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What: This publication aims to elaborate key issues related to the trends towards globalization of research and development and their implications for developing countries: What is its development potential? How can the establishment of research and development abroad affect the transfer of technology – one of the main potential benefits from foreign direct investment? What types of research and development are the most desirable for development? What benefits and costs are involved and, how can policies in home and host countries influence the allocation of such activities and their economic impact?

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT









GLOBALIZATION OF R&D AND
DEVELOPING COUNTRIES





Proceedings of the Expert Meeting


Geneva
24-26 January 2005















UNITED NATIONS
New York and Geneva, 2005




Globalization of R&D and Developing Countries




ii


NOTE

As the focal point in the United Nations system for investment and
technology, and building on 30 years of experience in these areas,
UNCTAD, through its Division on Investment, Technology and
Enterprise Development (DITE), promotes the understanding of,
and helps build consensus on, matters related to foreign direct
investment, transfer of technology and development. DITE also
assists developing countries to attract and benefit from FDI and in
building their productive capacities and international
competitiveness. The emphasis is on an integrated policy approach
to investment, technological capacity building and enterprise
development.

The term “country” as used in this publication also refers, as
appropriate, to territories or areas; the designations employed and
the presentation of the material do not imply the expression of any
opinion whatsoever on the part of the Secretariat of the United
Nations concerning the legal status of any country, territory, city or
area or of its authorities, or concerning the delimitation of its
frontiers or boundaries. In addition, the designations of country
groups are intended solely for statistical or analytical convenience
and do not necessarily express a judgement about the stage of
development reached by a particular country or area in the
development process. The reference to a company and its activities
should not be construed as an endorsement by UNCTAD of the
company or its activities.

The following symbols are applicable to tables:

• Two dots (.) indicate that data are not available or are not


separately reported. Rows in tables have been omitted in those
cases where no data are available for any of the elements in the
row;


• A dash (-) indicates that the item is equal to zero or its value is
negligible;


• A blank in a table indicates that the item is not applicable,
unless otherwise indicated;









iii


• A slash (/) between dates representing years, e.g., 1994/95,
indicates a financial year;


• Use of a hyphen (-) between dates representing years, e.g.,
1994-1995, signifies the full period involved, including the
beginning and end years;


• Reference to “dollars” ($) means United States dollars, unless
otherwise indicated;


• Annual rates of growth or change, unless otherwise stated, refer
to annual compound rates;


• Details and percentages in tables do not necessarily add to totals
because of rounding.



The material contained in this study may be freely quoted with
appropriate acknowledgement.

The photographs on the cover page are courtesy of Gunter Fischer.





UNCTAD/ITE/IIA/2005/6


UNITED NATIONS PUBLICATION


Sales No. E.06.II.D.2
ISBN 92-1-112694-0



Copyright © United Nations, 2005


All rights reserved
Printed in Switzerland





Globalization of R&D and Developing Countries




iv


ACKNOWLEDGEMENT


This publication was edited by Kálmán Kalotay,
Thomas Pollan and Torbjörn Fredriksson, under the
supervision of Anne Miroux. It was copy edited by Trevor
Griffiths. Desktop publishing was done by Teresita Ventura.
The cover page was designed by Diego Oyarzun-Reyes.



The secretariat is grateful to the authors of the papers


included in this volume, which were presented at the Expert
Meeting on "The Impact of FDI on Development", that was
held in Geneva from 24 to 26 January 2005 and dealt with the
globalization of research and development and its
implications for development. These issues are expected to
remain for a long time at the heart of policy debate on
technological development in developing countries. It is
hoped that this volume will contribute to that debate in a
timely manner. With the exception of the Overview, which
was prepared by the UNCTAD Secretariat, the views and the
opinions expressed are those of the authors and not of the
United Nations.









v


CONTENTS

Acknowledgements ...................................................................iv

Preface......................................................................................vii

An overview of the issues ..........................................................1
UNCTAD secretariat


Part I. The globalization of R&D

The globalization of R&D: key features and
the role of TNCs .......................................................................29
Robert Pearce

Knowledge creation and why it matters for
development: the role of TNCs ................................................43
Rajneesh Narula

The complexity and internationalization of
innovation: the root causes .......................................................61
Dieter Ernst

R&D-related FDI in developing countries:
implications for host countries .................................................89
Prasada Reddy


Part II. Case studies

Features and impacts of the internationalization
of R&D by transnational corporations: China’s case .............109
Zhou Yuan

International R&D strategies of TNCs from
developing countries: the case of China.................................117
Maximilian von Zedtwitz




Globalization of R&D and Developing Countries




vi



Technological learning, R&D and foreign
affiliates in Brazil ..................................................................141
Ionara Costa

Globalization of R&D and economic development:
policy lessons from Estonia ...................................................155
Marek Tiits, Rainer Kattel and Tarmo Kalvet


Part III. Policy issues

Linking national science, technology and
innovation policies with FDI policies ....................................175
Thomas Andersson

FDI, R&D and technology transfer in Africa:
an overview of policies and practices.....................................193
John Mugabe


Part IV. Comments

FDI and the strengthening of the science and technology
capacities in Cameroon ..........................................................199
Efa Fouda

FDI and R&D: Sri Lanka’s experience ..................................203
Dilip S. Samarasinghe



* * * * * *



Summary of the Expert Meeting ............................................209

Contributors ..................................................................... 221

Selected UNCTAD publications on TNCs and FDI...............223

Questionnaire..........................................................................233







PREFACE



Reflecting a broader trend towards the offshoring of


services, a number of developing countries are attracting
foreign direct investment in research and development.
Transnational corporations, including the ones headquartered in
developing countries, are selecting developing countries as
locations for such activities. With the offshoring of research and
development, firms aim to access the skills of new locations,
adapting products to local markets and reducing their costs, in
response to competitive pressures, technological changes and a
more liberal trade and investment environment. In particular,
information and communication technologies have had a
profound effect on the way economic activities, including
research and development, are organized, enabling firms to
allocate tasks on a global scale through intra-firm information
networks. At the same time, keeping up with new developments
in information and communication technologies is a major
challenge for developing countries wishing to accelerate their
economic development. How important is this relatively recent
phenomenon? Is it set to continue?



This publication aims to elaborate key issues related to


the trends towards globalization of research and development
and their implications for developing countries: What is its
development potential? How can the establishment of research
and development abroad affect the transfer of technology – one
of the main potential benefits from foreign direct investment?
What types of research and development are the most desirable
for development? What benefits and costs are involved and,
how can policies in home and host countries influence the
allocation of such activities and their economic impact?





