are crucial in RDI and
production location decisions.
In view of the limited number of cases the defined hypotheses will be ‘explored’ and not systematically ‘tested’.
29
Relationship between the localisation of production, R&D and innovation activities
3. The market
Despite sector-specific differences, market considerations are generally decisive for
location decisions. This concerns decisions regarding where to realise innovations through
product and process market introduction on the basis of market size and growth potential.
The literature shows that companies value proximity to important markets and key
customers. Subsequently, the market penetration strategy of the company is of course
decisive to the extent to which local presence is necessary. As already discussed above,
market size characteristics increasingly play a role in the location decisions for research
and/or development activities. The following assumption has been explored:

Market characteristics (market growth dynamics, demand patterns etc.) are decisive
for production but also for RDI location decisions.
B. Organisational factors
1. Strategic considerations
A company’s overall strategy with respect to market entry and growth (linked to previous
hypotheses), product/market combinations, production organisation (e.g. through lead
factories or not), distribution and services etc. is obviously decisive for the location
decisions of RDI and production. Understanding the key strategic considerations and
longer-term vision of a company allows a better understanding of past and future location
decisions. The following assumption has been investigated:

A company’s overall strategy is decisive for the location decisions of RDI and
production.
2. Technology and innovativeness
Highly science & technology intensive firms and highly innovative firms require a more
intensive collaboration between production and RDI and a more pro-active strategy
towards knowledge and technology sourcing. R&D location decisions are strongly linked to
the stock of knowledge available in the host country (versus the home country).
Moreover, if the host country or region becomes more science and technology intensive,
there is less of a need to co-locate company R&D facilities, as the knowledge required can
be locally insourced. At the same time, if knowledge insourcing in the home country’s
ecosystem does not match their requirements, companies will look for other strong
ecosystems outside the home country. In other words, available knowledge stocks in the
home versus a potential host country are an important factor in R&D location decisions.
The following assumption has been explored:

For R&D intensive firms, location decisions depend largely on the knowledge available
in the ecosystem (the knowledge available in a home versus host country ecosystem).
3. Product & production complexity
On the basis of the literature review it became clear that both high product and process
complexity, and a high rate of new product introduction (clock speed) have a strong
influence on the need to co-locate research and/or development activities with
production. Similarly, in new complex markets that require a high degree of customisation
local research and/or development capabilities might be needed. This has been further
explored through the following assumption:

Co-location of research and/or development and production is largely driven by
product and manufacturing complexity.
30
Relationship between the localisation of production, R&D and innovation activities
C. Location decisions & impact
The previously discussed driving forces lead to particular company decisions with respect
to production and research and/or development and innovation. In policy circles there is
increasing concern that when production plants are offshored it is only a matter of time as
to when R&D and/or innovation will follow. This has been further explored through the
following assumption:

It is not obvious that production offshoring is followed by RDI offshoring.
Finally, once the production and R&D location decisions and their interrelation are
understood, the next step is to investigate the impact of these decisions, first of all on the
company level (turnover, employment, revenues etc.), secondly and by aggregating, on
the regional and national level both in the home and the host country. Recent literature
increasingly shows that offshoring is not necessarily bad for the home country. The
following assumption has been explored:

Production and/or RDI offshoring do not necessarily have a negative impact on the
company’s activities in the home country.
In the next chapter the case study approach is further discussed and explained, followed
by the analysis of the findings.
31
Relationship between the localisation of production, R&D and innovation activities
3/
The Case studies: setup, implementation and findings
3.1
Preparation
A total of 10 case studies have been carried out in order to shed light on the interrelation
between production and R&D and innovation location decisions and the way firms deal
with these decisions. In line with the earlier discussed analytical framework, the following
topics were touched upon during the case studies (also reflected in the case study
questionnaire as presented in Annex 3):

Strategy behind offshoring of production activities (firm specific considerations,
choices such as outsourcing, joint-venturing, role of the value chain, etc.).

Environmental ‘push’ or ‘pull’ factors that have determined the production and/or
RDI location choice (institutional, administrative, employment conditions, culture),
perceived strengths, acknowledged reasons for success.

Interrelation, or absence thereof, between R&D, innovation and production
location decisions (so-called ‘cross-functional’ dependencies).

Impact of the offshoring strategy on a.o. the firm's R&D and innovation activity
and its intensity (both in the host and the home country).

Impact of the EU legislative framework and/or barriers to trade in the destination
country on the strategic choices made, including environmental or pull/push
factors.
The case studies have been selected on the basis of the following guiding criteria24:

Companies (large companies or SMEs) being active in sectors that use and
commercialise knowledge more intensely, and where technology clusters are
highly competitive (e.g. semiconductors, catalysts, wind turbines).

