s:\group\510k\publikat\dimi\97\dimi971.doc

Discussion Paper on International Management and Innovation Alexander Gerybadze1, Guido Reger2 Globalisation of R&D: Recent Changes in the Management of Innovation in Transnational Corporations Discussion-Paper 97-01 Stuttgart, February 1997

1 Dr. Alexander Gerybadze, Professor of International Management at the University of Hohenheim,

Director, Center for International Management and Innovation. Contact: Department of International Management (510K), University of Hohenheim, D-70593 Stuttgart, Tel: ++49-711-459-3249, Fax: ++49-711-459-3446, E-mail: Agerybad@uni-hohenheim.de

2 Dr. Guido Reger, Senior Researcher, Fraunhofer Institute for Systems and Innovation Research (ISI), Karlsruhe, Research Group Technology Assessment and Innovation Strategies. Contact: Fraunhofer-Institute for Systems and Innovation Research (ISI), Breslauer Strae 48, D-76139 Karlsruhe, Tel: ++49-721-6809-186, Fax: ++49-721-6809-260, E-mail: Re@isi.fhg.de

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Contents

1. Introduction 3

2. Methodology and Selected Firms 5

3. Trends in the Internationalisation of R&D: Tendencies in the 1990s 9 3.1 Traditional Technology Transfer vs. Transnational Corporate Learning 9 3.2 New Modes of Lateral Organisation 11 3.3 Organisational and Fiscal Consolidation 11 3.4 Changing Relationship between Basic Research, Development and Innovation 12

4. Driving Forces for Locating R&D and Competence Centers Abroad 13 4.1 New Location Factors driving the Globalisation of R&D and Innovation 14 4.2 Globalisation of High-end Competencies and Focusing on Competence Centers 18 4.3 Globalisation vs. Concentration of Core Competencies in the Home Country? 20

5. A New Framework for Analysing R&D Globalisation within Transnational Firms22 5.1 Four Generic Types of Transnational R&D and Innovation 22 5.2 Types of Companies and their Dominant Patterns of Transnational Innovation 25 5.3 Effective Coordination Mechanisms Dependent on the Type of Transnational Innovation 27

6. Conclusions and Implications 29

References 32

List of Figures and Tables 35

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Globalisation of R&D: Recent Changes in the Management of Innovation in Transnational Corporations

1. Introduction

Globalization of R&D is a major topic within the business community as well as for academic researchers and decision-makers in government. A particularly strong trend towards the globalisation of R&D began in the 1980s and now, in the mid 1990s, no end to this process is yet in sight. Large multinational firms play a key role in the generation and diffusion of new technological knowledge (Cantwell 1994, Nonaka and Takeuchi 1995, Patel and Pavitt 1992, Roberts 1995a and b). In recent years, R&D strategies and international locations decisions of transnational corporations have changed substantially. This paper attempts to identify these trends, and to assess their possible impacts on the management of transnational innovation processes. In our empirical study, we examined the internationalisation of R&D at three levels. First we outline generic socio-economic trends that might have impacts on multinational firms and on the R&D systems in the industrialised countries in the long term (on this aspect, see Section 3). In a second step we identified, for leading technology-intensive corporations, changes in their choice of R&D locations and in the internationalisation of their R&D, as well as the establishment of competence centers (Section 4). In consideration of these more general changes, we then analysed, at the management level, the question of what new coordination mechanisms are increasingly adopted by selected international corporations (see Section 5). Our study was initially motivated by the aim of examining deficit areas in research to date and starting to close the gaps by means of our own research. The following deficit areas were identified for a large part of the existing studies on globalisation of R&D:

Most studies consist of macroeconomic or sectoral surveys on the internationalisation of R&D, while more specific, business-related investigations with clear implications for managers are insufficiently represented;

Correspondingly, there are numerous studies on R&D internationalisation from the viewpoint of economic and political sciences, but much less research from the side of business and management sciences;

Most published research is characterised by a bias towards the R&D internationalisation processes of US firms but disregards comparable developments in European and Asian corporations;

Many of the surveys relevant to the subject are based on a rather outdated paradigm of the management and control of multinational enterprises which does not take sufficient account of the dynamic, flexible new organisations and institutional arrangements;

On the other hand, surveys which do adopt the new paradigm of transnational enterprises (e.g. Bartlett, Ghoshal 1989, Hedlund 1993) do not examine explicitly concrete questions pertaining to R&D.

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Figure 1: Our Focus of Research on R&D Globalisation within Transnational Corporations

Focus of our paper"Systematic" Research(Validate/apply models,Test existing hypotheses,

Cross-sectional, many com-panies, quantitative data)

"Exploratory" Research(Explore key issues, gene-rate new hypotheses, pro-

cess studies, few companiesor cases, qualitative studies)

Integration Mode(R&D and Innovationwithin Transnational

Corporations)

Cooperationand Network Mode

(R&D Consortia, Techno-logy Networks, Innovation

Systems)

"Traditional Paradigm"of International Tech-

nology Transfer

"New Paradigm" ofTransnational Innovation

Processes

Key research questions: International R&D location decisions and criteria (4.1) Focus on Centers of competence (4.2/4.3) Design/Selection of Coordination mecha- nisms within firms (5.3)

Research on theGlobalisation of R&D

and Innovation

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These deficits in research are repeatedly referred to by various authors. Thus Cheng and Bolon (1993, 12) in a comprehensive - but still American - oriented - bibliographical overview, emphasise that research concentrates strongly on economic determinants for the globalisation of R&D and the driving forces behind geographical centralisation or decentralisation. More extensive, less US-dominated, empirically relevant surveys on the management of innovation processes and research issues relating to appropriate coordination mechanisms within enterprises are only approached in more recent studies (cf. the literary overview of the internationalisation of R&D by Granstrand, Hkanson, Sjlander 1993). 2. Methodology and Selected Firms

The aim of our own study was to understand the new trends in R&D and the decision-making processes of internationally active corporations, and to fill in a few of these above mentioned deficit areas. For this purpose we gave our investigation an empirical orientation right from the start and focussed on gathering information and insights from trend-setting corporations and decision-makers. We proceeded according to the following investigation plan:

1. In a first step, we undertook an evaluation of the core literature on this subject, of database searches and new empirical surveys.

2. In order to precisely formulate the research questions and judgements derived from this evaluation, workshops, lasting for half a day each, were carried out involving so-called Senior External Advisors (research managers, top managers, scientists).

3. Following these workshops, the issues to be addressed by the project were fined down to core questions, and a qualified interview guideline was elaborated which was subsequently tested out in 20 pilot interviews and then adapted.

4. In a series of interviews in 21 enterprises, a total of 120 semi-structured expert interviews were conducted on three levels (board member, head of research, project leader).

5. The results obtained from these interviews were compiled into 21 corporate profiles and 6 case studies on innovation projects. In parallel, a comparative analysis of the profiles and case studies was performed, based on an inductive structuring plan.

The results of the survey were presented, at three workshops, to representatives from enterprises and from the Federal Ministry of Education, Science, Research and Technology (BMBF), and were intensively discussed. The precise stipulations and comments elaborated at these workshops were incorporated into the final report of our study.

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Table 1: R&D Intensities and the Degree of Internationalisation of R&D within our Sample

Rank Company R&D Intensity 1993 in%

Share of Foreign R&D

1993 in %

Degree of Internation-alisation of

R&D

Industry

1. 2. 3. 4.