Globalization of R&D and Developing Countries




viii


These questions were elaborated at the Expert Meeting
on FDI in R&D held in January 2005. This volume contains
written submissions presented by scholars and experts at the
Expert Meeting. The overview chapter is based on a note
prepared by the UNCTAD secretariat for the meeting. The
Chairperson’s summary of the discussion at the Expert Meeting
is also included, reflecting the diversified views expressed by
scholars and experts from governments. The issues addressed,
to mention a few, included the use of foreign direct investment
versus contractual channels in acquiring innovative capacities in
developing countries, the potential links of transnational
corporations’ research and development activities with the local
innovation systems of host countries, the likelihood of research
and development activities spreading to new developing
locations and, the kinds of host country policies that can
facilitate the diffusion of technologies from foreign affiliates’
activities to the local economy.



UNCTAD’s analysis of transnational corporations’


research and development activities in developing countries
benefited largely from the insights gained at the expert meeting.
The continuation and deepening of that analysis resulted in the
publication, in September 2005, of the World Investment Report
2005: Transnational Corporations and the Internationalization
of R&D (WIR05; UNCTAD 2005). The readers of this volume
may find in WIR05 a rich body of additional first-hand
information on trends in research and development, its
development impact and policy implications. Furthermore,
readers familiar with the WIR05 will also find interesting expert
opinions and additional case studies.





An overview of the issues1


UNCTAD secretariat


For decades, technological change and innovation,
driven by research and development (R&D; for a definition, see
box 1), have been the most important sources of productivity
growth and increased welfare (Edquist 2000). As a result, there
is a high correlation between those countries that have shown
significant economic improvement in the past and those
countries that have made substantial investment in R&D. For
that reason, it is imperative for developing countries, including
least developed countries (LDCs), to build R&D capacities,
without which they are likely to miss opportunities to upgrade
their technologies, move up the development ladder and, catch
up with developed countries.2





Box 1. Definition of R&D



Research and development (R&D) consists of four types of activities:
basic and applied research, and product and process development.
Basic research is original experimental work without a specific
commercial aim, frequently done by universities. Applied research is
original experimental work with a specific aim. Product development
is the improvement and extension of existing products. Process
development is the creation of new or improved processes.

Source: UNCTAD.





1 This overview is based on the note by the UNCTAD secretariat


on “The impact of FDI on development: globalization of R&D by
transnational corporations and implications for developing countries”
(TD/B/COM.2/EM.16/2), prepared for the UNCTAD Expert Meeting
on FDI in R&D.


2 Many of the challenges that countries in transition face in R&D
are similar to those of developing countries. However, this overview
will not discuss in detail the specific situation of countries in
transition.




Globalization of R&D and Developing Countries




2


Since transnational corporations (TNCs) are playing a
major role in global R&D, it is timely to look at the
opportunities and risks that such a process creates for
developing countries. In addition to being a source of finance
for R&D, TNCs could also help developing countries to build
up their R&D commercialization systems by facilitating their
access to global supply and distribution chains and external
markets. Thus, FDI can serve as a “vehicle for carrying tacit
knowledge as well as assisting enterprises at the frontiers of
world technological learning” (Liu and Wang 2003: 945).



In certain cases, technology transfer requires the


presence of TNCs or their affiliates. Even if technologies are
imported, a certain amount of R&D capacity may be necessary
in the host economy for absorbing them, adapting them to local
conditions and applying them to alternative uses. Moreover,
entry barriers to emerging industries, in terms of capital
requirements and industrial experience, are low in the initial
stages. It is then easier for developing countries to enter and
build competitive strength as the technology evolves (e.g.
biotechnology). Once an industry reaches consolidation, entry
barriers rise (e.g. semiconductors), and developing countries get
confined to lower-value-added activities. Another reason why
developing countries are paying more attention to this area is
that their own firms are also undertaking R&D-related FDI in
both developed and developing countries in their quest to
acquire and develop R&D capacities. This further underlines
the importance of exploring the globalization of R&D and its
implications for developing countries.



The participation of developing countries in the


globalization of R&D has so far been uneven. On the one hand,
some developing countries with robust infrastructures, highly
trained workforces, reasonable intellectual property protection
and appealing domestic markets – especially in Asia and the
Pacific – have attracted significant FDI in R&D (UNCTAD
2005, Pearce 1999). These developing countries have benefited




Overview




3


from the opportunities provided by the increasing demand of
TNCs for inexpensive talent and for new developing markets.
Their policies have focused on measures to maximize the
degree of technology spillovers from FDI and, to enhance their
absorptive capacity by encouraging local firms to engage in
R&D. On the other hand, many other developing countries have
fared moderately in growth and welfare creation because their
R&D efforts have remained underfunded and delinked from the
private sector.



1. Emerging patterns and drivers of the globalization of


R&D

a. Trends in R&D by transnational corporations


FDI and technology transfer are increasingly
interlinked. TNCs are responsible for a large share of global
R&D activities. In 2002, the largest 700 firms worldwide in this
area spent $311 billion on R&D (according to data available
from the United Kingdom’s Department of Trade and Industry).
Moreover, in the current global environment characterized by
rapidly changing technologies and shorter product life cycles,
TNCs are offshoring (box 2) more and more R&D in different
parts of the world (Cantwell and Janne 1999) through both FDI
and technology alliances (non-equity mode).3 This pattern of
locating R&D differs radically from that of the past (the 1950s
and 1960s)4



and challenges the traditional view that R&D


activities by TNCs are undertaken mainly at home. While in
itself the expansion of R&D beyond the borders of home
countries of TNCs is not a new phenomenon,5 the scale of


3 Such R&D activities can be part of the manufacturing units or
independent R&D laboratories.


4 During that period, TNCs derived competitive advantages,
particularly technological knowledge, from their distinctive domestic
environments, which led to the exploitation of this advantage abroad
through exports and outward FDI (Hymer 1960; Vernon 1966).


5 It has been well documented in developed countries in a number
of studies (Brash 1966 for Australia; Safarian 1966 for Canada;




Globalization of R&D and Developing Countries




4


offshoring is rising and its geographical reach is spreading to
developing countries. The spread of R&D-related FDI to new
host countries is part of the broader phenomenon of offshoring
services, which is a still relatively new but rising trend (box 2).
Within the range of offshored services, R&D represents the
higher end of the value-added spectrum.