Companies (large companies or SMEs) being active in sectors where innovation is
a key factor for success and where there is evidence of successfully
internationalised firms.
These criteria have been further refined in view of the findings of the quantitative data
analysis (Annex 2) in terms of identification of countries and sectors of interest.
24
Reflected also in the priority action lines as defined in the Communication, “A stronger European industry for growth
and economic recovery” (COM (2012) 582 final). In this Communication, the Commission proposes to jointly focus
investment and innovation on six priority action lines: advanced manufacturing technologies, key enabling
technologies, bio-based products, sustainable industrial and construction policy and raw materials, clean vehicles,
smart grids.
32
Relationship between the localisation of production, R&D and innovation activities
The selected case studies are presented in the figure below.
Figure 8: Overview of selected cases (sector and geographical ‘flows’)
China &
US
China &
US
China
Case 7
(Wind turbines)
Case 5
(Catalysts)
China,
Japan &
S. Korea
China
China &
India
Case 3
(Materials)
Case 6
(Fuel cells)
Case 1
(Automotive)
Case 10
(Steel wire &
coatings)
Case 9
(Semiconductor)
Case 2
(Construction)
Hungary
Austria &
Malaysia
Case 8
(Air polution)
Case 4
(Semiconductor)
Singapore
& China
S. Korea
& US
Investment to...
Investment from...
The selected companies are mainly located (headquartered) in central and northern
Europe (e.g. in Germany, France, Belgium, Denmark, and Austria). One case concerns an
EU inward foreign direct investment of an Asian company. In terms of sectoral spread, the
selected companies are active in the semiconductor industry, automotive, industrial
technology, equipment, materials, construction, production of catalysts and air pollution
control systems, and wind turbines (see also Section 4 for more details and background).
33
Relationship between the localisation of production, R&D and innovation activities
A ‘case’ has been defined as a (co-)location decision/event involving production, research
and/or development, or innovation, or a combination thereof (e.g. investment in a new
production facility abroad). This event has been subsequently discussed with the (top)
management of the selected companies. Particularly helpful for the identification of
potential case studies, or events, was the European Restructuring Monitoring (ERM)
database25. The database allows for the selection of restructuring activities
‘offshoring/delocalisation’ for specific companies, countries, and sectors over time.
Information about specific offshoring/delocalisation by country is also provided in the
database. Below is an example26 of the type of available information provided for
Novartis, which very recent announced an additional investment in the Czech Republic.
The ERM database made it
possible
to
select
companies that have taken
a
particular
location
decision
of
interest
(production and/or RDI
offshoring).
After composing a long-list
of cases, the final selection
was
made
in
close
collaboration
with
the
European
Commission
Services. For confidentiality
reasons, it has been
decided that the names of
the participating companies
will not be made public,
and hence not to distribute
individual
case
study
reports
beyond
the
European
Commission
steering board for this
study.
3.2
Case study implementation
Each of the selected case study companies was initially invited by e-mail. The invitation
was accompanied by an introductory letter from the European Commission explaining the
overall objectives of the study and offering the possibility to cooperate anonymously. The
invitation process has been a ‘parallel process’ (instead of a sequential invitation), i.e. all
case study representatives (often general managers/Vice Presidents, investment
managers or chief technology officers/CFOs) have been invited almost simultaneously in
order to start the case study process as soon as possible.
25
26
http://www.eurofound.europa.eu/emcc/erm/index.htm
http://www.eurofound.europa.eu/emcc/erm/factsheets/27862/Novartis%20CZ?template=searchfactsheets
34
Relationship between the localisation of production, R&D and innovation activities
In each case study a number of in-depth (1.5-2 hour during) interviews took place (mix of
face-to-face and telephone interviews), guided by a semi-structured interview
questionnaire (see Annex 3). On the consortium side, the interviews were carried out by
experienced researchers. For each case study a draft case study report was prepared. The
draft versions were returned to the companies for validation and approval in order to be
sure that all information provided is captured correctly. After validation by the company,
the case study report has been considered to be final.
3.3
Cross-case analysis and limitations
The cross-case analysis focused on the commonalities but also the difference across the
cases, driven by the defined case study assumptions. The cross-case analysis focused on
the decision process and associated critical factors leading to a particular location or colocation decision, and has been based on ‘triangulation’ among the research team
involved in this study, and with existing literature and data. To this end, an internal
workshop has been organised in order to align the obtained insights, conclusions and
recommendations. This workshop took place on 8 May 2014 in Brussels.
Important to note is that the case study results should be interpreted with care in view of
the limited number of case studies and the wide spread across countries and sectors.
35
Relationship between the localisation of production, R&D and innovation activities
4/
Analytical discussion of the case findings
4.1
Case study findings: summary tables
In the tables that follow we present the main factors that played a role in the location
decisions of the studied companies. These results are discussed in more detail in the
sections thereafter.
In the first table, we present the main findings for cases 1 to 5, whereas in the second
table we present the main findings for cases 6 to 10.
36
Relationship between the localisation of production, R&D and innovation activities
Case 1
Sector(s)
Size (SME/L) - staff
The ‘case’
EU inward or
outward?
Co-location?
Case 2
Case 3
Case 4a/4b/4c
Case 5
Automotive, industrial
technology RDI
L (10,000-25,000)
Construction products,
innovative materials
L (>50,000)
Non-ferro metals
Semiconductors
Catalysts
L (10,000-25,000)
L (25,000-50,000)
L (1000-2,500)
Presence of production and
RDI activity in an Eastern
European country.
Presence of production and
R&D activities in China and
India.
Presence of production and
R&D activities in South-Korea,
Japan and China.
RDI in the home country,
production and to some extent
development in the US and
perhaps soon in China
(production site under
construction).
Outward
Outward
Outward
Case 4a: Closure of three frontend manufacturing plants in the
US and in a North-African
country and the subsequent
increase in front-end investments
in Singapore.
Case 4b: Concentration of backend manufacturing plants outside
of Europe (mainly Asia).
Case 4c: R&D investments
focused on Europe.
Outward
No. The co-existence of RDI
and production is not
functionally related; both
activities belong to different
‘networks’.
Yes. The co-existence of R&D
and production in both China
and India is functionally
related.
Yes. The co-existence of R&D
and production is functionally
related.
Partial. Some co-location of RDI
and back-end manufacturing in
some countries. Some colocation of RDI and front-end
manufacturing in others.
Partial. Development that
takes place in the US is
primarily to adjust for the local
market.
- Presence in important market
regions
- Presence near the customers
(customer power)
- Presence in important
technology regions: located
where the value chain is
- Business friendly
administration and low redtape level
Case 4a:
- Availability of technology &
qualified labour
- Public support & incentive
schemes
Case 4b:
- Presence of other firms in the
electronics value chain
- Availability of qualified labour
- Low-cost business
environment
Case 4c:
- Clusters & local ecosystems
- Availability of qualified labour
- Public support
- Global value chain important
(clusters in Asia, US and
Europe)
- Access to knowledge ecosystem
- Ability to attract global
talent
- Access to complementary
skills
- Good knowledge of the
political system
- Low-cost business
environment
Outward
Environmental ‘pull’ or ’push’ factors (ranked from most to least important)
Location factors
Value chain
considerations
- Low-cost business
environment
- Skilled and accessible
workforce
- Strength of local RDI
ecosystem
- Not relevant
- Local market presence
- Cost structure (taxation
schemes)
- Local incentive schemes (e.g.
policies favouring local
research initiatives)
- Connections to local
organisations (facilitates
dialogue with
authorities/stakeholders)
- Access to university
clusters/research
communities important for
location decision of research
centres
- Proximity to customers and
markets is very important
- Presence of a value chain is
very important (for one
business segment there is no
value chain in the EU)
- Customer
requirements/negotiation
power
- Importance of being present
in leading technology regions
- Not relevant
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Relationship between the localisation of production, R&D and innovation activities
Market considerations
- Not relevant
- Market presence is main
driver
(scientific excellence of
universities in South-Korea,
Japan and China)
- Market presence is main
driver
- Local presence is requested
by the customer
- Not relevant (market presence
is not directly related to the
end-customer)
- Important for location of
mature production
- No influence on the
manufacturing of new
products
Case 4a:
- Optimise general business
capacity utilisation (through
concentration and effects of
scale)
- Strengthening production
excellence
Case 4b:
- Cost savings (labour)
- Concentration of production
and effects of scale
Case 4c: Maintaining of strategic
RDI in the home countries
- Highly R&D intensive company
(hence importance of access
to top knowledge)
- Access to RDI ecosystem
- Keep strategic RDI in home
country
Organisational considerations (ranked from most to least important)
Strategy
- Production optimisation and
cost savings
- Keep strategic RDI in home
country
- Support production
(develop solutions for local
market)
- Help local business
(propose innovative
solutions for local market)
- Start of possible new
activities
Technology and
innovativeness
- Highly R&D intensive
company (hence
importance of access to top
knowledge)
- Not relevant, as the lead
plants are responsible for
production line optimisation
- Highly R&D intensive
company (hence importance
of access to top knowledge)
- Highly R&D intensive
company (hence importance
of access to top knowledge)
- Relevant. Highly complex
product and production
process
- Relevant. Highly complex
product and production
process
- There are local adjustments
to the product
- Relevant. Highly complex
product and production
complexity
- Co-location between the
leading edge fab (most
complex technology) and RDI
- Relevant. High product and
production complexity for
new products (part of the
reason for keeping these in
the home country)
- Capable of maintaining
activity levels and even
investing
- Increase in global sales and
revenues, which also
benefits the home country
- Activities in Asia contribute
to the overall sales and
revenues of the company
- Contribution to further
development of ecosystem
- Employment and
knowledge spill over effects
- Strengthen local innovation
development and capability
- Employment effects
- Positive employment effects
- Increase in RDI activities
- Keeping highest state-of-theart
- Contribution to further
development of local hightech clusters
- Generation of employment
(especially in a cluster in the
home country).
- Creating absorptive capacity
- Developing local high-tech
clusters
- Increase in employment
Product and production
characteristics
- Highly R&D intensive
company (hence importance
of access to top knowledge)
Main impacts (ranked from most to least important)
Home
Host
- Not relevant
38
Relationship between the localisation of production, R&D and innovation activities
Case 6
Case 7
Case 8a/8b
Case 9
Case 10
Sector(s)
Size (SME/L) - staff
The ‘case’
Hydrogen and fuel cells
Wind turbines
Air pollution control systems
Semiconductors
Steel wire and coatings
SME(<250)
L (250-1000)
SME (<250)
L (25,000-50,000)
L(25,000-50,000)
RDI in Europe, although owned
by a Canadian investor.
Establishment of RDI Centre in
Europe.
- Case 8a: Establishment of
subsidiary in Asia
- Case 8b: Joint venture in US
to produce for US market.
Establishment of a new R&D
Centre in China
EU inward or
outward?
Co-location?
Not relevant
Inward
Outward
- Case 9a: Increased
investment in Europe in
front-end production facilities
and in RDI
- Case 9b: Investment in frontend fab in Asia (200mm
wafers)
Outward
No
No
No
No
Yes. The co-existence of R&D
and production is functionally
interrelated
- Proximity to the market and
the customer
- Access to growing market
Case 9a:
- Access to technology and
qualified labour
- Public support and incentive
schemes
Case 9b:
- Proximity to suppliers and
value chain
- Access to highly skilled
workforce
- Public support and incentive
schemes
For R&D:
- Close collaboration with
universities (recruitment
possibilities)
- Support of local authorities
and the provision of
incentives
- Collaboration with local
suppliers important and
necessary
- Access
- Local presence is requested
by key customers
- Access to important clusters
in Asia, US and Europe
- Collaboration with local
suppliers and customers
necessary (also for R&D)
- Access
- Local presence is preferred
- Keep R&D and innovation in
the home country
- Case 8b (US): licensing
model had disadvantages
(control of knowledge
diffusion, customers in the
Case 9a:
- Access next wave of relevant
technology and qualified
labour
- Public support and incentive
schemes (Austrian tax
Outward
Environmental ‘pull’ or ’push’ factors (ranked from most to least important)
Location characteristics
Value chain
considerations
Market considerations
- Strength of local
networks/ecosystem
(universities, other
enterprises)
- Skilled and accessible
workforce
- Access to highly skilled
workforce
- Strength of local
networks/ecosystem
(universities, other
enterprises)
- Some development with key
suppliers in the value chain
- Not relevant
- Not relevant
- Not relevant
- Not relevant
For the location of production:
- Proximity to the market and
the customer
- Access to growing market
- Cost factors (including
avoidance of currency
fluctuations)
Organisational considerations (ranked from most to least important)
Strategy
- Funding opportunities
- Contributing to the national
scientific ecosystem –
shaping the research
- Proximity to the research
frontier
- Access to competences and
knowledge located
For production:
- Increase in local demand
made the company decide to
increase investment in
production.
For R&D:
39
Relationship between the localisation of production, R&D and innovation activities
US could be potential
customers in Europe) and
thus start of joint venture
Technology and
innovativeness
Product and production
characteristics
- Highly R&D intensive
company (hence importance
of access to top knowledge)
- Complex product and
production process, but no
need for co-location.
incentives).
Case 9b:
- Presence of suppliers and
value chain
- Availability of qualified labour
- Public support schemes
- Highly R&D intensive
company (hence importance
of access to top knowledge)
- Complex product and
production process, but no
need for co-location.
- Co-location between the
leading edge fab (most
complex technology) and
R&D
- Presence linked to the need
by customers for local
technical assistance
- Support local production
- Customization and adaptation
to the local market
- Highly R&D intensive
company (hence importance
of access to top knowledge)
- Relevant. Highly complex
product and production
process.
- Strong growth in sales and
revenue
- Only increase in R&D when
the local demand increased
(R&D in the home country
had to support foreign
production)
- Strong growth in sales and
revenue
- Increasing R&D jobs and
potential spillovers
- Highly R&D intensive
company (hence importance
of access to top knowledge)
- Complex product and
production process, but no
need for co-location.
- Highly R&D intensive
company (hence importance
of access to top knowledge)
- Complex product and
production process, but no