5. 6. 7. 8. 9.

10. 11. 12. 13.

14. 15.

16. 17. 18. 19. 20. 21.

Siemens IBM Hitachi Matsushita Electric ABB NEC Philips Hoechst Sony Ciba-Geigy Bosch Roche Mitsubishi Electric BASF UTC Sandoz Sharp Kao Eisaj Sulzer MTU

9.2 7.1 6.7 5.7

8.0 7.8 6.2 6.2 5.8

10.6 6.7

15.4 5.2

4.5 5.4

10.4 7.0 4.6

13.2 3.4

ca. 25

28 55 2

12

90 3

55 42 6

54 9

60 4

20 5

50 6

13 50 27

-

** ***

* **

***

* *** *** **

*** **

*** *

** *

*** *

** ** ** *

Electrical engineering Computers Electrical engineering Consumer electronics Electrical engineering Telecommunications Electrical engineering Chemical/Pharmaceuticals Consumer electronics Chemical/Pharmaceuticals Electrical engineering Chemical/Pharmaceuticals Electrical engineering Chemical/Pharmaceuticals Advanced engineering/ Aeroengines Chemical/Pharmaceuticals Consumer electronics Chemical/Cosmetics Chemical/Pharmaceuticals Advanced engineering Advanced engineering/ Aeroengines

Evaluation of the Degree of Internationalisation of R&D *** Globalisation of R&D very advanced ** Above-average globalisation of R&D * Relatively low internationalisation of R&D Source: Database on International R&D Investment Statistics (INTERIS) and ISI Database on International Research and Innovation Activities (ISI-DORIA).

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The empirical sample consisted of 21 transnational corporations, most of which are engaged in electronics and information technology, in the chemical and pharmaceutical industry, as well as in machinery and advanced engineering (e.g. turbines and aeroengines). Eleven enterprises were included from Western Europe, eight from Japan and two from the United States. For the reasons given above, we concentrated our investigations on corporations from Western Europe (Germany, Switzerland, Netherlands) and Japan. The 21 selected enterprises are among the leading R&D-performing industrial firms worldwide. Many of them are technology leaders in their specific business, and are very far advanced in terms of the degree of R&D globalization. Table 1 gives an overview of the corporations studied. Four of the ten enterprises with the highest R&D expenditures in the world were included in the survey (Siemens, IBM, Hitachi and Matsushita). Approximately one-third of the 50 most important corporations with the highest R&D expenditure were included in our survey. 16 of the 21 enterprises spend more, some considerably more, than one billion U.S. $ on R&D annually. The enterprises included in the study have an above-average intensity of R&D (R&D expenditure as a proportion of turnover) of 8,3%. Most of them are characterized by a high R&D intensity at the corporate level, or at least one of their business units is very R&D intensive.3 In addition to presenting the R&D intensity and the share of foreign R&D, Table 1 includes a qualitative evaluation of how far the R&D globalisation process has advanced in the corporations in our sample. This qualitative assessment of the extent of internationalisation cannot be compared with the parameter of the share of R&D performed abroad. The former also considers the extent of worldwide distribution of R&D and innovation activities, the globalisation of management and corporate culture, and the type of transnational coordination and interaction. If the average values for R&D intensity and the share of foreign R&D are compared at the level of the corporation, two clusters can be distinguished (cf. Figure 2):

1. A group of high-tech corporations with a strong global orientation, which invest a relatively large amount in R&D and have a strong R&D presence abroad (close to 50%, or even above that rate). These include ABB, Ciba-Geigy, Eisaj, IBM, Hoechst, Philips, Roche and Sandoz.

2. Apart from these, there is a group of enterprises mainly active in the area of medium-to-high tech, in some cases with divisions classified as high tech, but with an overall R&D intensity of between 4% and 10%, which are not so far advanced in transferring research functions abroad. A few of these enterprises have a share of foreign R&D of 20 to 30% (e.g. BASF, Siemens and Sulzer); however, the majority

3 Examples for a very high R&D-intensity at the corporate level are Roche (15%), Eisaj (13%) and

Ciba-Geigy (11%). Several other firms spend less than 10% of turnover for R&D at the corporate level, but display very high R&D intensities at the business level. As an example, SulzerMedica invests more than 10% of ist turnover for R&D, while the average ratio for the Sulzer corporation is only 3.4%.

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of enterprises in this group are not so far advanced regarding their share of R&D abroad.

Figure 2: R&D Intensity and Proportion of R&D conducted abroad in the

Enterprises Analysed

8,5%

0%

30%

60%

90%

0% 15%R&D Intensity

ABB

SULZER

KAO

BASF

MATSUSHITA

SONYMELCO

UTCHITACHI NEC

SHARP

BOSCH

ROCHE

EISAJCIBA SANDOZ

IBMPHILIPS

HOECHST

ForeignR&D

(% of total R&D)

SIEMENS

50%

30%

10%

3,5%

Source: Database on International R&D Investment Statistics (INTERIS) and ISI Database on International Research and Innovation Activities (ISI-DORIA).

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3. Trends in the Internationalisation of R&D: Tendencies in the 1990s

Since the early 1980s, the extent of internationalisation of R&D has greatly increased, both in basic research and industrial R&D. During earlier periods of global expansion (the 1960s and 1970s), multinational corporations first built up their sales, distribution and asssembly operations in foreign countries. In later phases (late 1970s/ early 1980s), efforts were then directed towards supporting foreign subsidiaries with corresponding capacities in application engineering and applied R&D. Although initially the tasks of development departments abroad were limited to adapting product and process technologies from the home country to local production and market requirements, there was a clearly recognisable trend, since the late 1980s, towards strengthening R&D in foreign countries and extending the global competence portfolio. Increasingly, research became established at a high level in foreign locations. 3.1 Transnational Technology Transfer vs. Transnational Corporate

Learning

This change has resulted in a new paradigm of transnational innovation, that is significantly different from the still persistent old view of international technology transfer and innovation. The traditional paradigm can be characterised by the concept of technology adoption: pre-determined technical solutions are seen to be generated in one (mostly central) location, and are later replicated in other peripheral locations; this process may be interpreted as outward learning, and is most often synonymous with a one-way technology transfer (typically a flow of information from the center to the periphery). In striking contrast to this traditional view, the new paradigm of transnational innovation is characterised by:

intense market and technology interaction; multiple centers of learning (at different geographical locations); cross-functional learning (comprising different segments of the value chain); inward learning as well as outward learning, as opposed to purely outward learning; reverse and interactive technology transfer, both between different geographical

locations, as well as between different functional units. This new paradigm of transnational innovation builds on multiplicity and dispersion of competencies on a global scale. The trend towards real research competencies and sustained innovation outside the home country was determined by the successive building-up of multiple national innovation systems and knowledge centers at various locations throughout the world. This strengthened the incentives of multinational enterprises to go for global sourcing in the area of research and technology.