Box 2. Definition of offshoring and outsourcing

Offshoring is defined as the location or transfer of activities abroad. It
can be done internally by moving services from a parent company to
its foreign affiliates (sometimes referred to as “captive offshoring”,
involving FDI, in differentiation from offshoring to third parties). It is
different from the concept of outsourcing, which always involves a
third party, but not necessarily a transfer abroad. Offshoring and
outsourcing overlap only when the activities in question are
outsourced internationally to third-party services providers as shown
in the table below.


Offshoring and outsourcing R&D: definitions


Location of
R&D Internalized


Externalized
(“Outsourcing”)


Home
country


R&D kept in-house at
home


R&D outsourced to
third party provider at
home


Foreign
country
(“offshoring”)


R&D by a foreign
affiliate of the same
TNC, called “captive
offshoring”


R&D outsourced to a
third-party provider
abroad:
To a local company
To a foreign affiliate
of another TNC


Source: UNCTAD, adapted from UNCTAD 2004b: 148.




Stubenitsky 1970 for the Netherlands; Ronstadt 1977 for the United
States; Behrman and Fischer 1980 for United States-based and
European TNCs; Zander 1994 for Swedish TNCs; Kuemmerle 1999
for various developed countries).




Overview




5


The offshoring of R&D in developing-country locations
has involved internationally known TNCs such as Ericsson, GE,
IBM, Intel, Microsoft, Motorola, Nokia, Oracle, Texas
Instruments and SAP.6 Data on the activities of the affiliates of
TNCs from the Triad (the United States, Japan and the
European Union) confirm the rise of corporate R&D in
developing countries, although at different speeds. Between
1989 and 1999, R&D performed by all foreign affiliates of
United States TNCs in developing countries increased nine
times, to $2.4 billion, as compared to a three-fold increase
worldwide, to $18 billion in 1999.7 In developing Asia, there
was an 18-fold leap forward to $1.4 billion in 1999.8 Over the
same period (1989–1999), R&D expenditures by Japanese
foreign affiliates rose even more rapidly (eight times) than those
by United States affiliates, and offshoring of R&D by Japanese
TNCs to developing countries grew faster (10 times) than their
R&D expenditures worldwide. The offshoring of R&D by
European TNCs, especially to developing countries, is still in a
nascent stage (Cantwell and Janne, 2000). For example, the
outward FDI stock of Germany in R&D amounted to only $970
million at the end of 2002, although this was up from its 1995
level ($43 million).9 The industry and geographical composition
of such R&D is fairly conservative: 97% is spent in
manufacturing, and more than 90% takes place in the United
States and Europe.



6 For example, in 2004 Intel employed some 1,500 information


technology (IT) professionals in India, and Motorola operated one of
the largest foreign-owned R&D institutes in China, employing almost
2,000 people.


7 According to data from the United States Department of
Commerce, Bureau of Economic Analysis.


8 Despite the fact that those statistics may underestimate the role
of such locations as India, for which only $20 million, or 0.1% of
outward FDI, is reported.


9 According to unpublished data of the Deutsche Bundesbank.




Globalization of R&D and Developing Countries




6


Reflecting the increased internationalization of R&D,
foreign affiliates are assuming more important roles in many
host countries’ R&D activities. Between 1993 and 2002 the
R&D expenditure of foreign affiliates worldwide climbed from
an estimated $30 billion to $67 billion (or from 10% to 16% of
global business R&D; UNCTAD 2005: 125). Whereas the rise
was relatively modest in developed host countries, it was quite
significant in developing countries: the share of foreign
affiliates in business R&D in the developing world increased
from 2% to 18% between 1996 and 2002. The share of R&D by
foreign affiliates in different countries varies considerably. In
2003 foreign affiliates accounted for more than half of all
business R&D in Ireland, Hungary and Singapore and about
40% in Australia, Brazil, the Czech Republic, Sweden and the
United Kingdom. Conversely, it remained under 10% in Chile,
Greece, India, Japan and the Republic of Korea (idem).



Data on the geographical distribution of foreign


affiliates engaged in R&D worldwide (table 1) also point to the
growing importance of developing economies. In 2004, of the
more than 2,500 affiliates registered in the Who Owns Whom
database of Dun and Bradstreet, more than 10% were located in
developing countries, with developing Asia alone accounting
for more than 8%.10






Recent data on greenfield R&D projects initiated
worldwide also indicate a rise of developing destinations and
service-related R&D (OCO Consulting, LOCOmonitor
database). Of the more than 1,000 FDI projects in R&D
worldwide for which information has been collected for the
period August 2002–July 2004, the majority (739) were located
in developing countries or economies in transition. Developing
Asia and the Pacific alone accounted for more than half of the


10 Furthermore, there are indications that this sample survey
underestimates the role of certain Asian locations such as India or the
Republic of Korea because of, among other reasons, a classification
problem of software development.




Overview




7


world total (563 projects). These data also suggest that the
majority of the new jobs created in greenfield R&D projects
also went to developing countries, mostly to India and China
nd, to information and communication technologies (ICT). a


Table 1. Geographical distribution of R&D foreign
affiliates,a 2004


(Number of affiliates)


Region/economy Number
Total world 2 584
Developed countries 2 185
of which Western Europe 1 387
United States 552
Japan 29
Developing countries 264
of which Africa 4
Latin America and the Caribbean 40
Asia 216
South, East and South-East Asia 207


Source: UNCTAD, based on the Who Owns Whom database (Dun and
Bradstreet).
a
On the basis of 2,284 majority-owned foreign affiliates identified in the


above database that are engaged in commercial, physical and educational
research (SIC code 8731), commercial economics and biological research
(SIC code 8732), non-commercial research (SIC code 8733) and testing
laboratories (SIC code 8734).


However, FDI data are imperfect indicators of the R&D
activities of TNCs abroad. Indeed, firms also often use non-FDI
forms such as technology alliances, R&D joint ventures, R&D
consortiums and university-industry linkages to access strategic
knowledge abroad (UNCTAD 2000). These forms of
cooperation can be equity- or non-equity based; in most cases
they fall outside the scope of the definition of FDI. As part of
their alliances, TNCs are outsourcing some technology
development activities to firms and research institutes
worldwide, including those located in developing countries.



