While tariffs (or the risk of them) dominate headlines, and governments and companies globally fret about the consequences, one simple and obvious fact is worth remembering: tariffs only affect physical goods. Although some services trade and investment will get caught up in the turmoil, the same does not hold true for most cross-border investment into research, development, and innovation (RD&I). RD&I activities involving sensitive technologies may be subject to outbound FDI screening, such as the US Outbound Investment Security Program. Otherwise, companies remain free to conduct research (almost) anywhere in the world.
For many investment promotion agencies (IPAs), attracting manufacturing investment remains the ultimate prize. ‘The bigger, the better’ still applies for the investment that many IPAs seek to attract. Large manufacturing projects are prioritized because of their job creation and supply chain impacts and potentially transformative nature.
However, manufacturing’s share of global FDI has been declining for decades and represented only 13% of greenfield projects globally between 2020 and 2023 (source: UNCTAD). At the same time, corporate expenditures on R&D have been growing rapidly, with data from the World Intellectual Property Organization (WIPO) showing an increase of roughly 40 percent between 2019 and 2023. In most countries, corporate R&D now significantly exceeds R&D spending by governments and academia, reflecting the importance of innovation for companies of all sizes.
RD&I investment has a significant economic impact and creates the types of high-paying, high-quality jobs that IPAs covet. The benefits of RD&I investment hold true both for developed countries whose competitiveness depends on innovation as well as developing countries seeking to move up the value chain.
Despite the benefits, few IPAs have a clear strategy for attracting RD&I FDI. There are valid reasons for this, as the approach for attracting RD&I differs from the typical methods used by most IPAs.
RD&I investments are made by a different set of individuals within companies than those responsible for other expansion decisions. Location decisions for RD&I projects often do not follow a standard site selection logic, and academic networks and professional connections between researchers play a key role in where corporations choose to locate their R&D.
For IPAs, this creates the need to build different types of networks within the academic circles that R&D decision-makers form part of. It also means that typical outreach strategies based on general “signals” of investment potential are unlikely to work. Discussions with companies about their RD&I plans require a degree of specialized knowledge that most IPAs do not have in-house. Anyone who has ever attended a scientific conference (which is where decision makers for RD&I can be found) knows how difficult it can be to have a meaningful conversation with corporate innovation specialists about their activities and plans without the relevant technical background.
Attracting RD&I investors also requires different, and often more sophisticated, value propositions and support. Like all investors, RD&I investors need talent, property and a favorable regulatory environment. However, their requirements are highly specific. It is not enough for IPAs to tell investors that their universities produce X number of science graduates – they will need to know how many of those specialize in a particular field of scientific research. Not all “R&D labs” are the same and the infrastructure requirements for RD&I – even within the same sector such as pharma – differ considerably depending on the area being researched. Regulations and policies governing RD&I must reflect deep knowledge of the specific field of research. While incentives are important, simply providing tax credits for R&D will not compensate for regulatory restrictions. Companies will expect IPAs and governments to provide customized support such as creating opportunities for collaborative research, product testing, or access to data.
This requirement for specialized knowledge and expertise makes it essential for IPAs to collaborate closely with specialized partners – notably universities, research institutes, individual academics, and ministries of science and innovation – in their FDI attraction activities. If these institutions do not support the IPA’s efforts, attempts to attract RD&I investment are unlikely to succeed.
To justify an increased focus on RD&I, IPAs also need to move beyond KPIs that measure absolute levels of capital expenditure and employment. While some RD&I investments can be significant (for example, Apple is investing two billion euros in its Silicon Design Centre in Munich), these projects are the exception. Many RD&I investments involve relatively low employment and cap ex. In some cases, RD&I does not create any jobs at all, as companies simply wish to test new technologies without setting up a permanent physical presence. The typical KPIs used by IPAs therefore provide a disincentive for attracting RD&I. IPAs aiming to focus more on attracting this type of investment need their stakeholders to accept a potential reduction in annual capex and job creation numbers.
The declining role of manufacturing in global FDI and the increase in corporate spending on innovation create opportunities for IPAs to diversify the type of investment they attract. RD&I investments are different from other types of projects, and many IPAs will need to adopt new methods to successfully attract RD&I FDI.