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As part of the formation of global technology procurement systems, corporate learning takes place in several distributed knowledge centers, and innovation strongly builds on inducements from high-end market and production systems; these inducements drive innovation activities in several locations in the world, and can also lead to significant changes in the home country of a transnational firm. The generation of new technological knowledge thus evolves worldwide; enterprises engage in global scanning of this know-how and establish efficient internal mechanisms for the transfer of knowledge4. These mechanisms contribute to speeding-up the conversion of knowledge into marketable products, and their integration with advanced manufacturing systems, to enhanced interactivity between markets and research systems, and to the establishment of multiple centers of learning. This development is closely associated with the transition to a polycentric structure of national research and technology systems. Until the end of the 1970s, the situation was largely characterised by the dominance of one single center for research and innovation in the world (the centers for important fields of technology were mainly the USA and, for some particular areas such as polymer chemistry, Western Europe). However, it is now true to say that, for each important field, two or three centers of excellence have crystallised out in the Triad countries. These are engaged in a forceful technological and industrial competition, in which rankings change very rapidly. Because of this development, the leading enterprises that conduct R&D need to have a presence in more than one center of R&D and innovation; they have to establish sufficiently stable and reliable structures at the current centers of excellence in order to increase their absorptive capacities (Cohen, Levinthal 1990), and be in a position to react as quickly as possible to dynamic changes in relative location advantages. The new paradigm of transnational innovation leads to new forces of lateral organisation both within large corporations, as well as across institutional boundaries. Our investigation has concentrated on exploring new modes of organising intra-corporate innovation processes (as outlined in figure 2). Large corporations pursue integration strategies in a world of multiple learning centers, by building up in-house R&D and innovative production systems at locations abroad, under full control of the corporations headquarter in the country of origin. Pursuing integration strategies, the leading international enterprises that engage in R&D have established R&D units and product development capabilities at several different locations in the Triad countries.

4 These internal mechanisms for the transfer of knowledge are at the center of the new research on

information exchange and innovation within transnational corporations. On this aspect see for instance Bartlett, Ghoshal (1989), Hedlund (1993) and Nonaka, Takeuchi (1995).

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3.2 New Modes of Lateral Organisation

In addition to this integration strategy of building up their in-house R&D units abroad (a process which is very expensive and coordination-intensive), an increasing number of large multinational firms enhance their absorptive capacities by building on cooperative modes and networks. Through R&D cooperations and strategic alliances, which have greatly increased in number since the mid 1980s, leading international technology enterprises have created new solutions that allow for the rapid, flexible networking of institutionally or regionally scattered centers of competence (cf. Gerlach 1993, Gerybadze 1994, 1995, Sydow 1992). These include various new forms of distributing R&D activities and capabilities between suppliers, customers, and research institutes. An increasing number of these consortia is transnational. Both strategies, however, the building up of intra-corporate, though regionally distributed R&D structures, and the embedding into worldwide R&D cooperations and strategic alliances, have resulted in increasing problems of coordination. Even in the age of global information and communication systems, the effective organisation of numerous R&D units and spatially scattered projects across major geographical, cultural and institutional boundaries is no trivial matter. Experiences with the growing coordination problems of globally distributed R&D consortia have led to new consolidation efforts both by international corporations and by decision-makers in the area of national science and technology policy. After the initial, euphoric phase of lateral R&D organisation, this has led once again to more globally centralised re-structuring in several well-known international corporations (e.g. Ford, General Motors, Hoechst). 3.3 Organisational and Fiscal Consolidation

This organisational consolidation is associated with a fiscal consolidation of R&D observed in almost all the OECD countries. Both public institutions and private firms are increasingly coming up against the barrier of the financeability of R&D. In the advanced, industrialised countries, an expenditure of 3% of the GNP on R&D constitutes a sort of sound barrier. In some major industrialised nations of the West, this indicator has gone down again in the last few years.5 Even the large transnational corporations are having difficulty in keeping pace with the R&D race, and in financing from private sources extremely high ratios of R&D which they are forced to perform in order to keep pace with their competitors.6

5 Recent figures for Germany, as an example, indicate a decline of R&D as percent of GDP from over

2.8 % at the end of the 1980s to less than 2.4% in 1994 (See NIW, DIW, ISI, ZEW 1995).

6 An R&D intensity equivalent to 10% of turnover, or an annual R&D expenditure which considerably exceeds the value of annual cash flows, leads sooner or later to severe financial problems. On this aspect cf. Gerybadze (1997, Chapter 1). For a critical review of the R&D arms race, see von Braun (1995).

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Both in public institutions and in private firms, this fiscal consolidation leads initially to attempts at short-sighted solutions: a stronger application orientation and a corresponding limiting of fundamental research can be observed in many large corporations. This has led to a weakening of central research, and has resulted in a much stronger divisional structure (cf. Arthur D. Little 1991, Gerybadze, Meyer-Krahmer, Reger 1997). This applies at least to the majority of large, R&D-performing enterprises in Western Europe and the USA. Japanese enterprises pursue a strategy which is somewhat different, but are likewise confronted with strong financial restrictions.7 In the area of publicly financed R&D in particular, fiscal consolidation has led to extensive changes in Western Europe, the USA and Japan. In the area of basic research, at universities and public research institutes, changes in fiscal and policy priorities have led to short-windedness, and to a deterioration of basic research capabilities. 3.4 Changing Relationship between Basic Research, Development and

Innovation

This undermining of basic research comes at a time when more and more international businesses build on significant advances in fundamental knowledge. Innovations in pharmaceuticals, electronics, energy and transportation require tremendous investments in basic research. Furthermore, the relationship between basic research, development and innovation is undergoing a lasting change. Enterprises are increasingly thinking in terms of integrated process chains of innovation. Basic research, too, is a cornerstone in these process chains, and for this very reason needs to be organised with strong interfaces to production and marketing. Of necessity, the traditional institutional separation of basic research, applied research, development, production and application has to be overcome. Leading research centers as well as the big multinational firms are increasingly gaining their competitive edge from a close, undistorted link-up between research, manufacturing and lead marketing. Integrated product development processes, simultaneous engineering and the cross-functional integration spanning R&D, marketing and product and production are the key topics of innovation management (cf. Wheelwright, Clark 1992, Iansiti 1993, Leonard-Barton 1995, Nonaka, Takeuchi 1995, Gerybadze 1997). These trends in innovation management and international R&D are giving rise to very decisive changes in the management within corporations (e.g. coordination of transnational, multidisciplinary projects) as well as between independent firms (new

7 The impacts of financial restrictions on the extent, emphasis and financing of research formed part of

our survey (on this aspect, cf. Gerybadze, Meyer-Krahmer, Reger 1997). The change in the relationship between central research and development in the divisions observed by Arthur D. Little (1991) has been re-examined in a recent investigation by Roberts (1995a and b), who reaches more detailed conclusions.