While R&D by TNCs in the developing world is


concentrated in a handful of key host economies such as Brazil,




Globalization of R&D and Developing Countries




8


China, Hong Kong (China), India, Mexico, Singapore and
South Africa, other countries have also started appearing on the
radar screen of TNCs. For example, in 2003 Toyota Motor
Corporation (Japan) expanded its R&D activities to Thailand;
Monterey Design Systems (United States, software) chose
Armenia for a new R&D centre; the IT company SAA
Technology (United Kingdom) established an Enterprise
Development Centre in Nigeria; and Honda Motor Co. (Japan)
set up a new R&D unit in Viet Nam to enhance local
motorcycle development and sales.11



TNCs also target with their


agricultural R&D activities some developing countries that are
otherwise less prominent on the global R&D scene. This is the
case of Kenya, for instance (box 3).



The trend towards the internationalization of R&D


activities by TNCs, with particularly fast expansion in
developing countries, has been illustrated in a recent survey, in
which 70% of the respondents stated that they already had R&D
staff abroad and 22% reported conducting some applied
research in overseas developing markets. More than half of the
respondents were planning to increase their overseas R&D
investment (EIU 2004). The top 10 destinations included China
(in first position), India (third) and Brazil (sixth). The next 10
on the list included three developing economies: Hong Kong
(China) (thirteenth), Mexico and Singapore (sharing fourteenth
place).



Recently, a growing number of developing-country


TNCs have established R&D activities abroad. While some of
them have targeted the knowledge base of developed countries
such as the United States, an increasing number have also
located their foreign R&D activities in other developing
countries. A number of firms from the Republic of Korea,
Malaysia, Singapore and Thailand have invested in R&D
activities in India, particularly in software-related R&D (Reddy



11 www.ipaworld.com.




Overview




9


2000: 97–103). More recently (in 2003), firms from India,
Indonesia and the Republic of Korea for instance, have invested
or announced plans to invest also in locations such as Abu
Dhabi, China and Singapore.12





Box 3. R&D by TNCs in Kenya’s agriculture



In general, Kenya is not a major player in global R&D. In agriculture,
which generates a large share of its export earnings, R&D
expenditures represented only slightly more than 1% of the
developing countries’ total in 2000.a Moreover, the private sector
made up only 3% of Kenya’s total agricultural R&D expenditure in
the same year.a

However, there are several agricultural/horticultural or related firms,
including TNCs, conducting some form of R&D in Kenya. The known
cases of R&D by TNCs in Kenya have followed different strategies.
Some TNCs have decided to conduct in-house R&D. Examples
include De Ruiter’s, Regina Seeds, Fourteen Flowers (Netherlands),
Del Monte (United States) and Kordes & Söhne (Germany). Other
TNCs, such as East African Breweries (United Kingdom), Monsanto
(United States) and Syngenta (Switzerland), have opted for
collaborative arrangements with local and foreign partners. The
Kenyan Agricultural Research Institute (KARI) carries out research on
barley on behalf of East Africa Breweries and works for Syngenta to
develop insect-resistant maize for Africa. Monsanto’s involvement in
Kenyan R&D is more indirect, as its project, originally initiated in
direct collaboration with KARI and the International Service for the
Acquisition of Agri-tech Applications (ISAAA), has been transferred
to its United States non-profit partner Donald Danforth Plant Science
Center.b






Sources: UNCTAD, CGIAR, ASTI Database (www.asti.cgiar.org/
expenditures.cfm) and Beintema and Pardey (2001).
a The share of private firms in Kenyan agricultural R&D may be higher,
because the original sample was based on information available on three firms
only.
b The non-profit Donald Danforth Plant Science Center is a partnership
organization of the Monsanto Company and various United States-based
academic research institutions.



12 See www.ipaworld.com.




Globalization of R&D and Developing Countries




10



b. The drivers


The rise of corporate R&D abroad and the growing
importance of some developing economies as locations for
R&D-related FDI reflect the combined impact of the global
economic environment (global competition), technological
progress and improved policy environments.



In the global economic environment, a number of


important changes have taken place. First, the technology
intensity of products and services has increased significantly,
making technology a key factor of competitiveness. Second, the
complexities of global competition have increased with the
advent of new, more differentiated products and producers,
resulting in a need for faster innovation. Third, at a time when
the technology intensity of products is increasing and the life
cycles of products are shortening, R&D costs are becoming
higher. More R&D costs need to be recouped by marketing
products as widely as possible. That competitive pressure has
opened the door to global product (and R&D) mandates within
the corporate networks of TNCs.



Technological change has had a strong impact on the


design and organizational patterns of R&D, leading to a
proliferation and differentiation of corporate R&D units (box
4). Products have become “modular”13 as “component
interfaces are standardized and interdependencies amongst
components are decoupled” (Prencipe et al. 2003: 85), allowing
for the fragmentation of design and the specialization of
knowledge creation in internal or external networks of TNCs. In
addition, the emergence of new science-based technologies (e.g.
electronics, ICT, biotechnology and new materials) has had a


13 Modularity is a general property of complex systems, including
R&D, innovation and transnational production. These systems are
decomposable, at varying degrees, into loosely related subparts and
tightly interrelated components.




Overview




11


Box 4. Types of R&D units

Technology transfer units are closely linked to manufacturing units
and are established to adapt a parent’s products and processes to local
conditions in host countries.

Indigenous technology units are set up to develop new and/or
improved products for local markets. They are often established when
an affiliate identifies locally distinctive investment opportunities and
convinces the parent company of its ability to implement such new
product development.

Regional technology units are established to develop new and/or
improved products for regional markets. These units serve the national
markets in regional clusters that share some common features and
needs for specialized products.

Global technology units are set up when a single product is envisaged
for the global market. This applies, in particular, to two cases: (i)
when a TNC has allocated parts of the product range to specific
affiliates abroad and may also find it beneficial to carry out R&D
relevant to that product range in the same place; (ii) when, because of
the magnitude of resources required to develop a product range, it is
more efficient for the firm to organize a decentralized but integrated
R&D programme.

Corporate technology units are established to generate new
technologies of a long-term or exploratory nature exclusively for the
parent company in order to protect and enhance the future
competitiveness of the company.

