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School of Business at Konkuk University Chaisung Lim College of Business, Konkuk University, Seoul, KR Industrial Technology Innovation: Global Research and Open Innovation on August 21st and 22nd, 2008, in Taipei. Foreign R&D activities after the financial crisis in Korea Slide 2 2 Source: Doz and Winson (2006, 2) 1. Globalisation of R&D activities Changing distribution of R&D sites Slide 3 3 In spite of globalisation of production and marketing activities of MNCs, R&D activities are concentrated in home countries (Patel and Pavitt 1991) Science and technology as the source of competitiveness in home countries Globalisation of R&D activities by early 1990s: concentrated in Triads (Elder, Meyer-Krahmer and Guido 2002) Recent expansion of R&D centers in East Asia raises questions on previous arguments MNC R&D activities are expanding beyond Triads to Asia MNC R&D abroad is expanding (Chen[ ] 2006; Gassmann and Zedtwitz 1999; Torbjorn Fredriksson 2006; UNCTAD 2005) 1. Globalisation of R&D activities Slide 4 4 Possible reasons for expansion of FDI R&D centers in East Asia Evolved global production network (Ernst 2002) -From production to design and R&D Expansion of market due to high economic growth in East Asia Asian students returning from the US: enhanced R&D capability Collaboration among partners, remotely, through internet (Chen 2004) -More opportunities for division of labor in R&D or knowledge-intensive engineering between Western countries and East Asian countries Competition among global firms for standards in ICT -Competition of global partnership for specific standards by major ICT firms -Mobile phone or X box example: East Asian country firms join in partnership with Western mobile phone standard leading companies by engaging in production and R&D of mobile phones of specific standards Slide 5 5 2. Factors influencing global positioning of R&D The factors influencing positioning of R&D centers in the world are complex (Reddy 2000) MNC positioning of R&D activities across world depends on country environments (Archibugi and Michie, 1995; Archibugi 1999; Patel and Pavitt 1998) Influential relevant market factors are: Accessiblity to market and size (Beise and Belitz 1999; Dougherty et al. 2003; Kummerle 1999; Gao 2000), Necessity to interact with market, localisation of products to local situation (Hiroda 1993; Florida 1996; Dobson 1999; Cornet and Rensman 2001; Hakanson 1992; Narula 2000; Kumar 2001) Slide 6 6 Human resources for scientific R&D and technical expertise in a specific area In the case of science-intensive R&D activities, human resources in universities and research institutes are important for attracting MNCs -FDI R&D for access to knowledge through participation in communities of scientists (Chiesa 1995; Dambrine 1997; Voelker and Stead 1999; De Meyer and Mizushima 1989; Florida 1996; Kummar 2001) -The allocation of R&D to country with expertise in specific technological field (Beise and Heike 1999) 2. Factors influencing global positioning of R&D Slide 7 7 Manufacturing Production experience and capability (Fors and Zejan 1996; Gao 2001) Proximity to supplier and manufacturing capacity (De Meyer and Mizushima 1989; Beise and Belitz 1999) Existence of competitive industry Positioning of R&D activities in a specific field in the countrys area of specialization: Cantwell and Harding(1997), Patel and Vega(1999) -Positioning R&D activities in a country where level of R&D is much more advanced (Cantwell and Janne 1999) -For utilizing externalities of intensely populated firms in a specific cluster (Cantwell and Piscitello 2002; Carrincazeaux, Lung and Rallet 2000) 2. Factors influencing global positioning of R&D Slide 8 8 Market attractiveness and the necessity to interact Attractiveness of human resources Research Market size Market proximity Localisation of technology through interaction with local market needs Availability of local university and local expertise Joining communities of local scientists Skilled