need for co-location.
- New pilot installations require
presence of people from R&D
team
- Further enrichment of the
research on hydrogen and
fuel cells
- Knowledge sourcing
- Increasing jobs and sales
- Expansion of R&D activities
Case 9a:
- Increase in RDI activities
- Further development of hightech clusters
- Employment (Austria and
Germany)
- Not relevant
- Increasing R&D jobs and
potential spillovers
- Increasing R&D jobs and
potential spillovers
- Increasing R&D jobs and
potential spillovers
Main impacts (ranked from most to least important)
Home
Host
40
Relationship between the localisation of production, R&D and innovation activities
Based on their location characteristics, the studied companies have been grouped (ex-post)
in 3 groups. In Group 1 (‘no co-location’), composed of 5 cases, there is no functionally
related production and R&D co-location, meaning that production is not related to/supported
by ‘close-by’ R&D activities), despite the existence of offshore production activity. Group 2
(‘partial co-location’) is composed of 2 cases where there is only partial co-location (i.e.
mostly development and adjustment capabilities are offshored close to the production
activity). In group 3 (‘full co-location’) there are 3 cases where co-location is functionally
based (i.e. full R&D capability is co-located with production on the basis of mutual
reinforcement and support). The groups are further presented in the table below.
Table 5: Grouping of case studies based on their ‘co-location’ behaviour
Group 1 “No co-location”
Group 2 “Partial colocation”
Group 3 “Full co-location”
No production – R&D colocation (cases 1, 6, 7, 8, 9)
Partial R&D – production
co-location (cases 4 and 5)
Production – R&D co-location
(cases 2, 3 and 10)
6. Knowledge ecosystem and
networks
7. Top-talent
8. Public support
9. Access to new
technologies
10.
Cost levels
(including taxation
options)
- Important for mainly
production location
decisions
5. Knowledge ecosystem
and networks
6. Access to new
technologies
7. Top-talent
8. Cost levels, including
taxation
5. Market/customer proximity
6. Knowledge ecosystem and
networks
7. Public support
8. Cost levels, including
taxation
- Mixed picture, value
chain is important, but
no particularities
Market
- Mostly not relevant
- Mostly not relevant
Product
and
production
complexity
- Product and production
complexity play a minor
role
- Product and production
complexity play a role of
importance
- Value chain of importance
(proximity to suppliers and
customers, depending on
B2B or B2C)
- Main driver (for
production, also
influencing R&D)
- Product and production
complexity play a major
role
Major
impacts
- Home: strategic
knowledge development
kept, strengthening of
existing ecosystems
- Host: not relevant
- Home: strategic
knowledge development,
build of new ecosystems,
spillovers
- Host: creation of local
absorptive capacity
- Home: spillovers, financial
flows
- Host: local employment
and knowledge
development, new
ecosystems
Pull or push
factors
(Ranked by
importance)
Value chain
For Group 1 (‘no co-location’), the general picture is that firms have not co-located R&D with
production on the basis of interfunctional reasons. R&D location decisions are taken more or
less independently from manufacturing, on the basis of mainly three criteria: 1) strength of
local ecosystems, 2) access to top-talent, and to some extent 3) access to public support
schemes, including tax incentives. In one case involving an R&D investment in Denmark, the
attractive tax incentives provided by the Danish government (E&Y in collaboration with
EuropaBio, 2014) seem to have played an important role as well, in conjunction with the
strong knowledge ecosystem that was present. The characteristics of the value chain in
which companies operate do influence production location decisions as such. This is less the
case for R&D activities, however. In these case product and production complexity does not
(always) trigger R&D de-localisation, often because of extreme standardisation or problem-
41
Relationship between the localisation of production, R&D and innovation activities
solving capabilities offered by e.g. lead factory staff. Strategic R&D remains central, often in
Europe. If speculating slightly, one could conclude that this type of companies is more
sensitive to cost-based incentives as manufacturing characteristics do not really require R&D
proximity.
In Group 2 (‘partial co-location’), we see that some of the R&D activities are co-located with
manufacturing. This concerns mainly local development or adjustment activities. Their R&D
location decision is strongly based on similar reasons as group one, like access to knowledge
and ecosystems, and new technologies. The role of the value chain characteristics and their
position in this chain is less clear/uniform. In these cases product and production complexity
do play an important role; that is why local development or adjustment is necessary. The
impact of partial co-location on the host country is limited, whereas the home country
(Europe) still benefits from the presence of strategic R&D (mainly strategic research)
activities and the associated economic effects. These findings are in line with the existing
theoretical insights and evidence.
Finally, in Group 3 (‘full co-location’) the companies indicated a functionally interrelated R&D
and production co-location. Key pull or push factors in terms of location are market
considerations, production complexity, access to new emerging markets, and proximity to
customers. Costs factors and public support do also play a role in the making of the final
location choice, often within one country or region. Market demand, translated in high
demand for innovation, and increased production complexity are main drivers influencing the
need for co-location.
Based the analytical framework on the factors affecting location decisions, the working
assumptions proposed are assessed on the basis of the information collected during the case
study interviews in perspective of existing literature evidence and data collected and
analysed. The case study findings will be further illustrated by firstly examining the role of
factors related to the firm environment (location characteristics, sector and value chains, and
the market), secondly the role of organisational factors (strategy, technology, product and
production complexity) and finally with the impact of these factors on the home or the host
country.
4.2
Case study findings: Role of the company’s ‘environment’
4.2.1
Importance of ‘pull’ and ‘push’ factors
Assumption: Location factors can work both as ‘push’ and ‘pull’ factors for RDI and/or production
location decisions.
On the basis of the case study results, it has become clear that the studied companies are sensitive to
‘pull’ factors that attract and/or persuade them to make a location investment outside (or inside)
Europe. The most important pull factors valid for production location decisions are: market and costs
considerations, value chain considerations and in particular proximity to customers and suppliers, and
cost considerations. Less important are public support and incentive schemes and business friendly
administration. For R&D and innovation, the most important pull factors are: access to
knowledge/technology ecosystems and complementary competences, access to a skilled workforce,
and to a lesser extent public support and incentive schemes, value chain and market considerations.
Although all factors can work as ‘pull’ and ‘push’ simultaneously, this is particularly true for the factor
cost and available knowledge.
42
Relationship between the localisation of production, R&D and innovation activities
In the tables below we provide an overview of the most important location related factors
mentioned by the companies and the strength of the factor as a ‘pull27’ or ‘push28’ factor.
Table 6: Location factors and their importance for production location decisions
Location factors and their importance
Market considerations (emerging and growing
markets)
Access to clusters and ecosystems including
universities (knowledge and technology)
Cost considerations
Value chain considerations (proximity to
customers and suppliers)
Access to skilled workforce
Public support and incentive schemes
(including tax incentives)
Business friendly administration
Trade obstacles
Importance as ‘pull’
Importance as ‘push’
***
**
*
*
***
**
(to other countries)
***
*
(away from the EU)
**
**
**
*
**
*
**
*
Note: Low *, medium **, high *** combinations reflect the importance attached to these factors by the case
study interviewees.
Table 7: Location factors and their importance for R&D and innovation location decisions
Location factors and their importance
Market considerations (emerging and growing
markets)
Access to clusters and ecosystems including
universities (knowledge and technology)
Cost considerations
Value chain considerations (proximity to
customers and suppliers)
Access to skilled workforce
Public support and incentive schemes
(including tax incentives)
Business friendly administration
Trade obstacles
Importance as ‘pull’
Importance as ‘push’
**
**
***
**
*
**
**
**
***
***
**
*
*
*
*
*
(to other countries)
(away from the EU)
Note: Low *, medium **, high *** combinations reflect the importance attached to these factors by the case
study interviewees.
In what follows, these factors are further discussed in the light of existing literature.
Four of the studied cases indicate that market developments are one of the most important
‘pull’ factors for investing in a location outside Europe. This applies strongly to manufacturing
location decisions, and to some extent also to R&D and innovation location decisions, as the
market (customer behaviour) prescribes to a large extent the need for local product
27
28
A ‘pull’ factor plays a role in the attractiveness of a certain location, often outside the home country/region. For example,
the low labour cost of a particular location might be very attractive for a firm and such influence the decision on where to
locate existing or new activities.
Whereas a ‘pull’ factor helps to attract firm activities to a certain location, a push factor might ‘motivate’ a company t o
leave the home country/region and to move activities away. Usually firm location decisions are based on an assessment of
the interplay between push and pull factors.
43
Relationship between the localisation of production, R&D and innovation activities
adaptation (development) and innovation. This is in line with existing literature, where
proximity to important markets and to key customers are identified as key ‘pull’ factors,
especially for production (see Brush et al., 1999), but also for R&D (see Athukorala and
Kohpaiboon, 2010; Dachs and Pyka, 2010). The costs of adaptive R&D can more easily be
recovered in larger markets with stronger demand and consequently larger revenues. Local
innovation in order to access and/or serve a certain market is an important reason to
develop R&D and innovation activities in new markets, in the proximity of local production
facilities. What is observed in e.g. Case 5 illustrates this further: the company has chosen to
locate production in the US and is currently building production facilities in China, to cater
two local markets. It is also stated in the literature that production activities are
characterised by a high degree of mobility since firms locate production facilities for reasons
other than proximity to their headquarters (see also Defever, 2009), this is observed in Case
5 and also in Cases 2 and 10.
A second important group of ‘pull’ factors (often also ‘push’ factors), mainly relevant to R&D
and innovation location decisions, is the importance of access to world-class ecosystems,
technological knowledge and competences. Several companies (Cases 5, 6, and 8) indicated
that this was the main reason for centralising strategic RDI activities in the home country or
for actively searching for global locations where these ecosystems are present and where
new knowledge can be accessed, through e.g. spillovers (e.g. Cases 1, 5, 6 and 1). In Case
7, the strength of the existing European ecosystem was the main reason why the Asian
company in question invested in Europe (Denmark), i.e. to insource new technological
knowledge. Complementary to this, it is also a fact that Denmark offers a favourable R&D
taxation climate (E&Y in collaboration with EuropaBio, 2014) whereby a 100% deduction for
qualifying expenditure is allowed in combination with a tax credit for R&D activities leading
to a refund of negative tax (loss) up to 25% of DKK 5m (for 2015). It can be expected that
this incentive also played a role of importance.
The importance of ecosystems and access to top knowledge ecosystems and hence the
possibility of benefitting from sizeable knowledge spillovers is an important factor for the
location decision of R&D activities is widely reported in the literature. Host ecosystems, or
the stock of knowledge in a host country more generally, strongly influences R&D location
decisions and ultimately the spillover potential (e.g. Erken and Kleijn, 2010; Cantwell and
Piscitello, 2002; Belderbos et al., 2009). For instance, the ecosystem around the company’s
home market in Case 6 has been a decisive factor in keeping RDI in the home country. Close
cooperation with universities and other enterprises on research and innovation, as well as
relatively easy access to a well-educated talent pool are critical factors. The ecosystem and
the possibility of collaborating with top scientists also contribute in making companies
attractive to global talent as a potential employer.
For the location of production activities in particular, (labour) costs considerations are (very)
important ‘pull’ and ‘push’ factors (this is broadly discussed in literature, see e.g. Defever
2006; Py & Hatem 2009; UNCTAD 2009). The often-cited argument around international cost
management is that financial space must be created for future investments. The studied
companies indicate that lower cost levels, especially in price competitive sectors (like in
Cases 1 and 2), are important to safeguard the future of the company (often in Europe),
which can only be achieved through new and forward-looking investments. Therefore, in
some cases, new production is setup at the periphery of Europe (or outside Europe), where
costs are undoubtedly lower. Strong examples were given for the semiconductor industry
where costs are indicated as an important ‘push’ (away from Europe) and at the same time
‘pull’ factor (towards e.g. Asia) for production activities.
44
Relationship between the localisation of production, R&D and innovation activities
Cost optimisation is an important driver for investments outside Europe but rarely the only
factor of importance in these very complex investment dossiers.
While governments often try to influence corporate relocation, the majority of interviewed
companies indicate that they do not base investment decisions on government incentives
(like tax breaks) only (in one case, however, Case 9, the government incentive did make the
difference in the location decision). Whenever government incentives are offered, these are
often attached to a particular location, which means that whichever company decides to
invest first in the given location receives the government incentive. Furthermore,
government incentives are indicated to be subordinate to other key considerations, like
market access, access to key knowledge, and supplier-client relationships. Nevertheless, all
other conditions equal, they can make a different in deciding between two or three locations.
This has been illustrated in a recent study (European Commission, 2013b) on the
international market distortion in the area of KETs. It was concluded that several competitor
countries provide significant incentives (grants, fiscal, loans and free land) in order to attract
EU investments in KETs manufacturing. The study indicates that for all investment decisions
concerned, a location in Europe was possible, but that investment incentives were decisive
for the respective decisions made (being outside Europe).
Several of the studied companies, and certainly the larger companies, all have an open
communication channel with the regional and national governments in which they operate,
but the dialogue is not necessarily initiated prior to an investment decision.
Literature indeed shows that tax conditions are (very) important to production location
decisions. Dunning (2000) underlines how nation states are becoming more dependent on
cross-border activities, and how states’ institutional framework increasingly influences these
