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.
Showing posts with label FDI. Show all posts
Showing posts with label FDI. Show all posts
Friday
Knowledge seekers
Knowledge Seeking and Location Choice of Foreign Direct Investment in the United States, Wilbur Chung and Juan Alcacer, 2002
In the latest Knowledge@Wharton newsletter, Wilbur Chung and Juan Alcacer present the hypothesis that foreign direct investment (FDI) is not purely cost or market driven. Companies acquire firms, engage in joint-ventures and set up green fields ventures for access to unique knowledge - not just to cut cost or gain access to markets.
(The academic paper can be found here.)
While such seekers have historically been characterized as technology laggards trying to catch up with market movers, more recently scholars have embraced the idea that leaders, too, invest abroad as they seek to broaden or deepen their knowledge.
The study covers FDI in the United States (by state and by economic region).
Not surprisingly, they found that knowledge seeking is most prevalent among foreign companies in R&D-heavy industries such as pharmaceuticals, semiconductors and electronics. In fact, they found that drug makers are twice as likely to seek knowledge abroad as companies in any other industry.
Where were knowledge seekers most likely to invest? R&D-intensive areas. 'Many investments, 32% of the sample, fall into four major metropolitan areas: New York City, San Francisco, Los Angeles and Chicago,' the researchers write. In contrast, a region of the United States known mostly for agriculture - the Dakotas and Idaho - had no investments during our investigation period.'
It seems obvious that a European biotech company would conduct R&D in the US, that a knowledge seeker in pharmaceuticals would set up shop near Boston, or that a company seeking state-of-the-art IT knowledge might invest in operations in Silicon Valley. But what about the opposite direction? The column mentions GE's new research and development lab for medical systems in China. The lab focuses on product development tailored to emerging economies. Is this a unique example? (GE does seem to be a pioneer as far as spreading R&D globally goes...)
K@W concludes that leading regions in the knowledge industry should be wary about inviting foreign firms and giving them tax-breaks or other incentives.
Traditionally, investments from foreign firms have been celebrated by holding press conferences and ribbon-cutting ceremonies, as South Carolina and Alabama did when they landed BMW and Mercedes. But if Chung is right, these investments may not always be unalloyed victories. 'If many foreign firms enter seeking new knowledge, [productivity] gains may not accrue, and a nation's technological uniqueness might be more quickly replicated,' he and Alcacer point out in their paper. Of course investments from foreign firms may still bring benefits such as more jobs and spin-off economic activity as, for example, suppliers spring up near the foreign firm's new plant.
This sounds much like an absurd reversal of the current outsourcing debate - we don't want our firms to invest abroad because that means we'll lose our jobs (even though our firms will be more competitive), but we don't want foreign firms to invest here because that means we'll lose our competitive knowledge edge (even though we'll get more jobs).
Besides, the argument doesn't hold. Knowledge doesn't diminish by being shared - and if foreign firms invest in US high-tech clusters, this strengthens the competitive advantage of those clusters by increasing their innovative churn. Many of a cluster's advantages (labour pool, social networks, proximity to leading research labs/universities etc.) don't travel well.
To be fair, Chung and Alcacer acknowledge the importance of place in other parts of the discussion, and the 'threat' to American competitiveness is only vaguely alluded to in a generalized statement in their academic paper.
An objection to Chung and Alcacer's research - and to the notion of knowledge seeking via foreign expansion, in general - might be that investing abroad is a costly way to learn. After all, patents and technical manuals are widely published, and newly graduated scientists and engineers are eager for jobs.
But Chung argues that this objection misconstrues the nature of knowledge. 'Knowledge can be broken into a codifiable piece - the stuff you can write down - and a tacit piece,' he explains. ... Consider eating at a restaurant, he says. 'You don't really experience it unless you go there yourself. You can have someone tell you about it. You can order takeout from the restaurant. You can buy the cookbook. But to get the full benefit of the experience, you have to go there.'
Think about it: Which advantage is eroded more easily - an emerging economy's lower labor cost, or the United States' R&D and innovation prowess? (Doubters may want to read Thomas Friedman's recent op-ed.)
By all means, negotiate IPR protections when entering alliances and joint-ventures, but don't get paranoid about foreigners transferring their money and their researchers here.
