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

Contents

1. Introduction

2. Methodology and Selected Firms

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

3.1 Traditional Technology Transfer vs. Transnational Corporate Learning


3.2 New Modes of Lateral Organisation
3.3 Organisational and Fiscal Consolidation
3.4 Changing Relationship between Basic Research, Development and
Innovation
4. Driving Forces for Locating R&D and Competence Centers Abroad
4.1 New Location Factors driving the Globalisation of R&D and Innovation
4.2 Globalisation of High-end Competencies and Focusing on Competence
Centers
4.3 Globalisation vs. Concentration of Core Competencies in the Home
Country?

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11
11
12
13
14
18
20

5. A New Framework for Analysing R&D Globalisation within Transnational Firms22


5.1 Four Generic Types of Transnational R&D and Innovation
5.2 Types of Companies and their Dominant Patterns of Transnational
Innovation
5.3 Effective Coordination Mechanisms Dependent on the Type of
Transnational Innovation

22
25
27

6. Conclusions and Implications

29

References

32

List of Figures and Tables

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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.
3

Figure 1:

Our Focus of Research on R&D Globalisation within Transnational


Corporations

Focus of our paper


"Exploratory" Research
(Explore key issues, generate new hypotheses, process studies, few companies
or cases, qualitative studies)

"Systematic" Research
(Validate/apply models,
Test existing hypotheses,
Cross-sectional, many companies, quantitative data)

Research on the
Globalisation of R&D
and Innovation

"New Paradigm" of
Transnational Innovation
Processes

"Traditional Paradigm"
of International Technology Transfer

Integration Mode
(R&D and Innovation
within Transnational
Corporations)

Cooperation
and Network Mode
(R&D Consortia, Technology Networks, Innovation
Systems)

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 mechanisms within firms (5.3)

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 decisionmaking 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 socalled 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.

Table 1:

Rank

R&D Intensities and the Degree of Internationalisation of R&D within


our Sample

Company

R&D
Intensity
1993 in%

Share of
Foreign
R&D
1993 in %

Degree of
Internationalisation of
R&D

9.2
7.1
6.7
5.7

28
55
2
12

**
***
*
**

Electrical engineering
Computers
Electrical engineering
Consumer electronics

8.0
7.8
6.2
6.2
5.8
10.6
6.7
15.4
5.2

90
3
55
42
6
54
9
60
4

***
*
***
***
**
***
**
***
*

Electrical engineering
Telecommunications
Electrical engineering
Chemical/Pharmaceuticals
Consumer electronics
Chemical/Pharmaceuticals
Electrical engineering
Chemical/Pharmaceuticals
Electrical engineering

14.
15.

Siemens
IBM
Hitachi
Matsushita
Electric
ABB
NEC
Philips
Hoechst
Sony
Ciba-Geigy
Bosch
Roche
Mitsubishi
Electric
BASF
UTC

4.5
5.4

20
5

**
*

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

Sandoz
Sharp
Kao
Eisaj
Sulzer
MTU

10.4
7.0
4.6
13.2
3.4
ca. 25

50
6
13
50
27
-

***
*
**
**
**
*

Chemical/Pharmaceuticals
Advanced engineering/
Aeroengines
Chemical/Pharmaceuticals
Consumer electronics
Chemical/Cosmetics
Chemical/Pharmaceuticals
Advanced engineering
Advanced engineering/
Aeroengines

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

Industry

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).

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&Dperforming 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 mediumto-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%.

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

90%

ABB

Foreign
R&D
(% of total R&D)

60%

ROCHE

PHILIPS IBM
CIBA

50%

SANDOZ

EISAJ

HOECHST

30%

30%
SIEMENS

SULZER
BASF
KAO

10%

0%
0%

Source:

MATSUSHITA
BOSCH

SONY
UTC
MELCO HITACHI NEC

3,5%

SHARP

8,5%

R&D Intensity

Database on International R&D Investment Statistics (INTERIS) and ISI Database on


International Research and Innovation Activities (ISI-DORIA).

15%

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.

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 intracorporate 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.

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 restructuring 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).

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, MeyerKrahmer, 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.

12

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 laboratories within a firm;
2. the globalisation of cross-functional business processes such as the product generation 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).

13

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).
14

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.

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).

15

Figure 3:

Proportion of Foreign Research and Development in Selected


Enterprises in Western Europe, the USA and Japan

Foreign
R&D
(% of total R&D)

40%
Europe
30%

20%
North America
10%

3 Years Ago
Source:

Japan

Today (Survey 1992)

3 Years From Now

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 ongoing 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
16

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.

17

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


Competence Centers

and

Focusing

on

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
18

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
19

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.

20

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
21

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, innovationenhancing 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.