human resources with advanced science and technology Devel- opment Market size Market proximity Localisation of technology through interaction with local market needs Human resources with rich production and development experience Human resources utilizing manufacturing competences 2. Factors influencing global positioning of R&D Slide 9 9 3. Expansion of FDI R&D activities in Korea over the last decade Expansion of the number of FDI R&D centers (with more than 10% equity share) number of new R&D centers (1998-2003) > number of R&D centers established before 1998. (Bok et al. 2006; Kim 2004) Factors that suggest potential expansion of R&D activities in Korea Human resources for manufacturing and product development (process engineering) in competitive export industries Returning students who studied abroad : Korean students occupy one of the highest rankings in their share among all the foreign students in the US (Chen 2006). Continuous market growth: not-low economic growth Technical expertise in ICT sector: a country specializing in ICT sector (one of the industries of high R&D globalisation) Factors that suggest negative increase in FDI R&D activities in Korea In spite of increase in number of FDI R&D centers, R&D activities may decline if FDI R&D centers emerge as a result of acquisition by foreign firms (UNCTAD 2005) Deglobalisation of MNC R&D activities (Patel and Pavitt 1991) Slide 10 10 4. The last decade in Korea- a good case Radical policy shift and FDI rush after the financial crisis in 1997. Rapid expansion of number of foreign R&D centers Does increase in number of R&D centers reflect globalisation of R&D activities as a world phenomenon? Anything new in FDI R&D activities over the decade? Slide 11 11 5. Radical policy shift after the financial crisis Background Korea before financial crisis: had solid rate of accumulating technological capability at time of financial crisis in 1997 After financial crisis: faltering a little, Korea continued accumulation of technological capability in the manufacturing sector Source: USPTO web site on 6 November 2007 Patenting trend of Korea in the US Slide 12 12 Very radical policy shift to attract FDI among NIEs: from passive (Japanese model) to aggressive Governmental policy shift: FDI as cushion against further financial crises Governmental policy swing to attract FDI -the Foreign Investment Promotion Act of 1998 : reduction in regulation of FDI, tax exemptions and incentives for foreign investment -free economic zones : 2003 Incheon, Busan and Gwangyang. Investor support center (later, Invest Korea) as a center for supporting FDI 5. Radical policy shift after the financial crisis Slide 13 13 Inflow of FDI investment and increase in number of foreign R&D centers Expansion of FDI -Four-year (1998-2002) influx of foreign investment, $35 billion in actual inflows more than double amount received during previous 35 years FDI for utilizing market opportunities and production capabilities 5. Radical policy shift after the financial crisis Equity Share- foreigner Establishment time Total Before 1997After 1998 Below 10%92119211 10~50%167248415 50~100%5478132 100%6080140 Total373525898 Source: MOST (2005) Number of foreign R&D centers in Korea Slide 14 14 Inflow of FDI investment and increase in number of foreign R&D centers Expansion of FDI -Four-year (1998-2002) influx of foreign investment, $35 billion in actual inflows more than double amount received during previous 35 years FDI for utilizing market opportunities and production capabilities 5. Radical policy shift after the financial crisis Increase in foreign direct investment 1962-2004 Source: MOCIE (2005) Slide 15 15 Policy drive for R&D hub for North East Asia (2003) : to attract foreign R&D centers by providing incentives through various ministerial attempts Some company R&D centers as a result of governmental efforts including visits by top government officials: for example, Intel Examples of new policies -cash grant to support personnel cost of FDI R&D centers (MOCIE) -matching R&D fund for R&D in ICT sector -KICOS (Korea Foundation for International Cooperation in Science and Technology) as an organisation to facilitate international cooperative research and attract foreign R&D centers (mainly public). 