activities. Therefore, states are becoming increasingly aware of their economic and social
infrastructure in order to attract multinational enterprises (Dunning, 2000). This is certainly
true for production activities, but also for R&D activities. For R&D and innovation investment
decisions, incentives for R&D are important in a company’s overall cost management as well.
For instance, Case 5 is a highly research-oriented company, and the research investments
amount to 11% cent of the company’s turnover. Hence, R&D tax incentives (tax cuts or
depreciation modalities) do matter. For R&D intensive companies that still operate in
immature markets (like in Case 6) public funding for R&D and innovation is another
important pull factor for locating RDI in a particular location.
Another group of important ‘pull’ factors, mainly for R&D and innovation location decisions,
are access to a skilled and talented workforce. This aspect was strongly emphasised in e.g.
Cases 1, 4, 5 and 6, belonging to Group 1 ‘no co-location’ and 2 ‘partial co-location’. For R&D
and innovation location decisions, skilled workforce and the quality of education systems are
essential. In particular, in the face of skills shortages and a growing demand for engineers
and scientists in the home country, firms frequently go abroad with their R&D. A shortage of
highly skilled science and engineering talent in the US explains the relocation of product
development to other parts of the world (see e.g. Erken and Kleijn, 2010).
Finally, literature often indicates the importance of trade regulations, and in particular trade
barriers when making location decisions (e.g. Brush et al., 1999). In Case 8,the main reason
for first licensing and now starting a joint venture in the US is that the US has other
production standards and regulations than Europe, which makes it favourable (if not
necessary) to produce directly in the US. In the other cases though, trade
regulations/barriers have generally not played an important role in the decision to setup new
production or R&D activities outside Europe.
45
Relationship between the localisation of production, R&D and innovation activities
4.2.2
Importance of industry, sector and value chain characteristics
Assumption: Industry, sector and value chain characteristics/development are crucial for R&D, and
production location decisions
The case study evidence strongly points out that industry and sector characteristics influence the
location decisions taken by the companies. As the case studies were spread over a variety of sectors,
each of them had their own ‘story’ with respect to how sector and industry characteristics influenced
location decisions. For example, there is a large difference between the semiconductor industry (a
truly global industry) and the construction materials industry (a quite local industry). The literature
gives a strong role to the geographical location or concentration of strategic value chain segments in
influencing the location of production and R&D. As shown through some of the case studies, the fact
that particular parts of the value chain are located outside Europe, has indeed forced companies to
locate production outside Europe as well. The geographical dispersion or concentration of various
value chain segments, the embedding of a company in its value chain and the interrelation with other
players (suppliers or customers) are found to be important in 7 cases.
Production location decisions depend on the characteristics of the value chain(s), and in
particular its geographical dispersion. As these value chains have become more global, the
decision-making processes have become more complex, and the role, and often location, of
production and R&D have become more global as well (see e.g. De Backer et al., 2013). In 7
out of 10 cases, value chain considerations played a different but important role. In the
studied cases, the value chain played a role from the perspective of proximity to customers
and suppliers (downstream and upstream) and access to clusters and geographical
concentrations of key value chain segments. In some cases (like Case 3) it has become clear
that due to the fact that important segments of the respective value chain are located
outside Europe, and because of the close collaboration with local customers and the
negotiation power of these customers, the respective company had to start production
operations in the vicinity of those clients. The geographical location of supplier networks also
influences production location decisions. Common arguments here were the hands-on
management of the material flows, quality assurance and to a lesser extent just-in-time
supplies. As Meijboom and De Vos (1997) have pointed out, the coordination aspects of
activities along a company’s value chain play an important role in location decisions. Firms
consider the co-ordination aspects of how to integrate their production and distribution
facilities, but they must also consider the configuration aspects of linking facilities along the
value chain.
In the semiconductor industry (Cases 4 and 9) the production stage is divided into front-end
manufacturing (wafer fabs) and back-end manufacturing (assembly, test and packaging).
Investment in front-end manufacturing is capital-intensive, while back-end manufacturing is
labour-intensive. This means that the back-end manufacturing is outsourced to low-cost
regions (such as Southeast Asia) to a higher degree than front-end manufacturing, where a
large share of manufacturing still takes place in Europe. Front-end manufacturing quite often
also requires R&D capabilities in the vicinity of manufacturing. As a result, the value chain is
dispersed and spread over different countries and regions.
46
Relationship between the localisation of production, R&D and innovation activities
4.2.3
Importance of market dynamics
Assumption: Market characteristics (market growth dynamics, demand patterns etc.) are decisive for
production but also for RDI location decisions.
In the majority of the case studies, market considerations (like emergence, growth, and required
customisation/tailoring) played an important role in the investment decisions made. This is particularly
valid for production, but to an increasing extent also for R&D and innovation. Particularly when a
product needs adaption to the local market or when continuous innovation is necessary to stay
competitive, production and at least development activities, but quite often also research activities,
are co-located. The market size is also important, and becomes increasingly important also for R&D
location decisions as the costs of adaptive R&D can more easily be recovered in larger markets with
stronger demand and consequently higher revenues.
Previous studies on the internationalisation of production clearly point out the importance of
market dynamics. New market entrance and/or the inherent characteristics of the market
and its customers are the most frequently heard arguments for making new production
investments outside (but also inside) Europe. Market proximity is an essential objective in
production location decisions. But markets do not always evolve as expected. If the host
country market decreases or increases to a smaller degree than expected, this reduces firms’
incentive to locate there (see Kinkel, 2012). The case study findings also point towards the
importance of the market. In two cases (Cases 1 and 3) clients in Korea or Japan required
the European companies to setup a production facility in their proximity (B2B cases). Main
reasons on the side of the customers were quality control and efficiency.
There are strong differences between sectors with respect to the importance of the market.
For instance, the construction market, several segments thereof, is to a large extent a local
market (Case 2). In the semiconductor industry (Cases 4 and 9), the market is of a real
global nature with almost no import tariffs, making it easy for products to travel around the
world (also transport costs are negligible). This essentially means that production can be
done from anywhere in the world on the basis of production efficiency and quality
management considerations. As noted earlier, that product adaptation requirements may
necessitate a company to locate development activities close to its production activities, if
needed outside Europe. The latter depends on the need for product customisation or
periodic renewal.
High product and process complexity and a high rate of new product introduction (clock
speed) are strongly linked to co-location (as shown also by Ketokivi and Ali-Yrkkö, 2009). In
Cases 4 and 9, the semiconductor industry, most design in R&D is still undertaken close to
the customer on the basis of local demand, whereas the more strategic R&D remains
centrally in Europe.
4.3
Case study findings: role of internal organisational characteristics and considerations
It is evident that the location investments made by companies are based on thorough
strategic considerations and choices. In the 10 implemented case studies we discussed the
main strategic considerations.
47
Relationship between the localisation of production, R&D and innovation activities
4.3.1
The role of company strategy
Assumption: A company’s overall strategy is decisive for the location decisions of RDI and production
It is obvious that strategy drives a company’s long term decision-making processes. The case studies
made clear that this longer-term strategy can only slightly be influenced by short-term incentives
provided by regional or national governments. Key strategic considerations indicated by the analysed
group of companies are access to a new markets or the need to insource the next generation of a
particular technology in order to stay innovative, hence to have access to strong knowledge
ecosystems. Cost factors are of course important, albeit more for production than for R&D.
It is always a company’s strategy that guides the longer term location investment decisions.
But what are the key strategic elements upon which the studied companies base their
location investments? The most frequently mentioned strategic objective is one whereby
access to new markets and safeguarding of future sales is of major influence to location
decisions (Cases 2, 3, 8, and 10), the importance of which is also confirmed in literature (cf.
supra). Another important strategy is to optimise production over different facilities spread
over different countries, quite often in order to manage costs and to benefit from economies
of scale (see also below). There are obvious differences between sectors. For the
semiconductor industry for example, the strategy is to improve capacity utilisation and
optimise business efficiency while cutting costs. The sector is highly global (low import
tariffs) and production can theoretically be done from anywhere in the world. Cost is an
important factor for locating labour-intensive back-end plants. Therefore, the production
facilities are often located in low-cost countries (Cases 4 and 9).
For R&D in particular, considerations like access to future key knowledge and technologies,
human capital and the need to adjust (or not) to a local market often driving location
factors. Several companies are continuously searching for potential optimisations of their
production and R&D network, often over countries, regions and even continents. R&D
outsourcing has increasingly become an important strategy of companies to get access to
distinctive capabilities of specialised providers, gain efficiencies and enter new or growing
markets. Such partnerships are organised in different contract forms, like alliances or
research cooperation with different partners, e.g. suppliers, clients, competitors or research
institutes. The majority of the companies that invest in R&D abroad aim to keep the most
‘strategic’ knowledge in Europe, often because of IPR protection concerns.
A final illustration concerns two companies (Cases 5 and 6) that keep their R&D and
innovation activities centralised in Europe, indicating that the main strategic consideration for
such centralisation is the strong scientific ecosystem. Obviously, if the company reprioritises
its R&D roadmap or its knowledge portfolio, this ecosystem might become less attractive,
and the company will start looking for alternatives, either inside or outside Europe. By
speculating to some extent, there is a strong impression that a company’s overall longerterm strategy is difficult to influence with short-term public incentive packages.
48
Relationship between the localisation of production, R&D and innovation activities
4.3.2
Importance of a company’s R&D intensity
Assumption: For R&D intensive firms, location decisions depend largely on the knowledge available in
the ecosystem (the knowledge available in a home versus host ecosystem)
There is ample evidence collected through the case studies confirming this assumption. For R&D
intensive firms, which invest heavily in R&D and particularly in forward looking research, access to
knowledge and technologies is vital. The companies indicate that it is a matter of matching supply to
demand. If the knowledge is not available in the home country, then there are different ways to
insource it, ranging from collaboration agreements (over distance) to physically locating an R&D
facility where the knowledge is available (in the right ecosystem either in Europe or outside). The
companies that have centralised R&D and innovation activities refer to access to human capital and
the attractiveness of the local ecosystem, and often the embeddedness in that ecosystem, as being
the main drivers. Companies who also have overseas R&D and innovation activities indicate the host
ecosystem to be important for the reasons mentioned.
The majority of the companies studied are R&D intensive (approximately between 2% to
13.5% of R&D to turnover investment). For these companies, the host and/or home
country’s ecosystems are very important for the location of R&D and innovation activities.
Roughly, on the basis of the case study results, we see two types of companies: (1)
companies who keep (most of) their R&D and innovation activities centralised in the home
country (mainly the strategic research component) at home, and (2) companies who have a
more globalised and dispersed R&D profile. As discussed above, there are different reasons
why companies find themselves in one of these two categories.
For the companies who keep their R&D and innovation activities centralised in the home
country, the quality of the local ecosystem is a crucial reason for doing so. Research
institutions and universities are important in these ecosystems, as they provide access to top
talent (see Cases 6 and 8) and top-knowledge. These reasons are broadly embraced in
literature as well (see e.g. Thursby and Thursby, 2006; Kinkel and Maloca, 2008; Marsili,
2001 and Malerba, 2002). If R&D intensive companies do not ‘find’ the knowledge they are
looking for in the home country (in Europe), efforts will be made to insource it in other ways,
e.g. through collaboration or through localisation of an R&D facility abroad, outside Europe if
needed (Ramirez, 2014).
Although knowledge sourcing is clearly linked to a company’s R&D intensity, there is no
obvious link with the need to co-locate R&D and production activities. As discussed above,
the need for functional co-location is mainly driven by product and manufacturing complexity
and the innovation speed and characteristics as posed by the market concerned. It is clear
that strong knowledge ecosystems are necessary in order to keep as many (strategic)
research activities in Europe.
49
Relationship between the localisation of production, R&D and innovation activities
4.3.3
Importance of product and production complexity
Assumption: Co-location of R and/or D and production is largely driven by product and manufacturing
complexity
Product and production process complexity are an important driver for the co-location of production
and development activities. The companies who have centralised their development activities in their
home country know complex production processes that require close support. The same also applies
to new production locations, where, in case of complex products and production processes that need
a high degree of customisation for the new market, development capabilities are also located close to
production. Of particular interest are pilot installations that in the early phases of setup and operation
require the intensive involvement of R&D for problem solving and optimisation.
From the cross-case analysis we can observe that the selected companies develop and
