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The globalisation of R&D: Key features and the role of TNCs

Presentation by Robert Pearce, University of Reading, United Kingdom, 2005

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What: The aim of this paper is to elaborate on relevant aspects of strategic restructuring in TNCs and then provide some detail on how this becomes operational in terms of the increased decentralisation of their R&D programmes. This paper could also provide a basis for discussion of the implications of these more differentiated and dynamic strategic orientations in TNCs for host countries in which they operate, with particular emphasis on countries at early stages of competitiveness development and on economies in transition. The strategic changes in TNCs now involve them with creative resources (R&D; technology stocks; market research; entrepreneurial management) in national economies in a way not envisaged 40 years ago Who: Relevant for anyone teaching or studying strategic changes in TNCs and their R&D programmes. How: Can be used for a lesson/course on the role of TNCs in the globalization of R&D.

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Expert Meeting on the Impact of FDI
on Development Organized


by




















United Nations Conference on
Trade and Development
( 24 - 26 January, 2005 )
























The globalisation of R&D: key features and the role of
TNCs




By


Robert Pearce
University of Reading, United Kingdom




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1. Introduction


A commitment to R&D can be seen as logically central to the dynamic
developmental needs of both transnational corporations (TNCs) and individual
national economies. Early analysis and evaluation of TNCs and foreign direct
investment (FDI) saw the location of R&D as being the developed home countries of
these firms and the internationalisation of their operations as then being based around
processes of outward technology transfer. The immediate developmental implications
of this for less developed host countries were then seen as relating to the quality of
this transferred technology; its appropriateness and the ability of local economies to
assimilate and utilise it effectively. The potential for poorer host countries to escape
from the implications of such a technological dependency would then be limited to
such relatively minor localised adaptations of products and processes as TNCs’
competitive needs impelled them to carry out. Beyond this, such early thinking
argued, the persistence of an R&D/innovation hegemony of a small group of TNC
home countries could impose an inherently undynamic hierarchical stratification on
the global economy (Hymer, 1972).


Perhaps the single most important element in our changing understanding of
the practicalities of TNCs’ strategic behaviour over the past 30 years or so has been
the perception of a breakdown in such an immutable home-country orientation of
creative (competitiveness generating) activity and moves towards globalised
programmes for innovation and R&D. Thus the tendency to see TNCs’ organisational
structures as predominantly hierarchical has been replaced by attempts to analyse
them in terms of heterarchy (Hedlund, 1986; Birkinshaw, 1994) or as dynamic
differentiated networks. This places a decisive emphasis on two factors; TNCs’
responses to heterogeneity in the form of various difference between locations (their
potential and needs) and a dynamic, ever evolving, structure in their global networks
that can alter, quite quickly, how they operate in different countries and regions (from
export processing zones to creative knowledge-based clusters).


The aim of this paper/presentation is to elaborate on relevant aspects of this
strategic restructuring in TNCs (section 2), and then provide some detail on how this
is operationalised in terms of the increased decentralisation of their R&D programmes




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(section 3). The aim of this, though, is to provide a basis for discussion (section 4) of
the implications of these more differentiated and dynamic strategic orientations in
TNCs for host countries in which they operate, with particular emphasis on countries
at early stages of competitiveness development and on economies in transition. The
strategic changes in TNCs now involve them with creative resources (R&D;
technology stocks; market research; entrepreneurial management) in national
economies in a way not envisaged 40 years ago. But in doing this do TNCs
necessarily strengthen these creative attributes of host countries? And, even if they
do, does this mean that these creative attributes necessarily improve the
competitiveness of the local economy and, thereby, provide a basis for sustainable
development? Or can TNCs use the flexibility of their global networks to apply new
technologies and competitive capacities that are generated in one country in supply
operations in another? When TNCs use R&D and other creative inputs in several
locations to support improvements in their global competitiveness are individual
locations that contribute to this fairly rewarded (in terms of improved efficiency and
economic growth)? (Pearce, 2002).


2. Technology/R&D/innovation needs of TNCs


It is useful to characterise the strategic positioning of the contemporary TNC


“as one of seeking to use the increasing freedoms of international transfer, reflecting
the essence of economic globalisation, to leverage the differences between economic
areas” (Pearce, 2005). Three types of diversity or heterogeneity can then be
suggested as relevant to the strategic postures of TNCs today.