5. Radical policy shift after the financial crisis Slide 16 16 Foreign R&D centers as a result of governmental efforts 5. Radical policy shift after the financial crisis MinistryResearch Institutes MOST Pasteur (Biotechnology) SOI APEC Climate Center (Optics) NIH (tuberculosis new drug development) APEC Climate Center (Weather Forecasting) Cavendish(Nano optoelectronics) Photronics (Semiconductor) RIKEN(NT/BT/IT Fusion Tech) eIMBL (BT) MOCIE Siemens (Medical equip.) Agilent (Wireless RF Module) Photronics (Semiconductor) National Semiconductor (Semiconductor) Dupont (Information Electronics Material) ATI (DTV) TI (Semiconductor) JATCO (Automobile) AMD (Semiconductor plan) MOC Intel (Digital home. Radio communication) Fraunhofer IGD (virtual simulation) Siemens (Network device) Microsoft (Mobile device) On-semi (Mobile solution) IBM (Telematics) HP(RFID) Agilent (Wireless RF Module) Sun (Mobile S/W) AMD (Semiconductor) Source: Chang et al (2006, p. 110) Slide 17 17 5.1 Policy characteristic Policy target: education and training, employment encouragement of R&D activities No target group: FDI group in general Main policy means: tax incentives, cash grants, R&D support Various ministries involved Slide 18 18 5.2 Policy details Supply of land for FDI firms ZonesTax exemptionGovernments Exclusive zones for foreign firms 100% or 75% reduction MOCIE Foreigners investment area 100% reductionLocal government Tariff-free area100% reductionMOFE MOCIEs cash grant for foreign R&D centers For R&D centers with green field investment for new (expansion of) facility Grants for employment & education expenses (personnel costs of R&D staff and dispatching costs for training), rents for land, construction costs, instruments and capital goods Slide 19 19 5.2 Policy details MOFEs tax exemption for FDI firms MICs R&D support Matching fund support for research classified as IT 839 (strategic research field) MOSTs policy for attracting foreign non-profit R&D institutes Research and operational costs for non-profit foreign R&D institutes Slide 20 20 6. Current Status of Foreign R&D centers More than half foreign R&D centers set up after financial crisis 54% respondent firms with less than 10-year history: Bok et al.(2006) with 76 surveyed FDI R&D centers (with more than 10% equity share) are less than 10 years old (see also Slide 13 ) R&D activities for domestic market 65.8% manufacturing firms R&D results (out of 76 R&D centers) are for domestic market (Bok et al 2006) No patent applications abroad : 78.0% of 150 FDI firms surveyed in 2004 (Chang et al 2006) No patent applications even in Korea : 33.3% of 150 FDI firms surveyed in 2004 (Chang et al 2006) mainly R&D for components (50.0%) and materials (31.6%) out of 76 R&D centers by Bok et al. (2006) Slide 21 21 R&D activities by Koreans utilizing Korean manufacturing capability R&D activities of FDIs in Korea taken from report on 168 FDI firms (KOITA 2007) Utilization of manufacturing and development capability: -development of products and technogy(75.0%), improvement of existing products(16.1%) -85.7 % own manufacturing factory 6. Current Status of Foreign R&D centers Major role of F. R&D center Type of R&D activities Slide 22 22 Reliant on Korean R&D staff -Foreign R&D centers with foreign R&D staff 27.4%, -average number of foreign R&D staffs 3.3 Major role of FDI R&D center : independent research 34.5%, research in collaboration with headquarters 38.7%, localisation of R&D results developed from headquarters (10.1%), technical support or partial role for R&D of headquarters (12.5%) R&D of FDIs for sales oriented, shorter R&D R&D of Korean multinationals for applied research to pure research, longer research (Cho et al. 2003) Most active FDI R&D activities are in industry where Korea s competitiveness is High the top 25 FDI