22

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 corporate
or SBU level)

Less Dynamic,
Slow Innovation
Regime

Dynamic, Fast
Innovation Regime

Coupling of
Lead-Marketing,
R&D and
Innovation

Science and
Research-based
Innovation

Large R&D Base


in Home Country

Important Lead
Market in Home
Country

Small R&D Base


in Home Country

Lead Market
Outside the
Home Country

Generic 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
23

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, lessdeveloped 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 customersupplier-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).

24

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 (CibaGeigy, 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).

25

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


Transnational Innovation

Companies from Large Countries


Strong R&D Base in this particular Field
Dominant R&D Center Concentrated in Home Country
Supplementary R&D Activities
at other Locations

Patterns

of

Companies from Large Countries


Strong R&D and Lead Market
in Home Country
1 or 2 Dominant R&D and Innovation Center(s) in Lead Market(s)
Close Linkage R&D and Product
Units

B
Small
Home
Country
and/or
Critical
Assets in
Foreign
Locations

Dominant

A
Large
Home
Country
and/or
Large Share
of Critical
Assets in
Home
Country

their

Companies from Small Countries


Companies from Large Countries
with Deficiencies in R&D in this
Particular Field
Establishment of Multiple Leading-edge R&D Centers Abroad
Key: Critical Mass of Foreign
R&D Unit / Reverse Technology
Transfer

Science and Research-based


Innovation

Companies from Small Countries


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

Coupling of Lead-Marketing
and Innovation

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
26

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 leadingedge research center with strong ties to the corporate center and centralized decisionmaking 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).

27

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:

Large
Home
Country
and/or
Large Share
of Critical
Assets in
Home
Country

Small
Home
Country
and/or
Critical
Assets in
Foreign
Locations

The Generic Types of Innovation Determine the Choice of the


Appropriate Coordination Mechanism

Leading-edge Research Center


Strong Ties to Corporate Center
Centralized Decision-making in
Home Country
Corporate Technology Platform/
Technology Committees Based in
Home Country
Enhance Research-type Culture
primarily in Home Country

Close Integration R&D and Lead


Marketing in Home Country
Cross-Functional Teams
in Dominant Country
Internal Markets and Contracts
between Units / Functions

(Strategic) Research Projects involving several R&D Laboratories


Inter-/Transdisciplinary Teams
Global Team Management (Crosscultural Integration)
Effective Corporate R&D and
Technology Strategy
Strong Corporate Culture
Globally Integrated Corporate
Technology Portfolio

Establish Effective Business


Unit or Division in Leading
Location in the World
Cross-Functional Integration
within Lead Market
Make sure, Headquarter understands Dynamics of the Business

Science and Research-based


Innovation

28

Coupling of Lead-Marketing
and Innovation

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 centerformation 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.

29

Figure 7: National Innovation Policy in Response to Dominant Types


of Innovation
C

A
Large
Home
Country
and/or
Large Share
of Critical
Assets in
Home
Country

Traditional Type of Innovation


Policy in Large Country (e.g.
U.S.)
Build on Strengths of National
R&D and Innovation System
Support Dynamic National Firms
with strong Home Country Base
Attractive Location for R&D of
Foreign Transnationals

B
Small
Home
Country
and/or
Critical
Assets in
Foreign
Locations

Establish Strengths of National


System of Demand Articulation
Position as World Lead Market
in Several Industries
Global Center of Learning for
National as well as Foreign
Firms

Traditional Type of Innovation


Policy in Small Country (e.g.
Sweden)
Focused Strengths of National
R&D and Innovation System
Support Dynamic National Firms
with strong Foreign Innovation
Activities
Niche Strategy for Attracting
R&D of Foreign Transnationals
Science and Research-based
Innovation

Niche Strategy for National


System of Demand Articulation in
Selected Fields
Support Learning of National
Firms in Foreign Lead Markets
Enhance/Facilitate Reverse
Technology Transfer
Attractive Location for
Concentrating Intellectual Capital
Coupling of Lead-Marketing
and Innovation

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).

30

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.

31

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34

List of Figures and Tables


Figure 1:
Figure 2:
Figure 3:
Figure 4:
Figure 5:
Figure 6:

Table 1:

Our Focus of Research on R&D Globalisation within


Transnational Corporations
R&D Intensity and Proportion of R&D conducted abroad in
the Enterprises Analysed
Proportion of Foreign Research and Development in Selected
Enterprises in Western Europe, the USA and Japan
Four Generic Types of Transnational R&D and Innovation
Types of Companies and their Dominant Patterns of
Transnational Innovation
The Generic Types of Innovation Determine the Choice of the
Appropriate Coordination Mechanism

28

R&D Intensities and the Degree of Internationalisation of R&D


within our Sample

35

4
8
16
23
26

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