In the latest Knowledge@Wharton newsletter, Wilbur Chung and Juan Alcacer present the hypothesis that foreign direct investment (FDI) is not purely cost or market driven. Companies acquire firms, engage in joint-ventures and set up green fields ventures for access to unique knowledge - not just to cut cost or gain access to markets.
(The academic paper can be found here.)
While such seekers have historically been characterized as technology laggards trying to catch up with market movers, more recently scholars have embraced the idea that leaders, too, invest abroad as they seek to broaden or deepen their knowledge.
The study covers FDI in the United States (by state and by economic region).
Not surprisingly, they found that knowledge seeking is most prevalent among foreign companies in R&D-heavy industries such as pharmaceuticals, semiconductors and electronics. In fact, they found that drug makers are twice as likely to seek knowledge abroad as companies in any other industry.
Where were knowledge seekers most likely to invest? R&D-intensive areas. 'Many investments, 32% of the sample, fall into four major metropolitan areas: New York City, San Francisco, Los Angeles and Chicago,' the researchers write. In contrast, a region of the United States known mostly for agriculture - the Dakotas and Idaho - had no investments during our investigation period.'
It seems obvious that a European biotech company would conduct R&D in the US, that a knowledge seeker in pharmaceuticals would set up shop near Boston, or that a company seeking state-of-the-art IT knowledge might invest in operations in Silicon Valley. But what about the opposite direction? The column mentions GE's new research and development lab for medical systems in China. The lab focuses on product development tailored to emerging economies. Is this a unique example? (GE does seem to be a pioneer as far as spreading R&D globally goes...)
K@W concludes that leading regions in the knowledge industry should be wary about inviting foreign firms and giving them tax-breaks or other incentives.
Traditionally, investments from foreign firms have been celebrated by holding press conferences and ribbon-cutting ceremonies, as South Carolina and Alabama did when they landed BMW and Mercedes. But if Chung is right, these investments may not always be unalloyed victories. 'If many foreign firms enter seeking new knowledge, [productivity] gains may not accrue, and a nation's technological uniqueness might be more quickly replicated,' he and Alcacer point out in their paper. Of course investments from foreign firms may still bring benefits such as more jobs and spin-off economic activity as, for example, suppliers spring up near the foreign firm's new plant.
This sounds much like an absurd reversal of the current outsourcing debate - we don't want our firms to invest abroad because that means we'll lose our jobs (even though our firms will be more competitive), but we don't want foreign firms to invest here because that means we'll lose our competitive knowledge edge (even though we'll get more jobs).
Besides, the argument doesn't hold. Knowledge doesn't diminish by being shared - and if foreign firms invest in US high-tech clusters, this strengthens the competitive advantage of those clusters by increasing their innovative churn. Many of a cluster's advantages (labour pool, social networks, proximity to leading research labs/universities etc.) don't travel well.
To be fair, Chung and Alcacer acknowledge the importance of place in other parts of the discussion, and the 'threat' to American competitiveness is only vaguely alluded to in a generalized statement in their academic paper.
An objection to Chung and Alcacer's research - and to the notion of knowledge seeking via foreign expansion, in general - might be that investing abroad is a costly way to learn. After all, patents and technical manuals are widely published, and newly graduated scientists and engineers are eager for jobs.
But Chung argues that this objection misconstrues the nature of knowledge. 'Knowledge can be broken into a codifiable piece - the stuff you can write down - and a tacit piece,' he explains. ... Consider eating at a restaurant, he says. 'You don't really experience it unless you go there yourself. You can have someone tell you about it. You can order takeout from the restaurant. You can buy the cookbook. But to get the full benefit of the experience, you have to go there.'
Think about it: Which advantage is eroded more easily - an emerging economy's lower labor cost, or the United States' R&D and innovation prowess? (Doubters may want to read Thomas Friedman's recent op-ed.)
By all means, negotiate IPR protections when entering alliances and joint-ventures, but don't get paranoid about foreigners transferring their money and their researchers here.
Tuesday
R&D in Brazil
This week, the Knowledge Economy team of the Development Gateway is focusing on Brazil as a potential tech and innovation powerhouse.
Brazil has over the past years been receiving increasing public and private investments aimed at boosting and expanding innovative activities in the country.