firms (with more than 50% equity), in terms of patent applications (1990- 2005), which account for 90.0% (27,558 out of 30,622) of total FDIs -Mainly (21 out of 25 firms) from transportation equipment (automobiles) and electronics (Lim 2007) 6. Current Status of Foreign R&D centers Slide 23 23 7 Patenting trends over the last decade Patents filed in Korea by FDI (>50% F. Share) : 1990-2005 Enhancement of FDI firms R&D activities after the crisis? Not supportive Almost stable growth pattern: 0.6% increase : (2005 patents filed/1998 patents filed) in annual patent application (1999 data reflect the crisis of 1997-1998) Slide 24 24 Source : US PTO (http://www.uspto.gov) Patents granted to inventors residing in Korea, Taiwan, Singapore, China and India owned by foreign owners US Patents of Eat Asian countries increased. Koreas patents increased at slower pace than other countries 7 Patenting trends over the last decade Slide 25 25 7.1 FDI with increasing R&D trends FDI with increasing patent trends with more than 5 US patents Companies Before Foreign firms acquisition : Chaebol company? Subcontracting relationship with Korean MNC of Global 500s Industry US patents (owner foreigner, inventor Korea resident)99-05 2004-5/98-99 trends of patents filed in Korea Samsung Thales Co., Ltd YesNo Electronics, Electricity 6123.16% Toray Saehan Inc Yes Samsung Electronics Chemical Engineering (Mobile Phone components) 52425.00% Daesung Electronic Co., Ltd No Hyundai and Kia automobile Transporta- tion equipment 13228.57% Mando CorpYes Hyundai and Kia automobile Transporta- tion equipment 35150.08% Halla Climate Control Corp Yes Hyundai and Kia automobile Transporta- tion equipment 18244.31% Slide 26 26 7.1 FDI with increasing R&D trends FDI with increasing patent trends with less than 5 US patents Company name Before Foreign firm acqui-sition of foreign firms (Chaebol relevance) Subcont racting relat- ionship with Korean MNC Indu-strial Classifi- cation 90-05 patents filed 99-05 patents filed 04-05 average patents filed/98-99 average patents filed Winia- mando Yes (Halla) No Electronics and Eletricity Consumer durables 1,9251,703163.9% Korea Delphi Auto- motive Systems Corp Yes (Daewoo Gijun joint venture) Yes (GM DAT) 3 Transporta- tion equipment component 884602371.2% Siemens Auto- motive Systems Corp No(Korea Bedix Electronics) Yes (Hyundai Auto.) ) Transporta- tion equipment component 180179 Not possible to calculate (98-99 patents filed = 0) (04-05 average patents filed/00-01 average patents filed = 302.8%) Dongwoo fine-chem Co., Ltd. No(Joint venture with Japanese firms) Yes (Samsung Electronics ) 7 Chemincal Engineering (TFT-LCD ) 144 2275.00% Samsung Corning Pre-cision Glass Co., Ltd Yes (Joint venture with Samsung Yes (Samsung Electronics ) Non Metal (Display component) 74 Not possible to calculate (98-99 patents filed =0) 04-05 average patents filed/00-01 average patents filed =1066.7%) Duckyang Ind. Co., Ltd. No Yes (Hyundai Auto.) Transporta- tion equipment (Instrument Pannel+Crash Pad) 10) 5448675.0% Daesung Electronic Co., Ltd Daesung Electronics Yes (Hyundai Auto) Transporta- tion equipment 78 59 228.6% Slide 27 27 -Toray Saehan Inc -Samsung Corning Precision Glass Co., Ltd -Dongwoo fine-chem Co., Ltd. Samsung Electronics LG Electronics GM DAT -Korea Delphi Automotive Systems Corporation -Mando Corporation -Halla Climate Control Corp -Siemens Automotive Systems Corp -Daesung Eletric -Duckyang Ind. Co., Ltd. Hyundai Automobile Kia Automobile 7.1 FDI with increasing R&D trends Slide 28 28 7.2 FDI with decreasing R&D trends FDI with decreasing R&D trends Delphi Automotive Systems Sungwoo Corp Slide 29 29 7.2 FDI with decreasing R&D trends R&D center for firms manufacturing goods for domestic market (Otis, Fuji, Honeywell) Automobile subcontractor (Delphi automotive systems Sungwoo) ICT subcontractor (Molex) Construction equipment for export (Volvo) Semiconductor firm acquired by a Chinese firm (Boe Hydis) Previous division of Samsung acquired by Fairchild (Fairchild Korea) Slide 30 30 8 Case : Toray Saehan Saehan, formerly part of Jeil Hapseom (Samsung Chaebol group) Saehan produces display film for LCD and PDP as a first-tier subcontractor to Samsung Electronics In 1999 Japanese company Toray acquires Saehan, creating Toray Saehan in order to have manufacturing basis in Korea. Saehans R&D institute was abolished because Toray Saehan was not supposed to have R&D function With continuous success of Samsung Electronics LCD and PDP TV in world market, Toray Saehan was under pressure to react to constantly changing specifications with high quality from Samsung Electronics Slide 31 31 8 Case : Toray Saehan Order sizes expanded and the size of production line in 2007 has increased to 6 times that of 1999. Demand for high quality with constantly changing specifications need for local R&D for close speedy interaction between Samsung Electronics and Toray demand became high Toray did not have technological capability to meeet demand from Samsung Electronics local R&D For example, demand to reduce number of display films to increase film brightness demanded R&D for luminosity, population of film molecule, morphology (related to status of molecules movement) R&D institute was established by absorbing some of film manufacturing human resources (2002). With the successful performance of development activities, R&D activities expanded. R&D staff increased from 19 (2002) to 47 (2007) All Koreans Slide 32 32 Annual Patent Application of Toray Saehan 8 Case : Toray Saehan Slide 33 33 Inventor resident population owned by Toray in the US Source: accessed in May 2007 KoreaJapan Chin a UK Ger- many FranceIndia Singapore Taiwan Canada Nether- lands Patents invented by inventors not resident in Japan 52202030200000134 8 Case : Toray Saehan Slide 34 34 R&D activity model of Toray Saehan Toray Industries, Inc Toray Saehan Inc Export demand Internal demand TPA,EG (Organic compounds) Related industry Samsung Electronics Development know- ledge from Korea Source Tech Delivery Specification Pressure for quality Improved products 8 Case : Toray Saehan Slide 35 35 9. Case : GM DAT Daewoo automobile formed in 1983 as an acquisition from Sinjin Automobile by Daewoo Chaebol group. In 2002, became GM DAT as an result of acquisition by GM GMs strategy : GM DAT specializing in small and medium car R&D center turned into FDI R&D center Export expansion due to continued success of previously developed small car model (Matiz and its derivative model) and newly developed car models (Tosca and Winstorm in 2005) high productivity and low cost : production line producing multiple car models in a single line and automated automobile component production system GM DAT became headquarters for development of the platform for small cars (2005) and platform for compact car (2006) GM Strategy: architecture for the world by spacialised org. or (subsidiary) of GM GM DAT develop its own models GM Strategy: GM at a region or a nation develops its own models on the basis of the architecture supplied for the world Slide 36 36 Annual Patent applications from GM DAT filed in Korea Source: KIPRIS 9. Case : GM DAT Slide 37 37 Successful performance of export of GM DAT cars: majority of products exported Expanded R&D for architecture of small cars, car models and components. R&D activity model of GM DAT R&D fundsTax incentives Firm strategy, Rivalry Competition for small & medium car market among Korean and foreign carmakers foreign firm R&D center activity Related industry 1 st subcontractor, 2 nd subcontractor (some from China) Export demand Internal demand Factor condition R&D personnel & work- force with rich ex- perience of dev&mfg GRI Infra Other factors Headquarters 9. Case : GM DAT Slide 38 38 10 Conclusions What happens after the policy shift in the financial crisis? The evidence does not show that Korea has grabbed opportunities provided by globalization of R&D activities (expansion of R&D activities of FDIs in Korea) -In spite of FDI rush, the increasing rate of FDI R&D activities remains minimal -the increasing rate