INTRODUCTION

As multinational corporations (MNCs) have evolved over the last 50 years, the framework that has been used to analyze their role in the Canadian innovation system has changed.

Early theories use oligopoly models that portray multinationals as entering the Canadian market to control strategic Canadian natural resources (Aitken, 1961) or avoid tariffs (Eastman and Stykolt, 1967). Caves (1971, 1982) extends this framework to argue that foreign investment by a firm just as often stems from the exploitation of a key asset that is indivisible and not easily transferred from one firm to another except through foreign direct investment (FDI). This asset might involve marketing competencies (brand recognition) or scientific knowledge arising from research and development expenditure. Asymmetric knowledge and an imperfect contractual environment associated with the characteristics of these assets means that the exploitation of this key asset is most efficiently done via the extension of the firm across international boundaries via direct investment.

The alternative to foreign investment is to export or license a foreign producer. Licensing is more likely to occur when the rent-yielding capability of the asset lies in a one-time innovation of a technique or product. In these cases, the information on which the asset rests is more easily transferred intact via an arm's-length sale to an unrelated foreign firm. In most other cases, either the information cannot be transferred without simultaneously providing entrepreneurial manpower, or the uncertainty about the value of the knowledge in the foreign market will preclude agreement about the terms of a licensing agreement with an unrelated third party. […]