produce highly complex products, bearing in mind the variation between markets and
sectors. There are several examples (Cases 4, 6 and 8) where product and production
complexity, and a high rate of new product introduction (market demand), are main reasons
for co-locating production and R&D and innovation activities (this is also confirmed by
Ketokivi, 2006; Ketokivi and Ali-Yrkkö, 2009; Simon et al., 2008). There are nevertheless also
cases where products and manufacturing processes are complex, but strongly standardised
at the same time (Case 1). Here there is less of a need to co-locate R&D and production.
Production location decisions do not need to be followed by the entire R&D and innovation
spectrum. In some cases only specific R&D and innovation functions (e.g. development and
adjustment) are co-located with the production facilities. There is also evidence that product
development, one of the R&D functions, often follows production activities, while process
technology development, another function, frequently remains centralised at the home
country.
For pilot installations proximity to R&D problem solving capacity is required especially in the
early stages of setup and operation. For the pilot installations that have been built in Europe,
the proximity to a strong R&D capability has been essential (Case 8). In the case of the
semiconductor sector, front-end manufacturing is capital intensive and consequently requires
heavy technology investments. There is a fairly strong degree of co-location between wafer
fabs and R&D centres. This is particularly evident in the high-tech cluster in the home
country. Back-end manufacturing, involving assembly, test and packaging, is more labourintensive (and to a certain degree also more standardised), which is why the necessity of
R&D attached to test and assembly facilities is less important (Case 4).
That means that co-location of production and RDI is necessary for the development and
introduction of new products. Product complexity and production complexity are two
distinctive concepts, but they are closely intertwined. Industrial activities involving both
highly complex products and production processes will tend to have more segmented value
chains (i.e. more segments and a more global division of labour within the corresponding
value chain) with front-end and back-end manufacturing.
The evidence collected during the case studies tends to indicate that both the upper end of
production and R&D largely remain located within the EU, given the historical ties and
interrelations within high-tech clusters (leading to a strong embeddedness). Especially for
the semiconductor industry, we see that back-end production complexity is less technologydriven, but more logistics-driven, and therefore the existence of a strong suppliers’ network
is the critical parameter.
50
Relationship between the localisation of production, R&D and innovation activities
4.4
Case study findings: co-location and impacts of location decisions on ‘home’ and
‘host’ countries
4.4.1
Co-location between production and R&D and innovation
Assumption: It is not obvious that production offshoring is followed by RDI offshoring.
The result of the cases studies in Groups 1 and 3 show that is not a ‘natural phenomenon’ for RDI to
follow manufacturing once it has been offshored. Also, if co-location takes place it does not
necessarily involve the entire R&D and innovation function. What drives co-location are product and
manufacturing complexity and the characteristics of innovation required by the market concerned.
There are clear indications that as manufacturing and production complexity increase, or when the
market is highly demanding in terms of innovation intensity, the need to partially or fully co-locate
R&D and innovation with manufacturing increases as well. The issue of co-location is complex and
strongly situationally dependent.
The case studies clearly show that there is not always a need to co-location R&D and
innovation co-located with manufacturing. If manufacturing activities are offshored, then it
depends largely on product and production complexity and the market characteristics
whether and to what extent R&D and innovation co-location is required.
Group 1 of the studied cases (‘no co-location’) clearly illustrates the despite being highly R&D
intensive, and despite having relative complex manufacturing process, there is no need for
physical co-location whereby R&D activities support manufacturing. There are examples
where R&D activities are located in the same country as manufacturing, but for different
reasons, mostly relating to access to knowledge and talent. For group 2 (‘partial co-location’)
and 3 (‘full co-location’), different R&D activities, development support in particular, are
closely located to production activities for problem solving and local market adaptation
requests (e.g. as strongly illustrated in the semiconductor and catalyst production sectors).
On the one hand, the case study findings show that the general assumption that once
manufacturing activities are offshored, sooner or later R&D and innovation activities will
follow as well, does not hold for all investigated sectors or firms. On the other hand, there
are clear and strong indications that as manufacturing and production complexity increase,
or when the market is highly demanding in terms of innovation intensity, the need to
partially or fully co-locate R&D and/or innovation with manufacturing increases as well. This
has also been emphasized in a report by McKinsey (2012) on the future of manufacturing,
and has subsequently been confirmed by the High Level Group on KETs in its 2013 status
implementation report (European Commission, 2013), thereby also referring to the
increasing co-location requirements in Asia, something that has also been pointed out in
several of the case studies.
4.4.1
About the ‘impact’ of (co-)location decisions
Assessing the impacts of recent (co-)location decisions and investments is challenging for
various reasons. Not only do ‘impacts’ take time to materialise and may not yet be visible, it
is also difficult to attribute or to link directly and in a linear way ‘changes’ to ‘events’.
Moreover, this study is based on a small number of cases displaying a high level of
heterogeneity. Most of the cases concern EU high-tech companies having recently invested
in new production facilities outside the EU (often in Asia). In half of these cases, there was a
‘co-location decision’, i.e. these investments in new production facilities were accompanied
by investments in new RDI activities at the same location, as complementary activities to the
new production facility.
51
Relationship between the localisation of production, R&D and innovation activities
However, even such a general description does not correspond to the large variety of
situations and drivers behind the decisions. While there can be a substitution of production
between the EU and other regions in the world (shift or de-localisation), it has been
observed that in the large majority of cases, there was actually expansion of production
capacity (in addition to production lines elsewhere, complementing those already existing in
the EU). Similarly, when it comes to R&D, the large majority of cases did not correspond to a
substitution of R&D capacity, but rather to the launch of additional R&D.
In some cases (e.g. in Cases 2, 4b, 8b), the investment in additional R&D outside Europe is
related to the adaptation of production to local market conditions (the ‘D’ of R&D), which
differs strongly from strategic research activities that are kept in Europe (the ‘R’ of R&D).
Finally, investment in production outside the EU can refer to ‘front-end manufacturing’
(upper end production technologies, like in Case 4a) or just ‘back-end manufacturing’ (lower
end production technologies, like in Case 4b).
In the international literature, many attempts have been made to ‘classify’ or to ‘categorise’
these strategies, e.g. by making a distinction between ‘horizontal FDI’ (i.e. duplication or
expansion of production in the same value chain with the purpose of serving local clients)
and ‘vertical FDI’ (i.e. locating different stages of production or ‘value chain segments’ in
different countries, cf. ‘front-end’ versus ‘back-end’ production’) (Peng, 2011; Ekholm et al.
2003). Most of these categorisations, however, still fail to cover the whole spectrum of
potential strategies. Obviously, these differences in ‘location decisions’ or ‘strategies’ will
generate strong differences in the impacts induced in both the host and home countries.
Therefore, the conclusions on impacts have to be considered with caution. Their degree of
generalisation is low and the reader should primarily refer back to the case-specific situation
to understand them correctly.
4.4.2
Impacts on the ‘home’ country
Assumption: Production and/or RDI offshoring do not necessarily have a negative impact on the
company’s activities in the home country.
On the basis of the case study results this assumption seems to hold. The impact of particular
investment decisions should be considered from different perspectives and over a longer time frame,
thereby not ignoring the fact that in the short-run there might be negative effects, like job losses. In
the longer-term the effects might be positive, like sustaining and/or expanding business level activities
in the home country. In some cases it is said that because of offshoring, European activities can be
maintained and new investments can be made. The majority of the companies, allegedly, see it as
their societal obligation to keep as much of their activities as possible in Europe, in their home
country.
Investing in production facilities and in RDI abroad does not necessarily generate negative
impacts on the home country. On the contrary, in most of the cases we observed that this
goes together with the decision to keep the most technologically advanced parts of
production as well as the strategic R&D in Europe. Shifting part of the production (or adding
new production capacities) abroad often answers the need of being closer to large, emerging
markets and/or of producing at lower costs. In such cases, the company often experiences
positive impacts in terms of overall sales, revenues and profit margins, which in turn
generate additional means for strategic investments at home (documented evidence for
Cases 1, 2, 3, 4, 8, and 9).
For instance, in Case 1, the home environment has recently benefited from a company’s
investment in a new R&D centre, and the home country continues to be technology-intensive
and a very important location to the company (e.g. in terms of patents applications). Despite
the international presence of the company in Case 3, the activities in Europe are not closed
52
Relationship between the localisation of production, R&D and innovation activities
down or downsized as a result, on the contrary. In the European semi-conductors’ industry,
and despite the investments abroad, the crucial RDI activities and production lines of the
companies are still located in Europe, and both employment and investment levels have
been maintained or even increased in the home countries (cases 4 and 9). Even in the case
of new investment in front-end production and RDI abroad, we sometimes observe a
noticeable difference in investments.
In Case 4, front-end production and the associated R&D were moved to Asia (Singapore)
where the respective company invested in a high-tech wafer fab. However, this wafer fab is
still based on the former industrial standard (200mm), while the only front-end production
based on the most recent industrial standard (and technologies, i.e. 300mm) has been kept
in Europe.
The example of Case 4 and other cases demonstrate how continued investment in the EU’s
highest-tech clusters and eco-systems is of crucial importance for both companies and the
EU as a whole. Hence, generating corporate profitability to maintain (or increase) large
investments in such high-tech eco-systems is probably the largest positive impact that can
be made, as it both increases the ‘anchorage’ in the host economy and triggers future
additional investments. The importance of the existing industrial structure and high-tech ecosystems as ‘agglomeration forces’ for future investment and locational decision-making has
been repeatedly pointed out in the international literature (Weber, 1929; Defever, 2006;
Bhatnagar et al., 2005).
Another positive impact is that investing in new production facilities abroad may be a
springboard to other surrounding regions and markets. Once the local presence has been
established, local supply chains consolidated and local human resources trained, the
company more easily decides to move forward to other networks, which in turn can leverage
additional turnover and profit margins.
4.4.3
Impacts on the ‘host’ country
The impacts on the host country are often significant, mainly (but not exclusively) in terms
of local employment (Cases 1, 2, 4, 9) at lower cost (see also Defever, 2006). For instance,
in Case 1, both the research facility and the production plants in the Eastern European
country employ local personnel, meaning that the local impact on employment is substantial.
In Case 2, production and R&D staff in both China and India has increased. In Case 4
investments in Singapore, China and other host countries have generated substantial
employment in these countries. However, given that in Case 4 the focus on keeping main
RDI activities within Europe, the impact of RDI in the host countries is estimated to be fairly
low. In Case 9, the construction of the fab in Asia has generated employment in the host
country (in the specific case about 30.7% of the global total in 2013 was generated in
Malaysia). Besides employment benefits, these investments also contribute to strengthened
local innovation development and innovation capabilities.
The different impacts are summarised below in terms of importance, thereby making a
difference between the impacts of production versus RDI offshoring.
53
Relationship between the localisation of production, R&D and innovation activities
Table 8: Importance of potential impacts related to production delocalisation
Impacts
Impacts on the home
country
Impacts on the host
country
***
**
***
*
(in the EU)
Increased revenues and profit margin at group’s
level
Continued investment in upper-end of value
chain and in strategic R&D
Inducing knowledge absorption capacity
Local employment creation
Creating a springboard to other surrounding
markets
*
(away from the EU)
***
**
***
***
**
Note: Low *, medium **, high *** combinations reflect the importance attached to these factors by the case
study interviewees.
Table 9: Importance of potential impacts related to RDI delocalisation
Impacts
Impacts on the home
country
Impacts on the host
country
**
*
***
***
**
*
***
***
*
**
(in the EU)
Increased revenues and profit margin at group’s
level
Continued investment in upper-end of value chain
and in strategic R&D
Inducing knowledge absorption capacity
Local employment creation
Creating a springboard to other surrounding
markets
(away from the EU)
Note: Low *, medium **, high *** combinations reflect the importance attached to these factors by the case
study interviewees.
54
Relationship between the localisation of production, R&D and innovation activities
5/
Key findings and main policy reflections
5.1
Key findings
In total 10 case studies, spread over different countries and sectors, have been selected and
extensively analysed in order to explore the motives and explanations behind the
geographical (co-)location decisions for R&D, innovation and manufacturing made by the
companies involved. On the basis on whether sub-functions of R&D and innovation, and
manufacturing have been co-located, and the extent to which, three groups of companies
have been distinguished. In Group 1 (‘no co-location’), composed of 5 cases, there is no
functionally related production and R&D co-location, meaning that production is not related
to/supported by ‘close-by’ R&D activities), despite the existence of offshore manufacturing
activity. Group 2 (‘partial co-location’) is composed of 2 cases where there is only partial colocation (i.e. mostly development and adjustment capabilities are offshored close to the
production activity). In group 3 (‘full co-location’) there are 3 cases where co-location is
functionally based (i.e. full R&D capability is co-located with production on the basis of
mutual reinforcement and support).
The ex-post grouping of cases on the basis of the co-location intensity and the subsequent
analysis thereof, leads to a number of important findings.

