Near and Far: R&D Strategies of Business Groups

Understanding how multi-location firms organize their global research and development (R&D) networks has implications for their innovation performance. Among various drivers of innovation, geographic distance plays a critical role in determining the benefits and costs of conducting R&D in different locations. Prior research has suggested firms typically invest in geographically proximate subsidiaries that can transfer knowledge via spillovers and are relatively easy to monitor. Yet, there is also evidence of highly distant subsidiaries providing access to specialized knowledge. We test which organizational structures are most prevalent using data from a globally comprehensive sample of business groups. To account for the endogeneity of geographic distance, we employ a Regression Discontinuity Design (RDD). While both proximate and highly distant subsidiaries are equally likely to be active in R&D, business groups use different strategies to manage subsidiaries based on their geographic distance. Our findings suggest that business groups that invest in highly distant R&D-active subsidiaries tend to have higher patenting activity and productivity. These results yield concrete recommendations for business groups on how to balance the tension between the costs and benefits of geographic distance for R&D strategies.