Firstly, availabilities of standardised inputs to mature production processes.
Differences in these sources of comparative advantage between countries (or regions)
can determine which TNC goods are produced where, and therefore patterns of intra-
group technology transfer and, possibly, technology adaptation. Secondly,
differences in demand conditions between countries (i.e. market heterogeneity). An
important understanding of the forces of globalisation, that has emerged in recent
years, is that in many industries and product groups this has not led to demand
standardisation but often, instead, to an increased willingness to manifest localised
taste differences. Thus the in-depth research of Bartlett and Ghoshal (1989) showed




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that many successful TNCs benefited from a willingness to respond to local taste
differentiation, rather than seeking to override it (in pursuit, perhaps, of economies of
scale). In fact the ability of TNCs to benefit from acknowledgement of market
heterogeneity can go beyond willingness to differentiate existing product ranges.
Here, especially in industries oriented towards demand-driven innovation processes, it
is the unmet wants of customers that can be crucial when accessed by good quality
market-research. Such ideas for major new products can emerge, unpredictably, at
any time, in any country at almost any level of income.




Thirdly, it may be that one of the crucial forces conditioning the patterns of
development in the era of globalisation has been a systemic deepening of
technological heterogeneity. Thus increasing numbers of countries have sought to
generate the knowledge sources for economic development through commitment of
resources to R&D and support of a distinctive national system of innovation. But
analysis has suggested that an outcome of this is that individual national economies
have become scientifically and technologically stronger in increasingly differentiated
ways. Individual national science-bases have become increasingly specialised,
acquiring international leadership in a small and focused range of scientific
disciplines, whilst accepting a concomitant relative weakness in many others. Forces
of agglomeration, including very notably the R&D and innovation strategies of TNCs
to be discussed here, tend to reinforce these patterns of technological and research
heterogeneity across the evolving global economy.


Against this background the modern TNC feels, with increasing intensity, two
basic competitive pressures. Firstly, the tactical need to supply its established product
range in the most cost-effective and market-responsive way possible. Secondly, a
complementary need to address forward-looking issues of strategic competitiveness
(Pearce, 1999), in the sense of securing the new sources of firm-level distinctiveness
that can help sustain its position in an inevitably dynamic market environment. We
can then suggest that these needs provide the TNC with three levels of competitive
priority in the areas of technology application and generation, which are increasingly
being pursued through global networks.




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As suggested the immediate short-term priority for TNCs is to achieve the
optimally effective and competitive use of their existing technologies, as embodied in
successful established goods and services. This crucially involves being responsive to
differences in supply conditions in particular locations in the global economy (i.e. the
input heterogeneity noted earlier). Thus the increasing freedom of trade, along with
the adoption of export-oriented development strategies in many of the countries that
were earlier oriented to import substitution has, over perhaps the past four decades,
made it both necessary and feasible for TNCs to implement integrated global-supply
strategies (Papanastassiou and Pearce, 1999; Pearce, 2001) and separate where goods
are produced from where they are sold (generating intra-group trade).


In this process careful categorisation of the different factor needs of different
goods can lead to each being allocated to a supply subsidiary in the location able to
provide the required input mix in the most cost-effective manner. Once a particular
subsidiary has been allocated supply responsibility for a good, in reflection of the host
economy’s input potentials, the TNC will then make available all the technical
specifications (product characteristics, manufacturing process details, etc) needed to
activate its role. Thus the generation of such a supply network in TNCs places a high


priority on effective intra-group mechanisms for technology transfer, assimilation and
adaptation.


Nevertheless, however proficient a TNC may be in securing optimal supply
and maximised profitability from its current products, it will know that this range will
not sustain its competitive position very far into the future. Therefore it must be
continually targeting the medium-term priority of innovation, seeking to add new
technological and/or market insights to existing competences in order to secure very
significant developments to its competitive scope. Some of the most important
insights into the strategic evolution of TNCs in recent years have then related to their
increasing acceptance of the decentralisation of innovation into globalised operations.
Implicit in this is the acceptance of technological and market heterogeneity, indicating
that new scientific or customer-driven initiatives towards significant produce
development can emerge anywhere in a TNC’s global operations.