Sources: UNCTAD, based on Ronstadt, 1977; and Reddy and
Sigurdson, 1994.

profound effect on the way economic activities, including R&D,
are organized by TNCs (Cantwell and Santangelo 1999). The
development of ICT has enabled companies to allocate tasks on
a global scale through intra-firm information networks. The
emergence of new technologies requiring less industrial
experience has also created catching-up opportunities for




Globalization of R&D and Developing Countries




12


developing countries with reserves of scientists and engineers.
R&D in microelectronics, biotechnology, pharmaceuticals,
chemicals and software development can be globalized more
easily than R&D in conventional industries, as it can be
geographically delinked from production. Moreover, in these
new technologies, R&D itself is divisible into different
modules, and these may be carried out in different locations.
This facilitates the division of R&D into “core” and “non-core”
activities. Some of these non-core activities can be carried out
in low-cost countries or contracted out to other firms (Reddy
2000).


Improved host country environments have facilitated
the globalization of R&D by TNCs. One set of policies in host
economies has dealt with the economic bases of R&D activities
in general, such as skills and capabilities development, the
strengthening of supplier networks, the improvement of
infrastructure and the development of science and research
bases. Over the decades, some developing countries have
trained a sizable number of scientists and engineers, sometimes
at advanced levels. Various developing countries have also
improved their infrastructure, education and innovative
capability, which has placed them on the list of potential host
countries for R&D location. They have similarly increased their
R&D investment as a proportion of the gross domestic product
(GDP).14



Academic institutions in developing countries have


established linkages with their counterparts in developed
countries through exchanges and joint research projects, thus
strengthening their knowledge base. In addition, the
liberalization of trade and investment regimes over the past two
decades has also contributed to the globalization of R&D by
TNCs.



14 For example, R&D expenditures as a percentage of GDP for the


Republic of Korea (2.6% in 2002) were higher than in many
developed countries.




Overview




13


2. Implications for development


Opinions differ on the degree to which TNCs’ R&D
activities help in building up local technological capacity in a
host country. On one hand, R&D-related FDI can directly
benefit economic growth by stimulating, through the R&D
activity undertaken by TNC affiliates, technological efficiency
and technological change. The globalization of R&D by TNCs
and their location in developing countries may result in what is
often believed to be a desirable form of economic activities, to
be sought actively by host countries. As TNCs gain control of a
growing part of key knowledge and technology in new
industries, such as microelectronics, biotechnology,
pharmaceuticals, chemicals and software development, the
scope for host countries to access them through contractual
forms, as selected Asian countries (Japan, the Republic of
Korea) did in the twentieth century, may be reduced. However,
it still appears possible to rely on a combination of equity and
non-equity relations with TNCs.



The potential direct benefits of R&D-related FDI for


host countries depend on the mandate and role of different R&D
units (box 4). Technology transfer units can most often provide
products and processes that are better suited to local conditions
and contribute to training local technical staff. Indigenous
technology units often provide products that are better suited to
local needs and tastes. They can make better use of locally
available materials, leading to more cost-effective products and,
they have more potential to form linkages with the local
innovation system. Regional technology units can establish
strong links with the local innovation system, widening its
capabilities and, they can help in the international specialization
of scientific and technological capabilities. Global technology
units and corporate technology units can transfer application
knowledge to convert theoretical knowledge into tangible
products and processes.





Globalization of R&D and Developing Countries




14


Host economies can also derive direct benefits from
TNCs’ R&D units through, for instance, (a) subcontracting and
sponsorship of research to local universities, and (b) licensing
technologies for by-products to local firms. TNCs’ R&D
activities can also affect the employment prospects of trained
people in host economies. Inflows of foreign R&D may help
counteract the risk of brain drain from developing countries by
providing more job opportunities for skilled people, especially
in cases when local capabilities (firms and institutions) cannot
create the amount and type of jobs that would respond to the
needs and expectations of the local trained workforce. They
may also help bring skills back to an economy (e.g. in Ireland or
Taiwan Province of China in the past or, in India today).



In some cases TNCs may contribute indirectly to


upgrading technologies as innovations emerge and consumption
patterns change. The potential spillover effects of TNCs’ R&D
activities could be categorized as follows:



• The encouragement of commercial culture among scientists


and engineers. When R&D-related FDI started flowing into
India for instance, scientists in many research institutes
started focusing on patentable research. Many of them have
become entrepreneurs by forming start-up companies.


• The implantation of an R&D and innovation culture among
local companies. For example, TNCs’ R&D activities in
India spurred an R&D drive among Indian companies,
whose R&D expenditures and patenting activities have
increased significantly in recent years. Some of these
companies (e.g. software companies) compete directly with
TNCs.


• The inflow of manufacturing-related FDI to commercialize
R&D results at the same location if other conducive
parameters are in place.




Overview




15


• Employee spin-offs of R&D companies.15


Central to the debate on the spillover impact of TNCs’
R&D activities on host economies is the question of whether
knowledge and skills can be isolated from their surrounding
host environment in the long term. For some observers, the
mobility of research personnel and the need for local
procurement of staff, material and services are bound to diffuse
technologies into the local economy.



On the other hand, the benefits from attracting R&D


activities are far from automatic. In fact, in many situations,
they may be limited if the foreign affiliates create too few or no
local linkages to domestic actors. TNCs’ R&D units sometimes
create high-technology enclaves with little diffusion of
knowledge into the economy. Moreover, with the fragmentation
of R&D and the increasing specialization of individual units,
the scope for transferring broad knowledge may be narrowing,
reinforcing the enclave nature of R&D units.



In addition, when investment into the R&D facility


takes the form of a merger and acquisition, it may be argued
that such transactions entail a simple change of ownership, akin
to portfolio investment, with lesser developmental value. Some
take-overs could have an adverse effect on local innovatory
capacities, as was illustrated in the 1990s by the acquisition of
firms in the automotive and telecommunications industries of
Brazil by TNCs. In this case, the result was a scaling down of
R&D activities in the acquired firms (UNCTAD 1999).



FDI into R&D may also divert scarce local R&D


resources of host countries from local firms and research
institutions. For instance, FDI may attract the best R&D
personnel. It may also result in a high opportunity cost when


15 For instance, an engineer working at Hewlett Packard started an
R&D company called Parallax Research in Singapore. This company
now develops products for Hewlett Packard (Reddy 2000).




Globalization of R&D and Developing Countries




16


scarce public resources are diverted to foreign affiliates at the
expense of local firms and institutions. TNCs may also show
more propensity to transfer the results of innovation performed
in developed countries than to transfer the innovation process
itself (UNCTAD 1999). These innovations may not benefit
manufacturing and marketing operations in the host country,
except in that its personnel would be more prestigious and
creative (Pearce 1989).