As product and production complexity increase, and the market demands fast
innovations, the propensity to co-locate manufacturing and R&D and innovation
activities increases as well.
On the one hand, the specific case study findings show that the general assumption that
once manufacturing activities are offshored, sooner or later R&D and innovation
activities will follow as well, does not hold for all investigated sectors or firms. On the
other hand, there are clear and strong indications that as manufacturing and production
complexity increase, or when the market is highly demanding in terms of innovation
intensity, the need to partially or fully co-locate R&D and/or innovation with
manufacturing increases as well29. This has also been pointed out by the High Level
Group on KETs in its 2013 status implementation report (European Commission, 2013),
thereby also referring to the increasing co-location requirements in Asia, as also pointed
out in several of the case studies. In Group 2 (‘partial co-location’) and 3 (‘full colocation’) we see that different R&D activities, development support in particular, are
closely located to production activities for manufacturing support and local market
adaptation requests. Manufacturing complexity and market demand hence are clear
driving forces behind full or partial co-location.
29
As also illustrated by the results of a survey targeting more than 100 managers from 54 manufacturing companies (McKinsey,
2012)
55
Relationship between the localisation of production, R&D and innovation activities

Consideration of the co-location of some of the activities in the R&D spectrum (partial
co-location) provides a more detailed and fine-tuned insight, and a more accurate
reflection of reality.
The on-going debate on R&D, innovation and production co-location can be
strengthened by a more detailed perspective on which R&D activities in particular are
more sensitive to ‘co-location’. The spectrum of R&D activities contains research (to
develop basic innovations), platform, application and process development (aiming to
develop product platforms and/or adjust products to regional markets and customers),
and production support (aiming to solve technical problems and ensure continuation of
manufacturing).
Depending on the activities involved, different degrees of co-location can be observed in
light of market, product and production characteristics and demands. Previous research
(Simon et al., 2008) indicates that full co-location, where all R&D phases take place at
the manufacturing site, only occurs at long established locations that serve as
knowledge centres for an entire sector, reflecting the shift of an entire industry locus or
value chain. Interesting to note is that the majority of the companies spoken to aim to
keep strategic research activities in Europe.
The case study findings indeed confirm that the location of (strategic) research activities
is strongly driven by access to strong knowledge ecosystems (composed of top research
and technology development centres) and top-talent. Once embedded in such an
ecosystem, assuming its worldwide excellence is maintained, it will be difficult if not
impossible for a firm to unplug from that ecosystem. The story is different when it
concerns development activities, the location of which is largely dictated by product and
production complexity and market demands. In other words, the drivers behind the
location of R&D and innovation activities, in terms of co-location with manufacturing,
differ strongly.

