How special is the special relationship? Using the impact of US R&D spillovers on UK firms as a test of technology sourcing

The results presented in this paper provide strong evidence for the existence of knowledge spillovers associated with technology sourcing. The idea that foreign firms might invest in R&D activity in a technologically advanced country such as the US in order to gain access to spillovers of new "tacit" knowledge has been suggested in the business literature, but we know of no studies that have attempted to find evidence for this in observed productivity outcomes. Our main results suggest that the increase in the US R&D stock in manufacturing between 1990 and 2000 was associated with, on average, a 5-percent-higher level of TFP for the UK firms in our sample, with the majority of the benefits accruing to firms with an innovative presence in the US. This compares with an average 6-percent-higher level of TFP associated with the increase in their own R&D stocks over the same period. Increases in US R&D in the 1990s seem to have had major benefits for the UK economy, and, by implication, for many other countries in the world. We should stress that, because we do not have a convincing instrument for the location of inventive activity, and thus rely on presample information, we can interpret these results only as associations, and not as causal relations. Nonetheless, we believe that they are suggestive, and an interesting extension of our methods would be to replicate the findings for other countries. A larger stock of US R&D should also increase the incentives for multinationals to locate R&D in the US, which is indeed what has occurred. Future research needs to show to what extent this movement in R&D is driven by technology sourcing rather than other potential causes. Our result has interesting implications for policy. Governments are generally keen to promote higher levels of domestic R&D activity, and the member states of the European Union have agreed on a target to raise the level of R&D spending within the European Union to 3 percent of GDP. Our results suggest that policies that seek to achieve this target by inducing European multinationals to relocate their existing R&D efforts away from the US and toward Europe could be counterproductive, as they may reduce the ability of European firms to benefit from US-based R&D spillovers. From an American perspective, our results suggest that while US R&D does generate large spillover benefits for the rest of the world, foreign firms must actually invest in innovative activity in the US in order to reap the full benefits. When it comes to international technology spillovers, it seems there is no such thing as a completely free lunch.