Virtually all governments are keen to attract international investments by multinational enterprises (MNEs) as these promote growth and employment by creating new jobs, realising new investments and bringing in new technologies. Policy makers are interested in the direct and indirect value that new investments by MNEs can bring to their country. By encouraging multinationals to establish local affiliates, host countries hope to generate technology transfer to local firms since foreign direct investment (FDI) is one of the most important channels through which technology is transferred across countries.

International investment has been an important driver of globalisation and has grown quickly over the last decades due to the rapid emergence of global value chains. Production processes have become increasingly fragmented as goods are produced sequentially in stages across different countries following the strong decline in communication and co-ordination costs. Firms seek to optimise the production process by locating their various production stages across different sites according to the most optimal location factors across countries. While distribution, sales and production activities were the first to lead the way, research and development (R&D) and decision-making activities have also become increasingly (re-)located internationally.

International investment has grown quickly over the last decades and been an important driver of globalisation. Not only production, distribution, sales, etc., but also R&D and innovation are increasingly internationalised as MNEs (re-)locate their R&D and decision-making activities on a global scale. Emerging economies have recently become increasingly attractive for international investments, including investments in innovative activities.

The attractiveness of a country for international investment is determined by the advantageous character of its location factors, which typically differ between industries, functional activities, entry modes, internationalisation motives, etc. In this chapter location factors for innovation are discussed using an industry approach (hightechnology industries) and a business function approach (corporate R&D functions and headquarters).

Attractiveness for international investments in innovation is a policy priority in most countries as almost all governments currently target international investments in high-technology industries and in innovation and R&D. The typical policies used by governments are broader innovation policies, investment promotion complemented in several countries with direct government incentives.

Governments seek a coherent and efficient strategy based on the right mix of policies reflecting the simultaneous importance of several location factors and in direct relation to the characteristics of the host country. To attract international investments in innovation, governments need to implement a broad, horizontal strategy including close co-ordination/integration of innovation policy and inward investment promotion policies. Careful attention has to be paid to direct incentive packages which may give rise to increasing policy competition between countries.