Foreign direct investment in industrial research in the pharmaceutical and electronics industries - results from a survey of multinational firms, Walter Kuemmerle, Research Policy 28, 1999.
One way of investigating the globalization of R&D is to analyze streams of foreign direct investment (FDI). Where and why firms do invest in R&D abroad? Kuemmerle's 1999 paper in Research Policy addresses these questions.
Chronology
Kuemmerle researched 32 multinational companies (MNCs) from the United States, Japan, Germany, France, and the Netherlands. In 1965, these firms carried out 6.2% of their R&D abroad (as measured by employment numbers). In 1995, the corresponding figure was 25.8%, a huge increase.
U.S. firms led this wave of international expansion, investing first in Europe, then Japan, and later other countries around the world. Typically, they had set up multiple research centers within the U.S. before expanding abroad.
European firms followed with investments in other European countries, then in the U.S., and finally in Japan. At the time the study was conducted, they had few R&D activities in other parts of the world.
Japanese firms were the last firms studied to extend their R&D activities abroad. Unlike the others, they tended to invest in multiple locations simultaneously.
However, since this paper doesn't include Swedish or Swiss firms, and only 1 Dutch firm, the chronology may be somewhat skewed. Firms from small European countries often set up R&D activities abroad out of necessity, long before their counterparts from larger companies considered a similar move.
Type of R&D conducted abroad
Firms locate their R&D abroad for two reasons:
1. to exploit competitive advantages in new markets (type 1),
2. to augment their competitive advantage and gain new expertise (type 2).
Kuemmerle also discovered that a firm's first R&D venture abroad was often aimed at exploiting its comparative advantage in a new country. This would often involve adapting products and processes to local market conditions. Later, the second type of expansion would occur.
Perhaps it took time for managers to trust the quality of R&D produced abroad, but also to assess the scientific strengths of the labor pool and their potential fit with the firm's overall strategy. It's a bit of a stretch, but this could be considered an example of absorptive capacity at work. Kuemmerle points out that it is easier to set up and manage type 1 facilities, and that the experience gained by establishing a type 1 site is conducive to the better establishment and management of type 2 sites, later.
At the time the study was conducted, only 5 R&D labs were recorded for India and China for all of the 32 firms. Only one very small lab was engaged in augmenting it's parent firm's competitive advantage. Although, I have yet to compile the relevant numbers, it is obvious that the situation has dramatically changed. The number of R&D labs in India and China today is staggering, and many are located so as to exploit expertise that is unavailable (or not available in large enough quantities) at a firm's other locations.
As some of these locations develop reputations as centers of excellence, firms may become willing to engage in type 2 research faster. For example, large industrial and engineering firms locate R&D labs in Bangalore to augment their software capabilities. As one VP of R&D put it, Bangalore is the place to get the best software expertise, so the lab there is expected to make up for the company's current IT disadvantage.
NB: Even in 1999, Kuemmerle noted that the importance of type 2 sites was increasing.
Modes of entry
When firms set up a new R&D lab they can choose between establishing a "green-field" site, acquiring an existing lab or engaging in a joint-venture. Joint-ventures often entail IP problems for the firm. Acquiring an existing lab is difficult because its integration into the firm's culture is tricky: Researchers are often alienated and leave, especially in well-known centres of excellence where their skills are in high demand. Kuemmerle finds that 79% of all sites in his sample were indeed green-field sites.
Locations
The U.S. is the most attractive location for FDI in R&D. It attracted 30% of all sites. In 1999, very few sites were located outside of the U.S., Europe and Japan, and these were restricted to Canada, Australia, a few Asian countries (China, India, Singapore etc.) and Chile.
The study doesn't include R&D sites of MNCs located in emerging economies. I would guess that most would locate a foreign R&D site in the U.S., but am curious to see if there's more data on this.
Monday
Saxenian on Bangalore, 5 years ago
Back to India: Indian software engineers are returning with enthusiasm and etrepreneurial know-how, Saxenian, WSJ January 24, 2000
The Bangalore boom: From brain drain to brain circulation? Saxenian. In Bridging the digital divide: Lessons from India, Kenniston and Kumar (eds.), 2000, National Institute of Advanced Studies, Bangalore.
Bangalore: The Silicon Valley of Asia? Saxenian, Conference on Indian economic prospects: Advancing policy reform, Center for Research on Economic Development and Policy Reform, Stanford, May 2000
In 1999 and 2000 AnnaLee Saxenian wrote a series of papers and articles (1, 2, 3) about Bangalore's prospects of becoming the Asia's "Silicon Valley." She drew heavily on her research of Taiwan and the Hsin-Chu hardware cluster in the analysis. Reading these pieces is an interesting look back in time - and useful for putting the current hype in perspective.
At the time India seemed successful in - but limited to - its role as a source of cheap, reliable and routing software coding. To her surprise, Saxenian found that increasing numbers Indian entrepreneurs in Silicon Valley were starting businesses in Bangalore and elsewhere in India. Given the importance of Taiwanese Silicon Valley entrepreneurs for Hsin-Chu's success, she saw this as a hopeful sign for Bangalore. Returnees were bringing angel/venture capital, business models and knowledge of (U.S.) customers with them, along with a willingness to take risks. The government of Karnataka seemed intent on supporting the growing IT industry. All this contributed to a new-found hope in India's IT potential.
