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The globalization of innovation: knowledge creation and why it matters for development

Presentation by Rajneesh Narula, University of Reading, 2005

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What: The presentation points out the links between technology, innovation and knowledge creation. It then analyses the process of internationalization of innovation and the reasons for technology transfer - both between countries and among companies. It outlines the political, economic and technological factors, which influence the globalization of innovation and knowledge. Who: A very good presentation that can be used by a lecturer on a course on globalization of innovation. How: For a course on R&D and knowledge creation.

The globalisation of innovation:
knowledge creation and why it


matters for development


Rajneesh Narula
Professor of International Business Regulation




Innovation and technology
innovation: changes in the knowledge, ability and
techniques required to produce goods and services of
higher or better quality per unit price,


technology represents the cumulative stock of these
innovations Technology includes all activities that provide assets


with which an economic unit can generate product or services.
Technology: both tacit and codifiable


Knowledge creation is a much larger and more systemic phenomenon,
although formal facilities account for a large percentage of output.




Knowledge creation
Formal R&D is just one aspect
TNC R&D is a subset (but very important in the
formal aspect), either through alliances or
subsidiaries


knowledge creation concerns both :
the acquisition and development of knowledge
the diffusion and efficient utilization of this knowledge.


TNCs tend to do a lot of asset-exploiting
R&D, rather than asset-augmenting R&D




R&D Expenditure of foreign affiliates
as a % of total R&D expenditures


Canada 34.2
Finland (1999) 14.9
France 16.4
Japan 1.7


Netherlands 21.8
Spain (1999) 32.8
UK (1999) 31.2
US 14.9
Czech Republic (1999) 6.4
Hungary 78.5
India (1994) 1.6
Turkey 10.1





It is not only about TNCs…
R&D needs to be seen as a holistic activity,
involving a large system of players. Innovation


involves complex interactions between a firm and its


environment


Firms – both domestic and TNCs
Non-firms: consisting of public research institutes, universities,


organisations for standards, intellectual property protection, etc
that enables and promotes science and technology development


These interact through institutions: formal and informal rules,
procedures and traditions that determine the interaction of
these groups




Industry
Factors


Competitors


Influence of local
structural features


Professional
& Industrial
bodies


Exhibitions
Conferences


Influence of local
structural features


In-house
R&D


Employees


Informal
networks


FirmsCorporate
Factors


Public sector
Factors


Educational
Sector


Public R&D
Sector


Industrial
Policy agents


Influence of local
structural features


Influence of local
structural features


Business
Factors


Suppliers


Related firms


User groups


Customers




What determines the level of
internationalisation of innovation?


Centripetal forces
Familiarity with domestic environment
Complexities of managing R&D


Centrifugal forces
Need for additional assets not available
locally




Firm-specific forces play a role…..
The need for physical proximity


To production activities
To customers
To inputs
To collaborators
To centres of agglomeration




but …


Firms need assets not available at home
National innovation systems change only very


slowly, and often slower than the rate of
change of technological needs of firms.


Firms need to maintain complex linkages with
external networks of suppliers, collaborators
and customers, not all of whom are located at
home




Stock of
knowledge in
the domestic
non-firm sector


Stock of
knowledge in the
domestic firm
sector


Stock of
knowledge in the
MNE
subsidiaries
sector


Foreign non-
firm
organisations
and
institutions


Governmental
funding
organisations


Universities


Private funding
organisations
(banks, venture
capitalists) may
be foreign owned


Intellectual
property
right regime


Government
funding for
education


Foreign firms/arms-
length purchases of
technology/ parent of
MNE subsidiary


Foreign
knowledge


Domestic
knowledge


Industrial policy
regime, including
competition policy


Supra-national
organisations
(e.g., WTO,
EU, UN)


Domestic


Foreign


Hybrid


Supra-national


Foreign
suppliers/foreign
customers




Paradox of globalisation
On the one hand, Countries remain
sovereign; Knowledge creation remains
concentrated in a few locations and primarily
in the home country of major TNCs.
there remains a high level of inertia in the
location of R&D of firms, and high cost of
learning about a new location and the
opportunities
On the other hand,…firms need access to the
best technologies at the best prices …




Distribution of competences based
on managers' perceptions


Applied sensor technology


System design


Control systems software


Component design


Specialised equipment
testing


Hardware design


Mechanical design of
sensors


Operating systems


PCB manufacture
Component
mounting, casing


PCB
design


Operating systems Display technologies


ALLIANCES


OUTSOURCING IN-HOUSE R&D




The alliance network of Texas
Instruments, micro-electronics




Paradox of globalisation (2) the
fuzziness of boundaries


Countries and TNCs therefore need to seek to
utilise the capabilities of other countries
(whether through immigration, or by
encouraging FDI), and firms may seek to use
other firms’ capabilities (by locating in
proximity to other firms, or by developing
strategic alliances).




How do other firms, non-firms
and countries get involved?


As suppliers, customers and sub-
contractors


Through equity means
Through outsourcing and off-shoring
Through non-equity alliances
through research consortia
Through universities




The opportunities are limited,
and take time to develop..


Developing a tradition of knowledge creation
and diffusion takes decades to
build…especially human capital
First learn to absorb, then to create.
The conditions for increased FDI flows are
the conditions for increased TNC R&D


TNCs need access to local (cheaper)
alternatives, and can act as ‘seeds’


Promote local capabilities in areas of strength
The need to build stability, trust and
transparent institutions




The multi-technology firm:
Need for complementary
assets


Rising costs/risk of innovation


New technologies


Reduction of coordinating costs,
transferring and acquiring
information


ICTs, transportation, new
materials, etc


Rapid technological
change Shortening of life
cycles, and need to speed
up innovatory process


The spread and intensity of
TNC activity, trade


The interdependence of locations


Blending of cultures


Cross-border migration


Homogeneity of
consumption patterns


GLOBALISATION OUTCOMES


The interdependence of firms


Standardisation


Supra-national
institutions


Liberalisation of
economic systems


Economic
integration


Shifting hegemonies


Shifting political
ideologies


Financial
Liberalisation


Innovation
by TNCs


Technological
factors


Political
economy
factors


Figure 1.1 mapping globalisation




But there are caveats to
this….which may create inertia


Industry-specific effects
Process vs engineering
Mature vs rapidly evolving


Size of firms
Limits on resources


Level of embeddedness
Industrial policy


• techno-nationalism, national champions
• Import-substituting stance
• Specialised resources available for targeted industries




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