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forms of joint R&D projects). They spur new, unconventional forms of cooperation between the public and private sectors (e.g. new forms of vertical, intersectoral joint projects, and new advisory councils and steering groups). The analysis of globally distributed product development and innovation forces a re-consideration of the traditional views of science and technology policy. Multinational firms are no longer simply optimising production machineries in search for low-cost locations. Rather, the knowledge-creating company is gaining more and more importance, searching for options at the leading intelligence centers of the world, and converting these as fast as possible into successful new businesses (Bartlett, Ghoshal 1989 and 1990, Hamel, Prahalad 1994, Marquardt, Reynolds 1994). Globally active enterprises are becoming more mobile and very selective regarding locations. Science and technology policy, on the other hand, has to create substantial options, and fertile grounds for global learning and for the enhancement of local knowledge pools. 4. Driving Forces for Locating R&D and Competence Centers

Abroad

Against the background of these socio-economic trends described above, virtually all large, transnational corporations are undergoing lasting changes regarding their selection of locations and the organisation of their R&D and innovation activities. First of all, the globalisation process does not affect the location of R&D centers in a functionally decomposed way, as was the case in the past. Most existing studies investigate the globalisation of R&D at the functional level, i.e. by analysing location decisions and integration mechanisms for geographically dispersed R&D laboratories.8 Cross-functional integration and greater interactivity between R&D, production and marketing, as outlined in section 3, however, must lead to changes in the basic unit of analysis. We have thus analysed the globalisation process from three different angles:

1. The traditional view of globalisation of the R&D function and of research labora-tories within a firm;

2. the globalisation of cross-functional business processes such as the product genera-tion process, new venture management etc.; finally

3. the globalisation of competence centers, defined by generic technologies (e.g. biotechnology) or product groups (e.g. aeroengines).

Globalisation strategies and patterns of internationalisation should be considered separately for each basic unit of analysis. Globalisation strategies based on R&D are different from globalisation strategies for cross-functional business processes, which again are different from globalisation strategies for competence centers. Our investigations show that transnational corporations pursue the following approach:

8 See, for instance, Cheng and Bolon (1993), Granstrand, Hkanson and Sjlander (1993), De Meyer

(1992, 1993), Westney and Frost (1996).

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In a first step, they define the basic decision-making unit, for which a coherent strategy and clear responsibility can be attributed;

in a second step, they define the center(s) of gravity for this unit at a global scale; this center of gravity is typically the location where critical knowledge and key resources are located, and where value-added is generated.

Globalisation strategies depend furthermore on the country-of-origin of corporations, on the industry resp. product group, and on firm specific factors such as corporate culture and predominant managerial and organisational practices. The firms in our sample can accordingly be classified into four groups:

R&D driven global players from small European countries. This group includes enterprises from small but highly developed European countries in which the R&D basis for research-intensive multinational enterprises is clearly limited from the outset, so that they participate actively in foreign research pools (for example, Philips/NL, ABB, Ciba, Roche, Sandoz/CH).

Companies from large European countries with a predominant technology base in their home country. Many enterprises in Germany, France and the UK, particularly in the machinery, transportation, and electrical engineering sector still tend to concentrate a significant part of their research in the country of origin (e.g. Siemens, Daimler-Benz); chemical and pharmaceutical firms in these large countries are the only exception, that have attained a high proportion of R&D conducted abroad (e.g. Hoechst).

In Japan the internationalisation of R&D and innovation has not progressed very far as yet. Corporations such as Sony, Sharp, Hitachi, NEC and Mitsubishi all still have values that are clearly below 10% for their proportion of foreign R&D. Kao and Matsushita have values of only slightly more than 10%. Only Eisaj has a share of foreign R&D of 50%, but constitutes an exception among the Japanese enterprises.

The US firms that we analysed are too few in number (only two corporations) to be able to draw significant conclusions. However, they represent two distinct types of US enterprises. IBM is an example of a corporation which is highly internationalised, also with regard to R&D. UTC, on the other hand, is representative of the greater part of American firms, which are strongly centered on their country of origin.

4.1 New Location Factors driving the Globalisation of R&D and

Innovation

Most empirical studies and available statistical data measure globalisation processes for the R&D function, and can only be used as a proxy for the other two units of analysis (processes, competence centers). To analyse globalisation at the process or competence level, we need to pursue in-depth studies within corporations. Our investigations indicate that there is a strong on-going tendency for globalisation at all three levels, which may be counterbalanced within some companies and for some periods (see particularly section 4.2).

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The degree of internationalisation of research, product development and innovation - as measured by indicators such as the proportion of R&D expenditure and R&D employees abroad, the number of R&D units, the amount of international patent applications, and by various FTO ratios9 - has increased continuously in the 1980s and 1990s in most of the large R&D-intensive international corporations. Further efforts towards globalisation and tendencies to allocate R&D abroad are explicitly included in business policy and R&D strategy for the second half of the 1990s. A recently published survey pursued at MIT, in collaboration with PA analysed 244 globally active enterprises which together account for 80% of total industrial R&D expenditure in Japan, the USA and Western Europe. These were asked, how the foreign part of their R&D had developed over the past three years, and how it would foreseeably develop over the next three years. As shown in Figure 3, European enterprises have the highest proportion of R&D abroad (about 30% - but with the emphasis on R&D units in other European countries), followed by US and Japanese firms. Firms from all three of the Triad regions have increased their share of foreign R&D in the last few years and will be further increasing this ratio in future. This result confirms the firm-specific statements in our empirical survey: in the period from 1980 to 1995, all the enterprises analysed, without exception, substantially increased the share of their R&D abroad. In the majority of the enterprises, the R&D strategy consists in further building up and strengthening R&D units abroad. The motives for establishing R&D units abroad and the main factors in selecting locations have been examined in various empirical surveys.10 These emerge mainly as market characteristics (size/attractiveness of foreign market, combined with the need to adapt product variants to country-specific situations) and specific location determinants (desire to access a local talent pool). Most of these studies, however, are driven by factor cost and factor availability considerations related to the R&D function. Our interviews, as well as more recently published investigations emphasise the knowledge and innovation generating capacities of particular locations, and dynamic interaction effects between R&D, lead-marketing and advanced manufacturing.

9 Empirical research on the internationalisation process of multinational enterprises typically uses FTO

ratios (indicating the share of foreign to total operations). These are only insufficiently recorded for the internationalisation of R&D, and had thus to be determined in the course of this study on the basis of data from individual companies.

10 On this aspect, see particularly the overview in Cheng, Bolon (1993) and also Lall (1980), Mansfield, Teece, Romeo (1979), Ronstadt (1977), Teece (1976) and Kogut, Zander (1993).

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Figure 3: Proportion of Foreign Research and Development in Selected Enterprises in Western Europe, the USA and Japan

Today (Survey 1992) 3 Years From Now3 Years Ago

10%

20%

30%

40%

Europe

North America

Japan

ForeignR&D

(% of total R&D)

Source: Results of the MIT/PA study, summarised in Roberts (1995a, 55). When deciding to establish or expand R&D units abroad, enterprises are motivated by the wish to gain access to highly sophisticated resources which cannot be found anywhere else, and to learn about specific customer requirements, market and production constellations on the spot. In our survey, the following motives for the on-going globalisation of R&D and innovation activities were given particularly often:

1. Companies locate R&D in the most dynamic and forward-driving markets. The motive of acquiring impulses for innovation processes by presence on the spot, learning in lead markets and adaptation to sophisticated customer requirements.

2. R&D is located close to the point-of-sale, at places where cash-flow is generated, and where new product concepts can be tested according to a probe and learn process.

3. The formation of dominant designs and standards plays an increasingly strong role. Active presence in locations where regulatory conditions, licensing procedures and standardisation agreements are decided, is a driving force for R&D location; specific regulatory environments provide impulses for innovations and subsequently bring

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international competitive advantages for enterprises that have been active in these regulatory niches from the start.

4. For certain sophisticated products, close linkages between R&D, advanced manufacturing and an efficient supplier network are decisive. Several companies highlight the motive of integrating high-quality production and simultaneous engineering on the spot with local R&D capacities, in order to secure advantages of cost, performance and flexibility.