However, there were enormous obstacles still to overcome. The bureaucracy and red tape were overwhelming despite the goverment's efforts to help - or at least stay out of the way. Physical infrastructure remained a huge problem. Many Silicon Valley Indians stayed in Bangalore long enough to set up their companies facilities, but then moved back to the U.S. As a result, there was no group comparable to the 'argonauts' (Taiwanese who shuttled between Hsin-Chu and the Valley several times a month) that Saxenian considered crucial Hsin-Chu's success. In addition, many of these new facilities felt more like Silicon Valley outposts than like Bangalorean service centers; most of the people linking India and Silicon Valley were a part of large, international firms, rather than independent entrepreneurs. This severely limited the potential for knowledge spill-overs, both technical and organizational. In 2000, the software industry was still dominated by the "big three" Indian firms (Infosys, Wipro, TCS) and smaller, specialized firms had yet to develop in significant numbers, heavily skewing the size distribution of firms. So, while the anchor firms (both Indian and foreign) were well-developed, the mix of large and small firms typical of successful clusters hadn't emerged.
In the end, Saxenian felt that the ingredients for Bangalore's success were not yet in place, but that the potential was increasing. It would need to develop quickly since Bangalore was already experiencing wage inflation and could no longer compete solely on cost. Competitive pressures were forcing it to move up the value-chain.
In short, there is a small but growing technical community linking India and Silicon Valley - one that could play an important role in upgrading the Indian software industry in the future.
In Saxenian's opinion, Bangalore's best bet was to focus on the domestic market - as a driver for innovation, entrepreneurship, market scale, and knowledge networks. The industry would thus develop a broader base as various firms specialized in different niches. It would also grow enough to allow more specialization (another important factor in cluster development).
Finally, Saxenian pointed out that IT was a success story that should inspire other industries - it would never be able to serve as India's main development strategy.
Many of these points remain valid today, even though there have been some important changes. The emergence of various speicalized, smaller firms (e.g. in biotech and bio-informatics) has gone some way towards balancing the mix of firm-sizes and introducing variety. Bangalore's success in attracting R&D labs and R&D outsourcing is letting it move up the value chain and increase the scope of technological expertise. The amount of venture capital is also growing rapidly and set to increase even more.
The Bangalore boom: From brain drain to brain circulation? Saxenian. In Bridging the digital divide: Lessons from India, Kenniston and Kumar (eds.), 2000, National Institute of Advanced Studies, Bangalore.
Bangalore: The Silicon Valley of Asia? Saxenian, Conference on Indian economic prospects: Advancing policy reform, Center for Research on Economic Development and Policy Reform, Stanford, May 2000
In 1999 and 2000 AnnaLee Saxenian wrote a series of papers and articles (1, 2, 3) about Bangalore's prospects of becoming the Asia's "Silicon Valley." She drew heavily on her research of Taiwan and the Hsin-Chu hardware cluster in the analysis. Reading these pieces is an interesting look back in time - and useful for putting the current hype in perspective.
At the time India seemed successful in - but limited to - its role as a source of cheap, reliable and routing software coding. To her surprise, Saxenian found that increasing numbers Indian entrepreneurs in Silicon Valley were starting businesses in Bangalore and elsewhere in India. Given the importance of Taiwanese Silicon Valley entrepreneurs for Hsin-Chu's success, she saw this as a hopeful sign for Bangalore. Returnees were bringing angel/venture capital, business models and knowledge of (U.S.) customers with them, along with a willingness to take risks. The government of Karnataka seemed intent on supporting the growing IT industry. All this contributed to a new-found hope in India's IT potential.
However, there were enormous obstacles still to overcome. The bureaucracy and red tape were overwhelming despite the goverment's efforts to help - or at least stay out of the way. Physical infrastructure remained a huge problem. Many Silicon Valley Indians stayed in Bangalore long enough to set up their companies facilities, but then moved back to the U.S. As a result, there was no group comparable to the 'argonauts' (Taiwanese who shuttled between Hsin-Chu and the Valley several times a month) that Saxenian considered crucial Hsin-Chu's success. In addition, many of these new facilities felt more like Silicon Valley outposts than like Bangalorean service centers; most of the people linking India and Silicon Valley were a part of large, international firms, rather than independent entrepreneurs. This severely limited the potential for knowledge spill-overs, both technical and organizational. In 2000, the software industry was still dominated by the "big three" Indian firms (Infosys, Wipro, TCS) and smaller, specialized firms had yet to develop in significant numbers, heavily skewing the size distribution of firms. So, while the anchor firms (both Indian and foreign) were well-developed, the mix of large and small firms typical of successful clusters hadn't emerged.
In the end, Saxenian felt that the ingredients for Bangalore's success were not yet in place, but that the potential was increasing. It would need to develop quickly since Bangalore was already experiencing wage inflation and could no longer compete solely on cost. Competitive pressures were forcing it to move up the value-chain.
In short, there is a small but growing technical community linking India and Silicon Valley - one that could play an important role in upgrading the Indian software industry in the future.
In Saxenian's opinion, Bangalore's best bet was to focus on the domestic market - as a driver for innovation, entrepreneurship, market scale, and knowledge networks. The industry would thus develop a broader base as various firms specialized in different niches. It would also grow enough to allow more specialization (another important factor in cluster development).
Finally, Saxenian pointed out that IT was a success story that should inspire other industries - it would never be able to serve as India's main development strategy.
Many of these points remain valid today, even though there have been some important changes. The emergence of various speicalized, smaller firms (e.g. in biotech and bio-informatics) has gone some way towards balancing the mix of firm-sizes and introducing variety. Bangalore's success in attracting R&D labs and R&D outsourcing is letting it move up the value chain and increase the scope of technological expertise. The amount of venture capital is also growing rapidly and set to increase even more.
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