This dissertation will examine the determinants of research and development (R&D) activity in the foreign affiliates of U.S. multinational companies (MNCs) and its impact on performance. It will make use of a unique set of micro-data on affiliates and parents of U.S. MNCs for the recent period 1995-2006. The study distinguishes between & INCs that are technological leaders in their industry and those that are laggards, finding that the more capable firms tend to have higher levels of affiliate R&D and to use it more effectively. The findings highlight a strong role of R&D conducted abroad on the firm's productivity at home. For technological leaders, this effect is particularly pronounced, with the return on affiliate R&D actually exceeding that on parent's own R&D. Although foreign affiliate R&D is shown to have a strong positive impact on parent productivity, the results do not support complementarity between imiovative activity at home and abroad. However, R&D carried out by the affiliate and knowledge transferred from the U.S. parent are complements for the affiliates of technological leaders. For these affiliates, intrafirm knowledge transfers increase the productivity of their own R&D activities, and vice versa. Taken together, the results are supportive of the important role of firm heterogeneity in determining the success of an international R&D strategy. In addition, the study provides new evidence for firms' R&D activity and performance on emerging markets.
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