5. Finally, research intensive companies in particular fields (e.g. genetic engineering, integrated circuit design etc.) emphasise the access to unique resources and leading research results and talents in particular centers of excellence with a high international reputation.

Qualitative factors and dynamic upstream and downstream-interactions are increasingly driving R&D location decisions. Thus the motives and aims underlying the internationalisation of R&D do not relate primarily to exploiting the cost advantages of globally distributed R&D units, but emphasise more the value-added effects of transnational learning processes along the whole value-added chain (research, development, production, integration into supply chains and logistic networks, marketing/sales and services relationships). The decisive indicator for the intensity of transnational processes of learning and innovation is the relative value of knowledge generation activities as a percentage of value-added within the corporation. Although there are few accurate methods for measuring or quantifying this parameter, more and more enterprises are conscious of the strategic value of these intangible assets and activities. Toshiba assigns a 40% share of corporate value-added to the generation of knowledge, and Asahi Glass a share of 28%. The globalisation of R&D, product development and innovation is thus relatively far advanced in those sectors and product segments where there is a high degree of generation of knowledge and a high degree of country-specific differentiation. Up to now, the enterprises pursuing globalisation have been mainly in specific segments of the chemical/pharmaceutical industry (biotechnology and genetic engineering) as well as the information technology industry (semiconductors, EDP, telecommunications, consumer electronics). The subsectors of industry, by contrast, which tend to lag behind in R&D globalisation are those in which production and assembly activities are the main constituents of value-added and in which research, product and process development, as well as manufacturing are still relatively easily decomposible. Modular product architectures and a geographical decomposition of lead-marketing, manufacturing and R&D are still valid for the automotive industry, for aerospace and for mechanical engineering. Even in these latter industrial sectors, however, the increasing importance of knowledge, the influence of information and communication technologies, and the requirement of simultaneity in research, design and production are all stepping up the process of globalisation in the 1990s.

18

Thus globalisation strategies and patterns of internationalisation differ according to countries and between individual sectors and product groups. The decisive determinants are:

The relative importance of knowledge generation as a constituent of value added in the corporation, compared with the proportion of value-added contributed by production and assembly.

The determination of centers of gravity and critical assets for the innovation process, which are often strongly concentrated at unique locations.

The degree of differentiation of customer requirements and production variants, and the changes in customer requirements and production characteristics in different countries.

The specific type of interaction between R&D, manufacturing and marketing, and the degree of modularity resp. decomposability between functions.

4.2 Globalisation of High-end-Competencies and Focusing on

Competence Centers

The globalisation of R&D is not necessarily associated with a universal scattering and global distribution of innovation activities. Economists pointed out repeatedly that the pool of technological knowledge is very unevenly distributed (Machlup 1962, Kuznets 1966, Teece 1981). With increasing sophistication of markets and research systems, this inequality tends to increase. The more specialised the area of competence that an enterprise wishes to acquire, and the more important its links with complex knowledge (e.g. research, production competence, user competence) the fewer high performance centers tend to arise worldwide. Most of the companies distinguish between:

Leading-edge or pre-eminent locations; only one or two centers in the world classify as such.

Advanced locations (typically the major markets and research systems in the developed countries).

Less developed locations, i.e. less sophisticated and non-dynamic markets and research systems.

Business processes, R&D units and competence centers, which require presence in the leading-edge locations, tend to be concentrated at one pre-eminent center. Other business processes and functions are increasingly outsourced to the less sophisticated locations. Large transnational corporations are restructuring their portfolio of activities, and tend to consolidate their innovation-driven parts of the value-chain at the most advanced locations. They are incurring high costs for the search, evaluation and selection of the most sophisticated centers of excellence, for the building-up of networks and for the coordination of tasks with other groups and locations. There was a period of uncontrolled jungle growth in the 1980s when - often following acquisitions - many companies increased the number of globally distributed R&D laboratories. This has now been succeeded by a phase of R&D consolidation. Thus, in the mid 1990s we are looking at an on-going process of internationalisation accompanied at the same time

19

by an even more consistent concentration, focusing and strategic emphasis on a few leading centers of research, advanced manufacturing and lead-marketing. Accordingly, when deciding on locations for their R&D, leading international enterprises pursue the main strategy of establishing a presence in R&D and product development at precisely those places where the best conditions worldwide are to be found for the particular product segment or field of technology concerned. They are no longer satisfied with locations that will enable them to just about keep up with the technology race, but deliberately search for the unique centers of excellence. The key criteria for this choice of locations based on the search for excellence are:

1. What location has the most advanced status of development worldwide and the best reputation in a certain field of research? Where are the best locational factors for sustained research excellence to be found?

2. Where do R&D activities require strong inducements from highly sophisticated lead markets and customer requirements, and where can these activities receive sustained impulses for further lead performance?

3. Where, on a worldwide basis, can the greatest potential for value-generation be exploited, i.e. where do manufacturing plants and sales units generate the cash flow for leading edge research, while at the same time determining the quality of the research?

4. Where is it possible to exert influence on regulatory regimes and dominant designs by participating in research consortia and standardisation networks, consequently gaining early advantages in the worldwide innovation competition?

5. Where does the type and intensity of competition stimulate the search for successful new businesses and sustainable innovation?

The evaluation and selection of these lead locations do not take place at a high level of aggregation (e.g. for an industrial subsector), but are typically carried out at the level of the strategic business unit (SBU/e.g. pharmaceuticals for the treatment of the central nervous system), or at the level of a technology (e.g. LCD/flat panel displays). For each product segment or technology, only one or two global centers of excellence usually emerge which act as attractors, capturing the attention of researchers and top managers, within transnational corporations. In themselves, the quality of research and the degree of innovation are not sufficient criteria for the positioning of an attractor location. It must also have a strong international reputation. Large corporations are not in a position to process information about many different centers of excellence at the same time, and to reach a management consensus on their evaluation and selection. Locations which have gained a high reputation and which pro-actively sell themselves by judicious marketing activities attract investors, while others will fall back into the second-tier of locations. Large, internationally reputed universities and research institutes with high advertising budgets, publications that attract the attention of the media, effective old-boy networks of alumni, and exceptionally high revenues from industry continually

20

strengthen their position (in particular, these include a few, large research universities in the USA). By contrast, universities and research institutes that do not make use of this combined catalogue of measures and do not have the required strength of international presence drop further down the list in the - largely subjective - assessments of international managers.11 4.3 Globalisation vs. Concentration of Core Competencies in the Home

Country?

When choosing centers of excellence, many multinational companies may reveal a preference for institutions in their home country; however, this is not necessarily the case. The strategic focusing of technological competence has led to a more critical assessment, in recent studies, of the globalisation of R&D. Some authors have questioned this trend and argue for a differentiation between different strategic types of technologies. Patel, Pavitt (1994) as well as Cantwell (1994) are sceptical of the alleged globalisation of technological competence and have encountered some research chauvinism, particularly for those types of technologies which possess a high strategic importance and which are transdisciplinary in character. Core technologies associated with strong prospects of market success and high differentiation from competitors, and with a generic application potential for many of the corporations products (Hamel, Prahalad 1994) are consequently kept close to the home market base, most often in research centers close to headquarter (Patel, Pavitt 1994). Regarding the hypothesis of concentration of core technologies in the home country we have made, on the basis of our own empirical investigations, an assessment which is more differentiated and which tends to reflect more recent trends. Although many large international enterprises that perform R&D are continuing to pursue the strategy of keeping the competence base for core technologies in the home country, clearly perceptible re-thinking processes are already under way. The dynamics of change depend upon an enterprises global technology strategy, on the one hand, and upon the size and resource base of the enterprises home country, on the other hand. If a corporation has a strong research and market basis in its country of origin, foreign units often still continue to perform only scanning and exploration functions and application engineering (this applies particularly to enterprises from Japan, the USA and Germany, with the exception of German chemical firms). By comparison, corporations with a less developed research and market basis in their home country have taken on the role of precursors in globalisation. In some large corporations from Sweden (e.g. Ericsson), the 11 In view of the often enormous investments made by leading research universities in the USA (e.g.

