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This paper asks: what can governments of new member states do to encourage MNEs to invest in R&D? There are two types of MNE R&D. Innovation can be undertaken in order to adapt its existing products and services to local stimuli. This is 'Demand-driven R&D'. Innovation can also be in stand-alone R&D facilities which are considerably more knowledge-intensive, and imply a considerably greater dependence on domestic knowledge sources and infrastructure. This is 'Supply-side R&D'. These two types of R&D require somewhat different approaches, and necessarily imply different policy options.
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