1 National policies to attract R&D-intensive FDI in developing countries National Policies to Attract R&D- intensive FDI in Developing Countries As multinational companies internationalize their R&D activities, new opportunities have opened up for developing countries to attract R&D- intensive foreign direct investment (FDI). However, countries that fail to raise their technological capabilities in line with the needs of multinational companies run the risk of remaining marginalized from global innovation networks. This policy brief discusses how developing countries overcome challenges and develop policy options to attract the R&D centers of multinational firms, which will help spur learning and productivity upgrading by local enterprises. By José Guimón World Bank, 2013 Introduction As globalization intensifies, multinational companies (MNCs) have gradually modified their spatial organization strategies through ongoing fragmentation of their international value chains. This shift applies to manufacturing, logistics, sales, and back-office functions; increasingly, it also applies to more knowledge-intensive activities. In particular, corporate research and development is gradually evolving from a centralized and hierarchical node of global supply chains toward one that builds on an open network of geographically dispersed R&D centers. As a result of such globalization, R&D-intensive FDI grew substantially from 1990 to 2010, albeit with significant differences across industries and countries: • The annual R&D investments by foreign subsidiaries in the OECD area more than doubled between 1997 and 2007, reaching USD 89.3 billion (OECD 2011). • Foreign subsidiaries contribute around one-third of total business expenditure for R&D in most European countries, around 15 percent in the United States and 5 percent in Japan, reaching over 60 percent in some small economies like Slovakia and Ireland (OECD 2011).