MIT, Stanford) with a view to building up their reputation, many European research centers and universities, for example, are relatively poorly positioned with regard to the big multinational corporations. They do not have a sufficient presence abroad, even vis--vis enterprises, in terms of pro-active marketing, acquisition activities, alumni networks, etc. There is a danger that in the long term they will not be able to keep up with the movement of global concentration currently taking place.

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Netherlands (e.g. Philips) and from Switzerland (e.g. A, Ciba-Geigy, Roche and Sandoz), but also increasingly in enterprises from the larger industrialised countries, there is a continuous process of transfer of R&D activities to centers of excellence in other countries, with the declared aim of concentrating core technologies abroad. The key question is: where is the center for gravity for the medium to long-term expansion of a corporations business? If the center of gravity coincides with the location of headquarters, core technologies may remain concentrated here for a long time. If the center of gravity is increasingly in another, more dominant and dynamic location, core technologies will be concentrated at this foreign location, and headquarters will often become reduced to a legal or financial entity. This tendency is clearly pronounced for some transnational corporations from Sweden, Switzerland, and the Netherlands. But similar developments are also occurring at some multinational corporations from larger countries. In large international corporations, the strategy of globalisation of R&D and its concomitant processes of global coordination of innovation activities are also associated with substantial adaptation measures in organisation and management. The absorptive capacities of an organisation, which are a prerequisite for its ability to derive lasting benefits from centers of excellence, depend largely on its ability to maintain a sufficient concentration of knowledge on the spot, with the local unit receiving sufficient support from headquarters in terms of resources and decision-making competence. Many R&D units abroad, however, do not attain the critical mass and are thus not viable in the long term. In the 1980s the combination of internationalisation and decentralisation led to a great deal of duplication, sub-critically equipped R&D units and squabbles about competence. For this reason many enterprises (including Sandoz, Philips and Hoechst, for example) have gone over to the principle of focusing core activities as far as possible in one place and assigning them as clearly as possible to specifically responsible groups at specific locations. This development results in the establishing, as far as possible, of one leading house for a specific product group or technology within the corporation. In the meantime, strong internal power struggles have broken out for world product competencies and recognition as worldwide centers of competence within the enterprise. Typically, the divisions of the corporation that are successful in this struggle are those which

have very high research competencies/know how;

if possible, have a very strong product of their own which offers impulses for R&D;

are profit centers generating their own cash flow, and

whose management occupies a very strong position in the hierarchy of the corporation.

The three latter factors are at least as important, if not more so, than the first point of research competence. Trying to strengthen the position of a location simply by increasing its technological competencies is not sufficient, in view of the importance of

22

subsequent value-added steps and the necessity for researchers and managers to successfully negotiate complex intra-coporate deals resp. arrangements. In the future, the strong centers within a corporation will be those which have unique technologies, which control sophisticated production capabilities, and which have close access to lead markets. Isolated research islands will increasingly go under and their importance will decline. 5. A New Framework for Analysing R&D Globalisation within

Transnational Firms

Our empirical investigations outlined in sections 2 to 4 of this paper have shown that R&D and innovation activities are - to a large extent - globally dispersed. Several companies in our sample indicated that they will perform more R&D abroad in the future, and that they are willing to be present in the most dynamic, innovation-enhancing foreign markets. Increasing global dispersion of activities, however, does not necessarily lead to greater decentralisation of ownership and control. Corporations want to benefit from multiple centers of learning on a global scale, but they tend to concentrate ownership and control of their most critical resources in only one country, or in a very small number of a few dominant innovation centers. The following framework may serve as a basis for analysing predominant patterns of globalisation, and to assess the related coordination and control issues in transnational corporations. 5.1 Four Generic Types of Transnational R&D and Innovation

According to our illustration in Figure 4, we have distinguished between two generic innovation regimes, characterized by the predominant types of innovation and their dynamics at the corporate level, or, if further differentiation is needed, at the strategic business unit (SBU) level.12 These two innovation regimes represent polar cases and may be further subdivided into different sub-classes. We have found it useful, to distinguish between:

Dynamic, fast innovation regimes, characterized by high R&D-intensities, fast innovation cycles and a relatively strong importance of breakthrough innovation; these may be distinguished from

less dynamic, slow innovation regimes. Many less dynamic businesses (such as manufacturing or shipbuilding) are characterized by low R&D intensities,

12 If most businesses of a corporation are characterized by similar innovation regimes, corporate-level

generalisations are useful. If different businesses display different regimes, a detailed analysis at SBU level is required.

23

comparatively slow innovation cycles, and by the predominance of incremental innovation.

Our empirical study has been concentrated on corporations and strategic business units characterized by dynamic, fast innovation regimes (as illustrated by the shaded area in Figure 4). However, some of the large, multiproduct firms in our sample (e.g. ABB, Hitachi, Siemens, Sulzer, UTC) are active in different industries, and in diverse markets characterized by different innovation regimes. In those cases, we have mainly concentrated our analysis on the more dynamic, innovation-intensive business units. Figure 4: Four Generic Types of Transnational R&D and Innovation

Innovation Regime(Predominant type of

innovation at corporateor SBU level)

Dynamic, FastInnovation Regime

Less Dynamic,Slow Innovation

Regime

Coupling ofLead-Marketing,

R&D andInnovation

Lead MarketOutside the

Home Country

Important LeadMarket in Home

Country

C D

Science andResearch-based

Innovation

Small R&D Basein Home Country

Large R&D Basein Home Country

A BGeneric Type of Transnational Innovation

Dynamic, fast innovation regimes have often been described synonymously with science-based and technology-push types of innovation. Our study shows that this connotation is no longer valid. While some dynamic business segments can still be considered as science-based (e.g. biotechnology), an increasingly large share of innovations is generated through demand articulation (Kodama 1995), i.e. through an

24

effective coupling of lead-marketing, R&D and innovation. We have found it useful to clearly distinguish between these two clusters of dynamic innovation processes as outlined in Figure 4, because both require completely different search and location strategies. On the left hand side in Figure 4, we find science and research-based innovation, for which corporations are dependent on excellence in R&D (e.g. genetic engineering or artificial intelligence). The most critical assets are leading researchers and world-class research laboratories. For those types of innovation, it is important from the corporate point of view, whether the company is based in a large country with a highly advanced research capability in the particular field(s), or whether there is only a small, less-developed R&D base in the home country. According to these characteristics, we may distinguish between the following two generic types of transnational, science and research-based innovation. Type A: The corporation is dependent on excellence in R&D and is located in a large,

highly advanced home country with strong R&D capabilities in the particular field. Type B: The corporation is dependent on excellence in R&D, but is located in a small

country and/or in a country with a less developed R&D capability in the particular field.