Specific location characteristics can have a strong ‘pull’ effect on R&D, innovation and/or
production location decisions. For R&D, access to top-knowledge and talent prevail; for
production, cost, value chain, and market proximity considerations prevail.
When considering the location of new investments, or the relocation of existing
activities, a wide spectrum of factors play a role. Existing literature on the topic provides
two distinguished perspectives on the role of pull or push factors. The first is the
economist’s perspective, presenting a locational ‘pull’ vision whereby companies are
pulled to a certain location, and the second is the organisational scholars’ perspective,
which takes an industry and firm perspective, mainly basing itself on the cross-functional
interdependencies between production and R&D activities.
Pull or push factors can either motivate the company to move away from the home
country (‘push’) and/or motivate the company to move into a particular location (‘pull’).
A location decision is usually taken at the complex interplay between pull and push
factors. The case studies point out that firms are sensitive to particular pull factors. The
most important pull factors for production location decisions are: proximity to customers
(market) and suppliers (value chain perspective), cost considerations, incentive
schemes, and business friendly administration. For R&D and innovation, the most
important pull factors are: access to knowledge/technology ecosystems and
complementary competences, access to skilled workforce, thereby complemented by
R&D tax incentive schemes. Especially for R&D intensive firms, access to knowledge and
technologies is vital. If the knowledge is not available in the home country then there
are different ways to insource it, ranging from collaboration agreements (at a distance)
56
Relationship between the localisation of production, R&D and innovation activities
to physically locating an R&D facility where the knowledge is available (in the right
ecosystem). The size of the market is also important for the location of development
activities, as the costs of adaptive R&D can more easily be recovered in larger markets
with stronger demand and consequently larger revenues.
To put this in perspective of the identified groups of companies, based on their colocation behaviour, companies that do not co-locate R&D with production (Group 1 ‘no
co-location’), R&D location decisions are taken based on the strength of local
ecosystems, access to top-talent and public support; i.e. independently from
manufacturing considerations. Instead, for full co-location (Group 3 ‘full co-location’)
market and manufacturing proximity is crucial, while access to top talent is not explicitly
mentioned as a factor of importance. Access to new knowledge and technologies
appears to be a top driving factor only for firms that offshore part of their development
and adjustment capabilities (Group 2 ‘partial co-location’).