Finally, the geographical concentration of corporate


R&D in a handful of host countries within the developing world
may raise concerns about the marginalization of the rest of the
developing world in the emerging global knowledge society.
Without an adequate science and technology base, attracting
corporate R&D and benefiting from it could remain a challenge
for the majority of developing countries, rather than an
opportunity. Weighting the opportunity costs of an R&D policy
against the risks of further marginalization and an increased
R&D gap is a matter of debate for policy makers. However, the
changing nature of R&D, and in particular the fragmentation of
R&D activities by TNCs, could open up opportunities to a
number of developing countries. All R&D is not necessarily at
the higher end of the value chain. With the modularization of
R&D by TNCs, some smaller developing countries for instance,
could specialize in niche areas to fit into the global knowledge
networks developing around TNCs.

3. Policy environment to promote R&D-related FDI and


its benefits

a. Host country measures


The ability to attract and benefit from R&D-related FDI
depends to a large extent on the policy environment in the host
country. A stable and good general policy environment,
including macro-economic and political stability, as well as
consistent and transparent investment, trade and industrial




Overview




17


policies, are important. Good communication systems and other
infrastructural facilities are equally important for the dispersed
R&D activities of TNCs. Developing countries may have to
improve their ICT infrastructure (e.g. access to the Internet).
Furthermore, a well-developed national innovation system
(NIS) – a “network of institutions in the public and private
sectors whose activities and interactions initiate, import, modify
and diffuse new technologies” (Freeman 1987: 1) – can
facilitate the clustering of economic agents in a given host
economy, including foreign affiliates, local firms, and local
research institutions. Hence, specific policies may be required
to improve the availability of local universities, professionals
and researchers (particularly important for global technology
units), to create and nurture local knowledge development and,
improve the attractiveness of the sources of technical excellence
(e.g. universities, suppliers) (de Meyer and Mizushima 1989).



Since TNCs tend to locate R&D in countries where


there are reputed academic institutions, a major challenge for
the national innovation policies of developing countries is to
strengthen their academic establishments by recruiting adequate
staff and providing them with adequate funding to carry out
research. Universities should also be able to provide doctoral-
and post-doctoral-level education in science and technology
subjects. Such capacity building can take place for instance,
through partnership with the private sector. The participation of
senior managers from both domestic and foreign firms in the
governing boards of the academic institutions can be one way of
strengthening such linkages by making the research more
relevant to the industry (Reddy 2000).



In science-based technologies, the difference between


basic research and applied research is not always clear-cut. At
least some innovation activities in these technologies can be
carried out in academic laboratories. Many governments have
established R&D centres to promote the technological
upgrading of firms. In order to enhance the innovation




Globalization of R&D and Developing Countries




18


capability and economic benefits through university-industry
collaboration, the establishment of science parks may be
important. Such parks may attract both local firms and TNCs to
locate R&D, if the parks are established in proximity to reputed
academic establishments and the staff in these academic
institutions has the freedom to collaborate with enterprises
(Reddy 2000). Some of the parks and business incubators, such
as the Hsinchu Science Park in Taiwan Province of China and
the Magnet Program in Israel, have been quite successful
(World Bank 2004: 173). However, when the dynamic interplay
of entrepreneurship, R&D institutions, skilled labour, capital,
and infrastructure is missing, the results are more mixed (Feser
2002, de Ferranti et al. 2003).



Performance requirements – either mandatory or


voluntary – have been used by policy makers in various
countries to maximize benefits from FDI (UNCTAD 2003).
They have been used in particular to address concerns that
excessive reliance on FDI could limit technological
development, since R&D was perceived to be largely
concentrated in home countries. However, mandatory
applications of R&D requirements appear to be rare. It is more
common to link R&D criteria to the receipt of various kinds of
incentives – these are the so-called voluntary performance
requirements (e.g. in Chile, Malaysia and South Africa, as well
as in several developed countries). However, the results have
often been limited because a firm is unlikely to set up R&D
activities in the absence of local capabilities and technical skills
to absorb, adapt and develop technology and know-how.
Furthermore, performance requirements may carry the potential
risk of losing would-be investors not wishing to comply with
those criteria.



In the area of fiscal incentives, Brazil applies a scheme


in which companies that invest in R&D are levied a reduced tax
on imported products (EIU 2004: 13). India, Malaysia, Mexico,
the Republic of Korea, South Africa and Taiwan Province of




Overview




19


China are other salient cases of developing economies’
providing fiscal incentives to R&D (table 2).16



Some developing


countries have also used financial market interventions to
encourage firms to pursue R&D, including directed credit
schemes (Republic of Korea) and venture capital funds
(Malaysia) (Kim 1997 and Yusuf 2003, respectively). Some
studies have found evidence that R&D incentives were cost-
effective (Shah and Baffes 1995, for Pakistan; and Shah 1995,
for Canada). However, the literature on tax incentives in the
developed countries17



shows more mixed results in the majority


of the cases analysed. The main reason for these findings is that
in comparison with the availability and quality of appropriately
skilled labour, the provision of fiscal or financial incentives is
of limited relevance for R&D investments.


Table 2. Fiscal incentives for R&D in selected developing
economies, 2004


(Percentage)


Economy R&D
depreciation


R&D capital
depreciation


Tax
credit


Brazil 100 100 None
India 100 100 None


Malaysia 200 Same as other investment None


Mexico 100 3 years’ straight-line
depreciation


None


Republic of Korea 100 18–20 10–25
South Africa 100 25 None
Taiwan Province of
China 100


Same as other
investment 15–20


Source: UNCTAD, based on World Bank (2004: 173).



16 In this respect, they are following the example of some


developed countries, such as the United States, Australia, Canada,
France, Japan and the Netherlands, which offer tax credits, full
expensing of R&D and even double deductions of some R&D
spending (World Bank 2004: 178).


