Tapping Foreign Sources of Knowledge: The Experience of Japanese Multinational Firms

How can multinational firms "tap into" technological developments outside their home market? Can success in such international technology sourcing be a competitive advantage? This paper seeks to answer these questions by drawing upon the experience of Japanese multinational firms' efforts to learn from U.S.-based technological activity between 1981 and 1994. The paper develops an empirical methodology for tracking international knowledge spillovers, using firm-level data on patent citations. The paper then quantifies the relative impact of technology alliances and foreign direct investment on knowledge flows to and from the initiating Japanese firms. The paper finds that both FDI and technology alliances positively enhance this knowledge flow, with the former having a more statistically robust effect. The paper also presents evidence indicating that a higher level of knowledge flow from the United States is correlated with higher levels of inventive productivity at the firm level. In other words, firms that are relatively more successful at technology sourcing are substantially more effective innovators.