Brazil is the largest recipient of foreign direct investment (FDI) in Latin America, and Brazilian entrepreneurs point to FDI as a major source of new technology transfer and to the licensing of foreign technology as a major form of acquiring new technology.
When it comes to the internal capacity to absorb and create new technologies, -while Brazil has been broadening access to education at all levels-, the Brazil Competitiveness meeting hosted by the World Economic Forum in June this year pointed out that only a relatively small number of high-tech professionals are graduating. The Forum recommended that Brazil increase the number of graduating professionals and improve education, primarily by increasing specialization in fields related to the more competitive industries of the country. The Forum also pointed out other weaknesses of Brazil's innovation system, among them insufficient linkages between universities and other actors.
This again points to the importance of building local absorptive capacity rather than relying too heavily on foreign direct investment. (See also a Foreign Policy article, which Reuben pointed out.)
I recently read an article describing the Xylella fastidiosa Genome Project. The Brazilian scientists in the project made use of Europe's distributed team organization for sequencing the genome and adapted it to their own conditions - thereby greatly improving on the European model in the author's opinion. Spreading the research across numerous labs (34 sequencing labs, 1 bioinformatics lab and collaboration with 2 European labs) also helped to train more scientist in biotechnology, and to create a better base/more absorptive capacity for future research projects and the biotech industry. The choice of the organism to sequence was also significant - a citrus pathogen, which is of great interest to academics and agribusiness.
At the time, the project created quite a stir: Brazil was the first developing country to join genome sequencing as a serious player; theirs was the first plant genome to be sequenced. From EMBnet news (April 2000):
In two years, Brazil (or at least São Paulo state) has gone from essentially nothing to being one of the larger producers of sequence data in the world. It has done so not by investing massively in a large sequencing facility, but by bringing together a large number of individual labs, many of which are already using these new data and know-how in their own research. In this way, the genome projects have already had a major impact on Brazilian science.
The world has not really taken notice yet, but I would bet that within another year or two ONSA and the HCGP will have achieved the same recognition as TIGR and CGAP. Bioinformaticians and genome scientists take note!
Brazil has over the past years been receiving increasing public and private investments aimed at boosting and expanding innovative activities in the country.
Brazil is the largest recipient of foreign direct investment (FDI) in Latin America, and Brazilian entrepreneurs point to FDI as a major source of new technology transfer and to the licensing of foreign technology as a major form of acquiring new technology.
When it comes to the internal capacity to absorb and create new technologies, -while Brazil has been broadening access to education at all levels-, the Brazil Competitiveness meeting hosted by the World Economic Forum in June this year pointed out that only a relatively small number of high-tech professionals are graduating. The Forum recommended that Brazil increase the number of graduating professionals and improve education, primarily by increasing specialization in fields related to the more competitive industries of the country. The Forum also pointed out other weaknesses of Brazil's innovation system, among them insufficient linkages between universities and other actors.
This again points to the importance of building local absorptive capacity rather than relying too heavily on foreign direct investment. (See also a Foreign Policy article, which Reuben pointed out.)
I recently read an article describing the Xylella fastidiosa Genome Project. The Brazilian scientists in the project made use of Europe's distributed team organization for sequencing the genome and adapted it to their own conditions - thereby greatly improving on the European model in the author's opinion. Spreading the research across numerous labs (34 sequencing labs, 1 bioinformatics lab and collaboration with 2 European labs) also helped to train more scientist in biotechnology, and to create a better base/more absorptive capacity for future research projects and the biotech industry. The choice of the organism to sequence was also significant - a citrus pathogen, which is of great interest to academics and agribusiness.
At the time, the project created quite a stir: Brazil was the first developing country to join genome sequencing as a serious player; theirs was the first plant genome to be sequenced. From EMBnet news (April 2000):
In two years, Brazil (or at least São Paulo state) has gone from essentially nothing to being one of the larger producers of sequence data in the world. It has done so not by investing massively in a large sequencing facility, but by bringing together a large number of individual labs, many of which are already using these new data and know-how in their own research. In this way, the genome projects have already had a major impact on Brazilian science.
The world has not really taken notice yet, but I would bet that within another year or two ONSA and the HCGP will have achieved the same recognition as TIGR and CGAP. Bioinformaticians and genome scientists take note!
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