17 See Hall and Van Reenen 1999 for a literature review.




Globalization of R&D and Developing Countries




20


One of the specific policy areas that affect the location
of corporate R&D in developing countries is the protection of
intellectual property rights (IPRs), which is perceived by some
TNCs as a precondition for such locational decisions.
According to corporate surveys, the protection of IPR is usually
mentioned by some TNCs among the top criteria in taking an
R&D investment decision. In a recent survey, 38% of the
respondents mentioned IPR as a critically important challenge,
a higher proportion than for any other issue (EIU 2004: 5).



b. Home country measures


While host country policies are crucial, measures taken
by home countries of TNCs also affect the international
allocation of R&D activities. For example, home countries may
provide special incentives to their TNCs to locate R&D units in
developing countries where such TNCs have assembly or
manufacturing plants. They may also provide special tax
concessions to their TNCs for R&D investments made in
developing countries. The most common home country
measures include support for FDI, training, matching services,
partnerships and alliances, and support for equipment purchase
or licensing (UNCTAD 2004a). For instance, of the 41
programmes and agencies surveyed by UNCTAD in 2004 in 23
countries, 15 provided incentives to their enterprises to enable
them to establish R&D in developing countries. Of these, three
had a technology transfer fund or a financing mechanism that
was independent of FDI support measures (UNCTAD 2004a).
This measure directly facilitates transfer of technology, and
therefore could also be adopted by other countries.



However, the offshoring of R&D activities may also


raise concerns in home countries, in spite of the fact that, in
principle, the offshoring of R&D activities should offer benefits
to all parties concerned. First, a large part of offshoring R&D
activities continues to target developed countries. Slowing
down offshoring could deprive such developed countries of FDI




Overview




21


opportunities. Second, as noted above, important reasons for
firms to expand their R&D activities in lower-cost locations are
to access skills and to lower costs. Protectionist measures to
obstruct the globalization of R&D may therefore have adverse
effects on the competitiveness of the firms involved and, by
extension, their home economies. Given the short history of
R&D globalization, there is a need for further analysis of its
implications for both host and home countries.



c. International dimension


At the international policy level, issues related to FDI in
R&D have been addressed in various manners, depending on
the nature and purpose of individual international investment
agreements (IIAs). The overwhelming majority of those
agreements provide protection to foreign affiliates’ R&D
activities and their related products by defining TNCs’
intellectual property as one type of the investment covered by
the definition provisions of the respective agreement. These
agreements contribute to creating an enabling framework for the
globalization of R&D by TNCs. As regards performance
requirements, some IIAs prohibit using R&D as a condition for
the establishment of an investment, while some others explicitly
mention that the agreements do not prevent a party from
conditioning the receipt of an advantage in connexion with
foreign investment (i.e. an incentive) in compliance with a
requirement to carry out R&D.



The WTO Agreement on Trade-Related Intellectual


Property Rights (TRIPS Agreement) does not expressly address
issues related to FDI in R&D. However, it provides an enabling
framework for the protection of R&D activities (including their
intellectual inputs and outputs) carried out by foreign affiliates,
for instance, by promoting minimum international standards for
the protection of IPRs (e.g. patents, copyrights, trademarks,
industrial designs and trade secrets). These standards are subject
to most-favoured-nation-treatment, national-treatment and




Globalization of R&D and Developing Countries




22


domestic-enforcement obligations. Some aspects of these
obligations and standards however, may limit developing
countries’ policy options for promoting the development of
domestic innovation capacity. For example, the protection of
foreign R&D activities through a patent may limit the
possibilities for domestic industry to engage in follow-on
innovation (e.g. if the patent is broad and covers elements the
domestic third parties would have to rely on for their research).



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________ (2000). “The role of multinational corporations and national
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PART I


The globalization of R&D









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



Robert Pearce1



A commitment to R&D can be seen as logically central


to the dynamic developmental needs of both TNCs and
individual national economies. Early analysis and evaluation of
TNCs and FDI saw the location of R&D as being the developed
home countries of these firms and the internationalization of
their operations based around processes of outward technology
transfer. The immediate developmental implications of this for
developing 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 utilize 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 localized
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 non-dynamic hierarchical stratification on
the global economy (Hymer 1972).



Perhaps the single most important element in the


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 globalized programmes for innovation and R&D. Thus,
the tendency to see TNCs’ organizational structures as


1 The views expressed in this study are those of the author and do
not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the author is affiliated.




Globalization of R&D and Developing Countries




30


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 differences 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 is to elaborate on relevant aspects


of this strategic restructuring in TNCs, and then provide some
detail on how this is operationalized in terms of the increased
decentralization of their R&D programmes. The aim of this
analysis though, is to provide a basis for discussion of the
implications of these more differentiated and dynamic strategic
orientations in TNCs for the 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. However in doing this do TNCs
necessarily strengthen these creative attributes of host
countries? 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)?





Key features and the role of TNCs




31


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

It is useful to characterize the strategic positioning of


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



• Firstly, availabilities of standardized 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 globalization, which has
emerged in recent years, is that in many industries and
product groups this has not led to demand standardization
but often instead, to an increased willingness to manifest
localized taste differences. Thus, the in-depth research of
Bartlett and Ghoshal (1989) showed that many successful
TNCs benefited from a willingness to respond to local taste
differentiation, rather than seeking to override it (perhaps in
pursuit 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




Globalization of R&D and Developing Countries




32


globalization 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 NIS.
However, 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 specialized, 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 faces, 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.



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. Crucially this involves being
responsive to differences in supply conditions in particular
locations in the global economy (i.e. the input heterogeneity




Key features and the role of TNCs




33


noted earlier). Thus, over perhaps the past four decades, 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 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, a careful categorization of the different


factor needs of different goods can lead to each being allocated
to a supply affiliate in the location able to provide the required
input mix in the most cost-effective manner. Once a particular
affiliate has been allocated supply responsibility for a product,
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 maximized 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
decentralization of innovation into globalized operations.
Implicit in this is the acceptance of technological and market
heterogeneity, indicating that new scientific or customer-driven
initiatives towards significant product development can emerge
anywhere in a TNC’s global operations.




Globalization of R&D and Developing Countries




34



Vital to the decentralization of innovation in TNCs has


been the emergence of a new type of affiliate, often designated
as a product mandate, 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 individualized
creativity, a product mandate 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 affiliate-level
management (to drive the integrated creative processes and to
provide persistent advocation of the affiliate’s status in the
group network). By allowing such localized initiatives in
product mandates the modern heterarchical (Hedlund 1986)
TNCs provide themselves 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 affiliates, product mandates 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 internalized and
individualized 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




Key features and the role of TNCs




35


breakthroughs. However, 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
internationalized perspectives.