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Vital to the decentralisation of innovation in TNCs has been the emergence of
a new type of subsidiary, often designated as a product mandate (PM), which acquires
permission from its group parent to take full responsibility for the development of a
new good. To accede effectively to this degree of individualised creativity a PM must
assemble, from strengths available in its host-country economy, a rich range of
functional capabilities. These need to include R&D (to generate, or mediate the
acquisition and application of, new technologies), market research (to detect unmet
market needs and/or to formulate the means of projecting new goods to initial
customers), inventive engineering (to establish a prototype production process) and,
crucially, entrepreneurial subsidiary-level management (to drive the integrated
creative processes and to provide persistent advocation of the subsidiary’s status in
the group network). By allowing such localised initiatives in PMs the modern
heterarchical (Hedlund, 1986) TNC provides itself with a means of tapping into the
globally-dispersed technological and market heterogeneities that drive competitive
progress. Here, by contrast with the cost-based supply subsidiaries, PMs go through a
creative transition (Papanastassiou and Pearce, 1999) such that (rather than being
allocated existing group technology to play an externally-determined role) it is their
own internalised and individualised technology and competences that earn them their
position.




Looking into a longer-term future TNCs should also foresee a need for much
more radical changes in competitive scope, based on much more fundamental
restructuring of the types of services supplied and the technologies used. In
anticipation that such changes are most likely to derive from new science-based
possibilities, and in the hope of securing a highly-profitable leadership advantage in
these discoveries, TNCs may commit resources now to speculative pure-science
research in disciplines considered likely to generate relevant breakthroughs. But to
cover a number of potentially relevant areas of science, bearing in mind the narrow
national specialisms resulting in the technological heterogeneity observed earlier,
ambitious TNCs may need to be involved with basic research programmes in several
countries. Covering this aspect of forward-looking competitiveness may, again,
involve internationalised perspectives.





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3. Global R&D programmes of TNCs
In order to organise an understanding of the complex strategic positioning of
R&D in contemporary TNCs two types of classificatory system have been developed.
Firstly, typologies have been derived (Behrman and Fischer, 1980; von Zedtwitz and
Gassmann, 2002) to distinguish different emphases in overall global R&D
programmes of TNCs. Secondly, typologies (Ronstadt, 1977, Haug, Hood and
Young, 1983; Medcof, 1997) have been generated to distinguish the different roles
played by individual R&D labs in TNC networks. Here we use a particular three-part
typology (Papanastassiou and Pearce, 1999; Pearce, 1999, 2002; Pearce and Singh,
1992; Pearce and Papanastassiou, 1999).


Firstly, support laboratories (SL). These labs support the achievement of the
short-run aims of TNCs by securing the effective transfer and application of the
group’s already successful technologies as embodied in the current product range. As
efficiency-seeking TNCs reconfigure global-supply networks and reallocate
production responsibility for particular goods to new subsidiaries, in potentially
lower-cost locations, SLs facilitate this transfer process by helping these subsidiaries
to assimilate, apply and, where relevant adapt these technologies. This is essentially a
static optimisation role in that its aim is to allow the TNC to make the most effective
use of its current sources of competitiveness and, similarly, secures the greatest value
from the activation of the country’s sources of static comparative advantage (notably
labour). For neither the TNC nor the country does the SL possess any real dynamic
potentials, in the sense of providing additional forward-looking dimensions to their
sources of competitiveness. Nevertheless, by putting into a subsidiary a source of
potential individualisation (albeit only in terms of improving local ability to play a
predetermined role using externally-provided technology) SLs may still suggest a
creative route forward to a more significant deepening of a localised element in the
subsidiary’s competitiveness.


Secondly, the locally integrated laboratory (LIL). Here the lab becomes a key
component of a localised innovation process that is encompassed within a particular
subsidiary of the PM type and, therefore, contributes to the way the TNC is pursuing
its medium-term objective (i.e. of effective product-range renewal). Whether the
innovation is science-driven or demand-driven the assumption is that it will usually




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involve either the initial operationalisation of completely new technologies, derived
from recent scientific breakthroughs, or a substantial reconfiguration of existing ones.
The LIL then plays the role of mediating the application of these technologies in
closely-integrated collaboration with the other key innovation-supporting functions
(marketing, engineering, management). A successful PM/LIL nexus, through its own
distinctive contribution to the TNC’s product range, asserts a powerful middle-level
position in the group; subject to the continued approval of higher-level decision
makers (validating the mandate) but also possessed of scope for dynamic initiative
and capacity to commit resources to speculative creative work.