Government incentives are not often the primary decision making factor when it comes
to making new investments. However, they do play an important and often decisive role
when deciding upon investments between equally suitable locations.
A recent study (European Commission, 2013b) on the international market distortion in
the area of KETs has concluded that several competitor countries provide significant
incentives (grants, fiscal, loans and free land) in order to attract EU investments in KETs
manufacturing. The study indicates that for all investment decisions concerned, an
equally suitable location in Europe was possible, but that investment incentives were
decisive for the respective decisions made (being outside Europe).
This case study results, however, do not provide clear evidence that investment
incentives provided by a certain region or country, are the primary and/or triggering
factor for re-locating existing manufacturing or R&D activities, or investing in new
locations. Other factors like political stability, market characteristics, infrastructure,
knowledge ecosystems and talent, are often of higher importance as a triggering factor
to consider new investment options. Investment incentives, nevertheless, play a decisive
role in the final decision between two or more equally suitable and interesting
investment locations, as also illustrated in the above-mentioned study.

The impact of offshoring or co-location of production and R&D activities on the home or
host country varies in terms of type of impact and in terms of intensity over time.
The case study results point out different impacts on both the home and host country.
In the home country several companies have indicated that because of offshored
activities, the level and intensity of EU activities could be maintained. Knowledge
transfer back to the home country has been another often heard effect, especially in
case of R&D offshoring. For the host country, offshoring brings along a number of
impacts as well, ranging from new employment creation to the development of new or
the strengthening of existing R&D or production ecosystems. The impacts should be
considered from different perspectives and over a longer time frame, thereby not
ignoring the fact that in the short-run there might be negative effects, like job losses, for
Europe or the home country. In the long-term, the effects might be positive (sustaining
and/or expanding business level activities in the home country).
57
Relationship between the localisation of production, R&D and innovation activities
5.2
Main policy reflections
In view of the significant heterogeneity of the selected case studies it is not possible to make
strong recommendations. There is nevertheless a common set of emerging issues that
deserve further (continued) policy attention:
 First of all, monitoring focused on particular groups of firms is important. In particular,
closely following the activities of firms in highly R&D intensive sectors and the
developments in their markets is essential. The case study results show that product and
production complexity, and market demand, drive the need to co-locate development and
manufacturing activities, with an increasing risk of co-location of strategic research
activities over time as well, in case the industry locus shifts. In that respect, the Group 2
companies (‘partial co-location’) are very relevant as they have co-located and offshored
part of their development activities, but still have development and strategic research
activities in Europe.
 Secondly, Europe should keep focusing on excellence, in terms of available knowledge,
research infrastructure and human capital. Strategic R&D investment decisions are
strongly driven by stocks of knowledge and technology, and access to human capital. The
presence of world class ecosystems is key to keep R&D and innovation activities in Europe
and to attract new investments from abroad. For this to happen, skills are essential,
particularly maintaining a high level of education and training also as a way to attract the
best talent to Europe. Strengthening Europe’s scientific and technological base by
achieving a European Research Area, in which researchers, knowledge and technology
circulate freely, reflects this point very well. The efforts towards the realisation of the
European Research Area and the bundling of resources should be maintained.
 Thirdly, the case studies confirm the role of the market and the characteristics of market
demand in location decisions for production and R&D. This emphasises the importance of
deployment and manufacturing in Europe in light of a potential strong European market.
In view of the key role that the market plays in offshoring and location investments, the
achievement of the full potential of the European Single Market, through an improved and
harmonised legislation is essential to allow companies to turn the Single market into a
‘local’ one. Furthermore, supporting the creation of new markets through public
procurement and lead market creation initiatives deserves priority, especially there where
Europe has a strong scientific and technological base and commercial deployment is
required.
 Fourthly, there is no doubt about the importance of strong incentive packages, and a
global level playing field for manufacturing and RDI investment activities. Government
incentives can make the difference when a company has to decide between two potential
locations with equal strengths. Further coordination is needed on two levels. First, there is
coordination needed among Member States and regions in order to provide coordinated
incentive packages and financial impulses to companies that are of crucial important to
European industry and society. This links closely to the modernisation process for State
Aid. Secondly, on an international scale, as has also been argued by the KETs High Level
Group (Status Implementation Report, July 2013), there is a clear need for bilateral and
multilateral trade negotiations to be used to address the transparency of third countries
State Aid.
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Relationship between the localisation of production, R&D and innovation activities
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Annexes
62
Relationship between the localisation of production, R&D and innovation activities
1/ Literature review
The literature review report is available as a separate report.
63
Relationship between the localisation of production, R&D and innovation activities
2/ Data analysis report
The data analysis report is available as a separate report.
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Relationship between the localisation of production, R&D and innovation activities
3/ Case study questionnaire
Block 1 (Facts on the location decision/investment)
1. On the investment (involving a location decision):
a. Type of investment and reasoning:
 Offshoring of production
 Offshoring of R&D& innovation activities (RDI)
 Co-location of production and RDI
Did it concern substitution or complementing of existing activities?
 Substitution: Existing activities were cancelled and offshored
 Complementing: New investments were made at an offshore location
b. Country, region, city and sector
c. Number of employees, size of site, organisation and management structure (both in the ‘new’
location and overall)
d. Activity profile, products, purpose of the new/relocated facility
 If production: which markets does the facility serve? Is the facility used for production of
intermediate or final goods?
- If intermediate, where does the next production step take place?
- If final, which market does the facility serve?
- Is the facility a pilot plant, or can it be considered a lead plant?
 If RDI: what role does the facility play in the global RDI activities of the company and which
specific RDI sub-activities have been delocalised
 Production support
 Process development
 Application development
 Platform development
 Research
 If combination of the above, please explain
e. Was there already any firm activity in the host country prior to this decision, and when?
 Production, in [year]…
 RDI (which sub activity), in [year]…
 Co-location, in [year]…
f. What were the investment cost and funding modalities?
g. What is the current status of the investment (still under construction, whether it is expanding,
profitable)?
h. Has your investment triggered other/alternative offshoring effects or modalities (e.g. offshoring
of production and innovation activity outsourced in the host country, cooperation contracts etc.)
Block 2 (Organisational characteristics and factors)
2.1 Strategic considerations
2. What are the overall main strategic considerations underlying the investment (what is the ‘main
story’)?
3. How does the investment link to the production-market-innovation strategy of the company? What
are the objectives?
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4. Reconstruction of the strategic milestones and decisions in the context of the investment dossier
along the time line? Which considerations were made (financial, market, other) at which point in
time? Which internal and/or external stakeholders (or types of stakeholders) were involved?
2.2. Technology and innovativeness levels
5. How RDI intensive is the company (in % of annual turnover)? How does the (low or high) RDI
intensity relates to your past (and future) RDI location decisions?
6. How important is it for the company to localise close to innovative communities or ecosystems?
What are the characteristics of these communities, both in the home and host country?
7. What information/intelligence did the company use to localise innovation activities – how important
was this information for the company decision?
2.3 Product and production complexity
8. Please elaborate on the product and production complexity (by reflecting on levels of
customisation/adaptation needed) and how this has influenced the investment?
9. On a scale of 1 (not at all) to 5 (fully):
a. How does the product and production complexity influence the degree of co-location between
RDI and production? Please further elaborate on that.
b. To which extent did the RDI intensity and activity pushed the company to co-locate production
and RDI?
Block 3 (Environmental factors of importance)
3.1 Location characteristics
10.In general, which factors did you consider while making the investment in the ‘host’ country (‘pull’
perspective)? (please scale from most important to least important)
 National or regional characteristics and strengths (e.g. political governance, political
situation, corruption, general education level (skilled workforce), scientific and
technological strengths, agglomeration tendencies and political stability)
 Cost factors like transportation cost, labour costs, raw materials, taxation structure, RDI
and other types of subsidies relieving costs
 Societal aspects
 Trade regulations or barriers
 Other, e.g. purely strategic
11. Host country choice, factors underlying this decision:
a. Did any of these factors made it easier for you to leave the ‘home’ country (‘push’ perspective)?
Which ones? Could you list them in order of importance?
b. Were other locations considered in addition to the one finally chosen? If yes, which ones?
Which factor(s) forced the breakthrough? How do you judge the role and importance of local
cluster and ecosystems? Could you list them in order of importance?
12.Did you have any direct dialogue with the regional/national/EU authorities (on e.g. available
support instruments) in the ‘home’ country prior to deciding to delocalise? And with the ‘Host’
country?
13.What kinds of support or incentives did you receive from the ‘host’ country in connection with the
investment? (please scale from most important to least important)
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 Support services (advice, help in connection with selection of location, building,
recruitment, tax advice, etc.)
 Grants
 Loan or loan guarantees
 Tax breaks
 Provision of goods, land, or buildings
 Supporting investments by the recipient country in tailor-made education/training,
research etc.
 Other, e.g. special treatment, bilateral agreement with the company, etc.
14.Could the EU or your home Member State (or Region) have done anything differently to keep the
investment within the EU? What in particular?
3.2 Industry sector & value chain characteristics
15.How would you describe your industry and sector, by reflecting on:
a. The overall value chain (upstream/downstream, strategic segments)
b. Existing cluster and ecosystems
c. Dependency on suppliers
16. Influence of value chain and dependency of suppliers on the de-localisation decision:
a. How did the position of your company-product and/or the characteristics of your ‘global’ value
chain influenced the investment decision?
b. Which part of the production/RDI was influenced and/or delocalised (if not already discussed
above)?
3.3 The market
17.Could you illustrate the main characteristics of the markets you are active on, e.g. size, structure,
integration in the region, differentiation, high-tech intensive, etc.? How have these characteristics
influenced the investment, and in particular the location thereof?
18.In your investment (location decision), how do market considerations relate to costs
considerations?
a. Market considerations are much less/much more important than costs considerations?
Block 4: Concluding questions
19.What are the future perspectives for the investment? Would you consider to ‘re-locate’ the
investment back to EU? Your home country? Hypothetically speaking, what would be needed to do
so?
20.Do you consider this investment decision as a success? At this point, would you make this
investment in the same way? What could be improved (in the decision making process)?
21.What is the ‘impact’ of this investment decision on the activities of the firm:
a. in the home country (RDI investment, employment, revenue, sales)
b. in the host country (RDI investment, employment, revenue, sales)
22.What is the ‘impact’ of this investment decision on your company’s activities still taking place in
Europe (if any)?
23.How could Europe become/stay an attractive location for investment in production
24.How could Europe become/stay an attractive location for investment in RDI?
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