Asia is a breeding ground for new innovation. In fact, Asia-based applicants accounted for more than half of all new international patents filed in 2021, according to the UN’s World Intellectual Property Organisation. But the potential benefits of attracting new innovative foreign companies are often restrained, hampering the growth of potential new Asian centres of technological excellence. 

To maximise the potential of foreign research and development (R&D) operations to create high-quality jobs and boost local economic development, policymakers in Asia should follow in the footsteps of fertile innovation ecosystems. 

One successful case study is Bangalore, in the Indian state of Karnataka. The city has become a leading tech hub thanks in part to attracting innovative multinationals such as HP and Texas Instruments. Just 15 years after IT giant HP filed its first patent with a Karnataka-based inventor in 1989, local innovation boomed. 

Knowledge spillover effects from the emergence of R&D activities by these foreign multinationals caused an increase in patenting by domestic firms. By 2005, the total number of patents filed in Karnataka rose to almost 400. The entry of the first foreign multinationals also sends a signal that one can successfully develop R&D activities in a region. This in turn attracts R&D activities from other foreign firms. In fact these demonstration effects are often larger than spillover effects.

However, multinationals are not always incentivised to embed themselves in local innovation ecosystems due to the risk of knowledge leakage to competitors. Studies show that more innovative multinationals, such as tech giants like Google, tend to have less spillover to the local economy as they can do most of their R&D in-house without interacting with other local players. Instead, the R&D activities of intermediate foreign firms bring far greater benefits.

What can policymakers do? One approach is to reduce transaction costs between multinationals and local actors, especially in less technologically advanced regions. Local interests can be enhanced by developing policies that promote knowledge transfers like workforce training and local sourcing agreements. Regions can also invest in universities and research centres to enhance labour pools. 

It may take a while before burgeoning Asia tech centres dominate the world. But balancing foreign R&D operations with local interests can be an effective way to speed up the process. 

Lawrence Yeo is CEO of AsiaBIZ Strategy, a Singapore-based consultancy that provides Asian market research and investment/trade promotion services. E-mail: lawrence@asiabizstrategy.com

This article first appeared in the June/July 2022 edition of fDi Intelligence.