While science and research-based innovation still plays a strong role for several corporations in our sample, many respondents emphasize other, market-related factors which drive the innovation process. Innovations in the fields of consumer electronics, factory automation, instrumentation, advanced engineering, energy or medicine are at least as much dependent on the interplay of lead markets, regulation, and customer-supplier-relationships, as they require a sophisticated R&D base. The most critical assets for the innovation process are the downstream-related complementary factors; crucial for success is the effective coupling of lead-marketing with R&D and innovation.13 Demand patterns are driving investment behavior which in turn influences the selection of new technologies. Corporations active in those fields are dependent on excellence in lead-marketing and on the presence in the most dynamic locations. While learning from lead-markets can occur at any location in the world, it appears to the most crucial for the long-term success of a corporation, whether its top management can transform market stimuli into a sustainable business. Headquarters have to be involved, top managers have to understand the new businesses and their risk, and they have to mobilize the appropriate resources. The type and coherence of innovation management will thus crucially depend on the cultural and functional distance between

13 An increasing number of innovation researchers emphasize these concepts of lead-user-marketing

(von Hippel 1988), demand articulation (Kodama 1995), or probe and learn innovation (Lynn et al. 1996).

25

the corporate headquarter and the lead-market(s).14 In our empirical investigation, we found it useful to distinguish between the following two types of transnational innovation: Type C: The corporation can benefit from proximity to a world-class lead-market,

and can establish an effective coupling of lead-marketing, R&D and innovation. Most of these high-end activities can be performed close to the corporate headquarter, at least within the same nation state.

Type D: The corporation is strongly dependent on access to a foreign lead market. Due to the small size of its home country and/or the level of market evolution, the firm is forced to perform critical functions abroad. Demand articulation and corporate resource allocation will be geographically, and often functionally, separated.

5.2 Types of Companies and their Dominant Patterns of Transnational

Innovation

Most R&D and innovation activities performed abroad within the sample of companies studied can be classified according to these two determinants, i.e. by the type of innovation pursued, and by the location of critical resources (whether critical assets are concentrated at home or abroad). Some companies primarily pursue science and research-based patterns of innovation (e.g. biotechnology research), and they tend to locate their R&D labs close to the best talent bases, whether they are found at home or abroad (see the left hand side in Figure 5). Other companies are active in business segments which require an effective coupling of lead-marketing/R&D and innovation. They can pursue this type of innovation at home or abroad, depending on the size and sophistication of the home market (see the right hand side in Figure 5). Type A Innovation is characteristic for large firms with a pre-eminent R&D infrastructure at home. A typical example are advancements in human genome research, where the U.S., based on funding by the National Institute of Health, has attained a world leadership position. U.S. pharmaceutical and health corporations would have little incentive to go abroad for access to scientific results and research talents. This is different for transnational corporations from small countries such as Switzerland, Sweden or the Netherlands. All Swiss corporations in our sample (Ciba-Geigy, Roche, Sandoz) have made strong inroads into U.S. based biotechnology research. The same was true for corporations from larger countries (Germany and Japan), who felt that the research infrastructure or regulatory conditions were less developed at home than in the U.S.. Both types of corporations pursued a B type strategy. Apart from a few research-driven fields, an increasing number of corporations

14 This geographical proximity argument has been emphasized by Burenstam-Linder (1961) and Vernon

(1966), and is a major theme in the new literature on the geography of innovation (see Audretsch and Feldman 1996, and Gersbach and Schmutzler 1996).

26

follow the strategy of locating R&D and innovation activities near the most dynamic markets and customer groups. Companies from large countries with a highly developed lead-market and a strong R&D base at home find a suitable climate for innovation and concentrate most of their activities close to the headquarter. This is the case for the majority of LCD innovations at corporations like Sharp, Hitachi or Canon. UTC concentrates most of its aeroengine development within the U.S. A significant share of R&D and innovation in the fields of automotive supply, mechanical engineering or energy of German firms is still pursued in Germany. C type innovation primarily involves the setting-up of 1 or 2 dominant R&D and innovation centers in the home country, and the effective linkage of R&D and product units. Innovation activities abroad are just a supplementary activity.

Figure 5: Types of Companies and their Dominant Patterns of Transnational Innovation

A

B

Companies from Large Countries Strong R&D Base in this par-

ticular Field Dominant R&D Center Concen-

trated in Home Country Supplementary R&D Activities at other Locations

Companies from Small Countries Companies from Large Countries

with Deficiencies in R&D in thisParticular Field

Establishment of Multiple Lea- ding-edge R&D Centers Abroad

Key: Critical Mass of ForeignR&D Unit / Reverse TechnologyTransfer

Science and Research-basedInnovation

LargeHome

Country and/or

Large Share of CriticalAssets in

HomeCountry

SmallHome

Countryand/orCriticalAssets inForeign

Locations

Companies from Small Countries Companies from Large Countries with Lead Market Deficiencies Key: Concentrate Competencies outside the Home Country / Esta- blish New Business Unit

Companies from Large Countries Strong R&D and Lead Market

in Home Country 1 or 2 Dominant R&D and Innova- tion Center(s) in Lead Market(s) Close Linkage R&D and Product

Units

Coupling of Lead-Marketingand Innovation

D

C

This is different for corporations based in small countries, as well as for companies from large countries with lead market deficiencies. Innovative companies from Europe that are active in optoelectronics or semiconductors perform a significant part of R&D

27

and innovation activities in the lead countries, i.e. in Japan or the U.S, depending on the specific business segment. A D type innovation strategy requires to concentrate major investments and capabilities outside the home country. Very few companies in our sample have demonstrated a strong track record with D type innovation activities. 5.3 Effective Coordination Mechanisms Dependent on the Type of

Transnational Innovation

During the 1990s, transnational corporations have tended to consolidate and streamline their organizations. Distributed R&D activities and global innovation processes have resulted in overly complex and un-manageable organisational architectures. Many companies in our sample have adapted a strategy of multiple centers of learning with one dominant center of coordination. For many companies this implies to select as few centers as feasible, if possible, only one. Corporations tend to locate the primary center as close as possible to the corporate headquarter, or else, they attempt to locate the center as close as possible to the greatest source of value. In many cases, however, these location strategies lead to conflicts, and management then tends to compromise by allowing for multiple centers with overlapping responsibilities. Based on our observations in 21 transnational firms, we want to sketch out dimensions of an organizational architecture, for which each generic type of transnational innovation determines the choice of the most appropriate coordination mechanisms. Organisation design and the selection of coordination mechanisms appears to to be rather straightforward for A and C type innovations. The locus for value creation, be it a world-class research capability (type A) or a lead-market (type C) is always close to the corporate headquarter. In the case of science and research-based innovation, a leading-edge research center with strong ties to the corporate center and centralized decision-making is often sufficient. Continuous innovation is enhanced through a research-type corporate culture. Corporate Technology Platforms and R&D Committees are centered in the home country, and support the effectiveness of the R&D program. C type innovations require stronger cross-functional integration and a more stringent system focus15 across the value-chain, but within one dominant country. The establishment of cross-functional teams and of internal quasi-markets, and contracting between units or functions poses no serious problems (see the upper right hand box in Figure 6). This is much more difficult for Type D innovation processes, for which lead markets and critical assets are located outside the home country. The corporation has to establish an effective business unit or a new division in the leading country of the world. Effective cross-functional integration has to be established within the foreign lead-market. With the business drivers and the core team members outside the home country, the prime factor for success will be that the corporate center understands the 15 Cross-functional integration has been explicitely described in the innovation literature (Wheelwright,

Clark 1992). System-focused R&D and its effectiveness have been outlined in Iansiti (1993).