Though the broad PM/LIL position in TNCs plays a demand-side role (in the
sense of seeking to fill perceived gaps in the group’s current competitive scope) the
location of a particular unit of this type also reflects supply-side influences (in the
sense that its ability to play the role derives from specific creative inputs-personnel,
technologies, etc. – available in its host economy). For the PM/LIL to then contribute
positively to host-country development two conditions ought to be fulfilled. Firstly,
that the local creative inputs co-opted by the TNC are, in the short-run, used more
effectively than they would otherwise have been. Secondly, that the PM/LIL
contributes to further improvements in the capacities and capabilities of these local
resources.




With regard to the former it can be suggested that very often when TNC
PM/LIL operations make use of local skill/technology inputs they combine them with
strong group-level attributes (e.g. established technologies, global market perspectives
and access) to develop strongly original and competitive new goods (beyond the
compass of a purely local enterprise). This then immediately endows the local
economy with a new high-employment export-oriented supply capability. This may
be temporary, however, since, once the product becomes mature and its market more
price-competitive, the TNC may reallocate its production to a lower-cost location.
This emphasis on the dynamic intra-group competition within TNCs then points
toward the second issue. Thus, due to the vulnerability of their dynamic
developmental role, PM/LIL subsidiaries need to be looking towards further
innovation and improving the creative assets at their disposal to do this. This, in turn,
indicates that these TNC operations expect to benefit from progress in the scientific




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and technological capacity of their host-country and, therefore, will provide support
(including R&D collaboration, scientific and other training) for local upgrading in
these areas.




The third lab type is the internationally interdependent laboratory (IIL). In
pursuing the longer-term strategic need of TNCs the IIL is immediately differentiated
from SLs and LILs by having no concern or connection whatsoever with the group’s
currently-operationalised technologies, or with any of its current commercial issues.
Instead an IIL is entirely oriented to pure/basic research in one or more of the
scientific disciplines that are considered likely to provide results that can become part
of the technological inputs to very radical new product breakthroughs (perhaps
reformulating the very nature of the services offered by an industry). Given the
narrow focus of the outstanding areas of research leadership of individual countries
(technological heterogeneity) and the often wide range of disciplines that can
potentially fuel the technological progress of an industrial sector, a TNC seeking
access to top quality investigation in all the relevant areas of science will need to set
up IILs in a quite extensive selection of locations. This leads to a network of IILs,
each of which follows its own distinctive research agenda, reflecting a specialised
area of expertise. But since the expectation is that any new breakthroughs may
ultimately derive from synergistic combinations of results from different parts of the
network, TNCs will propagate interdependencies between IILs. Thus these labs,
whilst focusing on clearly defined research of their own, will also share their new
insights with, and be prepared to ask questions of, other such units.


IILs certainly have the potential to reinforce a country’s developing strength at
the phase of basic research and pure science. They can do this both by providing
extra funding and by adding further dimensions to the research by positioning it in the
wider technological perspectives of the TNC. However, there is no mechanism by
which IILs necessarily strengthen the competitive scope of the host economy. Thus


important results of an IIL feed into the internal technology programmes of parent
TNCs and are likely, therefore, to contribute to competitiveness generation for the
group that need not be activated in the IILs host country (Pearce, 2002).




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4. TNC R&D and national development


From an understanding of how TNCs at a point in time build global
technological and supply strategies around different roles for laboratories and
subsidiaries we can also suggest how this can support processes of economic change
(development or transition) over time. The various roles taken by labs and
subsidiaries reflect different host-country resource potentials, and development (in its
very nature) comprises changes in the resource characteristics of economies. Thus the
form of TNCs’ involvement with economies can change over time in mutually
beneficial and supportive ways.


