Operational Localization and R&D Expenditure: Evidence from Investment in China by Taiwanese Firms

Abstract

The existing literature contains very few studies on the impact of operational localization by the China-based subsidiaries of Taiwanese business enterprises on the R&D activities of the Taiwan-based parent company. In an attempt to fill this gap in the literature, the present study uses four indicators that can be employed to gauge the degree of operational localization of China-based subsidiaries, focusing on the subsidiaries of Taiwanese companies that are listed on the stock market in Taiwan. The empirical results obtained in the study show that the degree of operational localization existing in the China-based subsidiaries has a major impact on R&D-related decision-making in the parent company in Taiwan. Broadly speaking, higher levels of localization in China are associated with reduced R&D expenditure in the Taiwan parent company. This relationship is particularly marked with respect to the localization of sales operations in China.