28

dynamics of the business, and that it is capable and willing to mobilize enough critical resources. Type B innovations are characterized as science- and research-based innovations with a lack of critical assets in the (small) home country. Transnational firms need to get access to critical assets abroad; they often have to organise R&D as a network of several R&D laboratories at different locations in the world. This requires effective global team management; team members with different cultural as well as educational backgrounds have to be socialised and integrated, This can partly be attained through an effective corporate R&D and technology strategy. In addition, corporations with strong performance in type B innovations often display coherent corporate cultures, and they often emphasize corporate visions, mental maps, and globally integrated technology portfolios.

Figure 6: The Generic Types of Innovation Determine the Choice of the Appropriate Coordination Mechanism

A

B

Science and Research-basedInnovation

Coupling of Lead-Marketingand Innovation

LargeHome

Country and/or

Large Share of CriticalAssets in

HomeCountry

SmallHome

Countryand/orCriticalAssets inForeign

Locations

D

C

Establish Effective BusinessUnit or Division in LeadingLocation in the World

Cross-Functional Integrationwithin Lead Market

Make sure, Headquarter under-stands Dynamics of the Business

Leading-edge Research CenterStrong Ties to Corporate Center

Centralized Decision-making inHome Country

Corporate Technology Platform/Technology Committees Based inHome Country

Enhance Research-type Cultureprimarily in Home Country

(Strategic) Research Projects in-volving several R&D Laboratories

Inter-/Transdisciplinary Teams Global Team Management (Cross-

cultural Integration) Effective Corporate R&D and

Technology Strategy Strong Corporate Culture Globally Integrated Corporate

Technology Portfolio

Close Integration R&D and LeadMarketing in Home Country

Cross-Functional Teamsin Dominant Country

Internal Markets and Contractsbetween Units / Functions

29

6. Conclusions and Implications

Our research on R&D and Innovation in Transnational Corporations has outlined some significant changes, with profound implications for corporate management, for R&D and innovation policy, as well as for further management research. Managers in many transnational corporations tend to redirect their efforts of global R&D proliferation of the 1980s towards a more cohesive approach of global specialization and balanced re-centralization. Many corporate functions and activities may remain geographically dispersed; coordination and control of R&D and innovation, however, is increasingly kept within one center of opportunity. The framework of analysis proposed in section 5 helps to understand some of the most critical parameters for center-formation and location. Managers are concerned with the following questions:

1. Where is the major driver and the center for value creation for the innovation process?

2. How are critical resources dispersed over geographical locations, and how can we best control the most critical assets?

Our framework suggests four generic types of innovation processes, which can be closely monitored. Appropriate coordination mechanisms can be determined on the basis of this diagnostic tool, with the overall objective to keep organisations lean and simple.

30

Figure 7: National Innovation Policy in Response to Dominant Types of Innovation

A

B

Science and Research-basedInnovation

Coupling of Lead-Marketingand Innovation

LargeHome

Country and/or

Large Share of CriticalAssets in

HomeCountry

SmallHome

Countryand/orCriticalAssets inForeign

Locations

D

C

Traditional Type of InnovationPolicy in Large Country (e.g.U.S.)

Build on Strengths of NationalR&D and Innovation System

Support Dynamic National Firmswith strong Home Country Base

Attractive Location for R&D ofForeign Transnationals

Traditional Type of InnovationPolicy in Small Country (e.g.Sweden)

Focused Strengths of NationalR&D and Innovation System

Support Dynamic National Firmswith strong Foreign InnovationActivities

Niche Strategy for AttractingR&D of Foreign Transnationals

Establish Strengths of NationalSystem of Demand Articulation

Position as World Lead Marketin Several Industries

Global Center of Learning forNational as well as ForeignFirms

Niche Strategy for NationalSystem of Demand Articulation inSelected Fields

Support Learning of NationalFirms in Foreign Lead Markets

Enhance/Facilitate ReverseTechnology Transfer

Attractive Location forConcentrating Intellectual Capital

The observed changes and our proposed concepts will also affect innovation policy, which has overemphasized supply-side R&D capabilities in the past.16 Since R&D capabilities and science-based innovation tend to be only one, often less important driver of global innovation, more emphasis has to be placed on downstream-related processes, effective national lead-markets, and on the enhancement of national systems of demand articulation (Kodama 1995). Furthermore, national policy has to prevent simple Me-too strategies, and has to emphasize sustainable national leadership positions, based on R&D capabilities, dynamic national firms, effective clusters of business activity, as well as on dynamic lead markets. Figure 7 may serve as a useful characterization of innovation policy in response to the four different types of innovation. Finally, we would like to suggest more theoretical as well as empirical research on the globalisation process of R&D and innovation. Additional research should address the following topics: 16 For a more detailed critique see Branscomb (1993), Kodama (1995) and Gerybadze et al. (1997,

Chapter 7).

31

1. Understand transnational R&D and innovation in a period of stronger consolidation and tight budgetary as well as managerial restraints.

2. Emphasize more solid empirical research and validation; particularly more cumulative, empirically grounded research, and a further refinement of suitable methods.

3. More research at the level of strategic business units (SBU), and at the project level within transnational corporations is needed; too many empirical investigations are still characterized by corporate-level generalizations (e.g. generalizations such as transnational innovation at IBM as opposed to transnational innovation within the IBM microprocessor business).

4. A more detailed analysis of world product responsibilities resp. global technology responsibilities within transnational corporations at locations outside the home country would be very useful. Where do transnational corporations establish effective centers abroad which drive innovation and new business with strong corporate implications?

5. Finally, more research should address the ownership and control issues for intellectual capital within transnational firms. Where and why do firms concentrate ownership and control of the most valuable intellectual capital? How does this concentration of intellectual capital affect corporate responsiveness, i.e. the ability of a firm to control the line of opportunity (for future business), as opposed to the mere exploitation of the line of authority (for todays business)?

Our on-going research activities at the Center for International Management and Innovation and at the Fraunhofer Institute for Systems and Innovation Research will address these issues further, based on empirically grounded studies. This requires effective transnational networking, and an open exchange of research findings among scholars working on related topics. We are thus helpful for any idea or suggestion, and we would highly appreciate the exchange of research results.

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List of Figures and Tables

Figure 1: Our Focus of Research on R&D Globalisation within Transnational Corporations 4 Figure 2: R&D Intensity and Proportion of R&D conducted abroad in the Enterprises Analysed 8 Figure 3: Proportion of Foreign Research and Development in Selected Enterprises in Western Europe, the USA and Japan 16 Figure 4: Four Generic Types of Transnational R&D and Innovation 23 Figure 5: Types of Companies and their Dominant Patterns of Transnational Innovation 26 Figure 6: The Generic Types of Innovation Determine the Choice of the Appropriate Coordination Mechanism 28 Table 1: R&D Intensities and the Degree of Internationalisation of R&D within our Sample 6