At the very early stages of a country’s development cost-based TNC
operations (perhaps including an SL) can provide a strong impetus to growth by
drawing unemployed resources (notably labour) into export-oriented industrial
activity. A danger here is that once full-employment is reached labour and other costs
will rise, providing a potential for footloose closure (relocation) of the cost-oriented
TNC subsidiaries. A positive possibility here, however, would be for a subsidiary to
firstly move towards supply of higher-value parts of the TNC product range
(involving inward transfer of more advanced group technologies, again perhaps
mediated by an SL) and eventually accede to PM/LIL status (Pearce 2001). This
option would, clearly, be more viable where, in the manner of the Asian newly
industrialised economies (Lall, 1996), host governments reinvested revenues from
early development in improved training, education (including higher education) and
commitment to scientific research (ultimately the generation of a national system of
innovation). As countries’ sources of growth and competitiveness move towards
science and technology the global R&D and innovation strategies of TNCs have the
potential to become sustainable embedded components of such knowledge-based
development.


Finally, we can note a variant of this scenario that is potentially available to
some of the countries in transition from state-controlled centrally-planned economies
(Manea and Pearce, 2004). Here, during the earlier socialist periods, many of these
countries built up strong science bases and quite well-trained industrial labour forces.
That this had not led to competitive industries, based around local technology and




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creative capacities, reflected a lack of entrepreneurial risk taking in the absence of
market forces. The availability of a stock of creative potentials (technology and
human capital) in important emerging market spaces could lead TNCs to very quickly
adopt the PM/LIL, and even IIL research, in these countries. Here TNC R&D and
innovation could provide a short cut through some stages of industrialisation-oriented
development.




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REFERENCES




Bartlett, C.A. and S. Ghoshal (1989), Managing Across Borders: the Transnational Solution
(London: Hutchinson Business Books).


Behrman, J.N. and W.A. Fischer (1980). Overseas R&D Activities of Transnational
Companies (Cambridge, Mass.: Oelgeschlager, Gunn and Hain).


Birkinshaw, J.M. (1994). “Approaching heterarchy – a review of the literature on
multinational strategy and structure”, Advances in International Comparative
Management, 9, pp. 111-144.


Haug, P., Hood, N. and S. Young (1983). “R&D intensity in the affiliates of US-owned
electronics companies manufacturing in Scotland”, Regional Studies, 17, pp. 383-
392.


Hedlund, G. (1986). “The hypermodern MNC: a heterarchy?”, Human Resource
Management, 25, pp. 9-35.


Hymer, S.H. (1972). “The multinational corporation and the law of uneven development”, in
J.N. Bhagwati, ed, Economics and World Order, From the 1970s to the 1990s,
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Lall, S. (1996). Learning From the Asian Tigers – Studies in Technology and Industrial
Policy, (London: Macmillan).


Manea, J. and R. Pearce (2004), “Industrial restructuring in economies in transition and
TNCs’ investment motivations”, Transnational Corporations, 13(2), pp. 7-27.


Medcof, J.W. (1997), “A taxonomy of internationally dispersed technology units and its
application to management issues”, R&D Management, 27(4), pp. 301-318.


Papanastassiou, M. and R. Pearce (1999), Multinationals, Technology and National
Competitiveness (Cheltenham: Elgar).


Pearce, R. (1999), “Decentralised R&D and strategic competitiveness: globalised approaches
to generation and use of technology in multinational enterprises”, Research Policy,
28(2-3), pp. 157-178.


Pearce, R. (2001), “Multinationals and industrialisation: the bases of inward investment
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Pearce, R. (2002), “National systems of innovation and the international technology strategies
of multinationals”, paper presented at the European International Business Academy
Conference, Athens.


Pearce, R. (2005), “Globalisation and development: an international business strategy
approach”, Transnational Corporations (forthcoming special issue).


Pearce, R. and M. Papanastassiou (1999), “Overseas R&D and the strategic evolution of
MNEs: evidence from laboratories in the UK”, Research Policy, 28(1), pp. 23-41.




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Pearce, R. and S. Singh (1992), Globalising Research and Development, (London:
Macmillan).


Ronstadt, R.C. (1977), Research and Development Abroad by US Multinationals, (New York:
Praeger).


Von Zedtwitz, M. and O. Gassmann (2002), “Market versus technology drive in R&D
internationalisation: four different patterns of managing research and development”,
Research Policy 31, pp. 569-588.





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