2. Global R&D programmes of TNCs



In order to organize 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 laboratories in TNC networks.
Here we use a particular three-part typology (Papanastassiou
and Pearce 1999, Pearce 1999 and 2002, Pearce and Singh
1992, Pearce and Papanastassiou 1999).



a. Support laboratories


Support laboratories help achieve 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 affiliates, in potentially lower-cost
locations, support laboratories facilitate this transfer process by
helping these affiliates to assimilate, apply and, where relevant
adapt these technologies. This is essentially a static
optimization 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




Globalization of R&D and Developing Countries




36


country’s sources of static comparative advantage (notably
labour). For neither the TNC nor the country does the support
laboratory possess any real dynamic potentials, in the sense of
providing additional forward-looking dimensions to their
sources of competitiveness. Nevertheless, by putting into an
affiliate a source of potential individualization (albeit only in
terms of improving local ability to play a predetermined role
using externally-provided technology) support laboratories may
still suggest a creative route forward to a more significant
deepening of a localized element in the affiliate’s
competitiveness.



b. Locally integrated laboratories


The locally integrated laboratory becomes a key
component of a localized innovation process that is
encompassed within a particular affiliate of the product mandate
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 involve either the
initial operationalization of completely new technologies,
derived from recent scientific breakthroughs or, a substantial
reconfiguration of existing ones. The locally integrated
laboratory 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 nexus between the
product mandate and the locally integrated laboratory, 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.





Key features and the role of TNCs




37


Though the broad product mandate/locally integrated
laboratory 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
product-mandate/locally-integrated laboratory 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 product
mandate/locally integrated laboratory 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 product mandate/locally integrated laboratory
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. However, this
may be temporary 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, product mandate/locally
integrated laboratory affiliates 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 and
technological capacity of their host-country and, therefore, will




Globalization of R&D and Developing Countries




38


provide support (including R&D collaboration, scientific and
other training) for local upgrading in these areas.

c. Internationally interdependent laboratories


In pursuing the longer-term strategic need of TNCs, the
internationally independent laboratories are immediately
differentiated from support laboratories and locally integrated
laboratories by having no concern or connexion whatsoever
with the group’s currently-operationalized technologies or, with
any of its current commercial issues. Instead, an internationally
independent laboratory 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 internationally
independent laboratories in a quite extensive selection of
locations. This leads to a network of internationally independent
laboratories, each of which follows its own distinctive research
agenda, reflecting a specialized 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 internationally independent laboratories. Thus these
laboratories, 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.



Internationally independent laboratories 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




Key features and the role of TNCs




39


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 internationally independent laboratories necessarily
strengthen the competitive scope of the host economy. Thus,
important results of an internationally independent laboratory
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
internationally independent laboratory’s host country (Pearce
2002).



3. 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 affiliates, we can also
suggest how this can support processes of economic change
(development or transition) over time. The various roles taken
by laboratories and affiliates 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 a support
laboratory) 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
affiliates. A positive possibility here, however, would be for an
affiliate to firstly move towards the supply of higher-value parts
of the TNC product range (involving inward transfer of more
advanced group technologies, again perhaps mediated by a
support laboratory) and, eventually accede to product




Globalization of R&D and Developing Countries




40


mandate/locally integrated laboratory status (Pearce 2001). This
option would clearly be more viable where, in the manner of the
newly industrialized Asian 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
an NIS). 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
centrally planned economies (Manea and Pearce 2004). 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 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 product mandate/locally
integrated laboratory, and even internationally independent
laboratory research, in these countries. Here TNC R&D and
innovation could provide a short cut through some stages of
industrialization-oriented development.




References
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Gunn and Hain.




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


Haug P, Hood N and Young S (1983). “R&D intensity in the affiliates
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Hedlund G (1986). “The hypermodern MNC: a heterarchy?”, Human
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Manea J and Pearce R (2004). “Industrial restructuring in economies
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Medcof JW (1997). “A taxonomy of internationally dispersed
technology units and its application to management issues”, R&D
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Papanastassiou M and Pearce R (1999). Multinationals, Technology
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Pearce RD (1999). “Decentralised R&D and strategic
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technology in multinational enterprises”, Research Policy 28(2-3):
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_______ (2001). “Multinationals and industrialisation: the bases of
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_______ (2002). “National systems of innovation and the international
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_______ and Papanastassiou M (1999). “Overseas R&D and the
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_______ and Singh S (1992). Globalising Research and Development.
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technology drive in R&D internationalisation: four different
patterns of managing research and development”, Research Policy
31: 569-588





Knowledge creation and why it matters for
development: the role of TNCs



Rajneesh Narula1



TNCs are one of the key features of globalization and


important sources of capital and technology. Perhaps even more
importantly, TNCs account for a significant share of global
business expenditures in R&D and, present an important
potential opportunity to promote knowledge creation (of which
formal R&D is a subset) in the countries in which they locate.
They also represent an alternative to traditional technology
transfer approaches to promote the competitiveness of domestic
firms in the developing world. The failure of protected
industries in developing countries to become competitive in
global markets has highlighted the limitations of the arms-
length technology transfer approach. At the same time, the need
to build strong local capabilities has not diminished. On the
contrary, it has risen as increasingly mobile TNCs seek strong
complementary factors at sites where they locate.



Hence, in recent years, both governments and


supranational organizations have increasingly come to focus on
the role TNCs and FDI can play in innovation and knowledge
creation. This has been accompanied by a lifting of many types
of regulations that previously limited the role of FDI and TNCs
in many developing countries, and a reassessment among
donors of the role of public versus private actors in
development aid.



This paper will focus on improving our understanding


of the role of innovation and knowledge creation in the process


1 The views expressed in this study are those of the author and do
not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the author is affiliated.


Comments from Tanja Sinozic, University of Sussex, are
gratefully acknowledged by the author.





Globalization of R&D and Developing Countries




44


of economic development. TNCs play a pivotal role in global
knowledge creation and, although they represent a small
component of the learning or innovation system, which furthers
knowledge creation, they are important catalysts. It is necessary
to define and explain some important underlying concepts and
trends regarding knowledge creation in general, before
proceeding to place these concepts in a developing country
context and, to highlight the issues and opportunities that TNC-
assisted knowledge creation presents.

1. Globalization, innovation and technology


Globalization is an ongoing process, rather than an
event. Economic globalization implies the growing
interdependence of locations and economic units across
countries and regions (Narula 2003). The term interdependence
is used very deliberately here. Cross-border linkages between
economic entities do not imply globalization, merely
internationalization. Trading activities do not necessarily result
in interdependence. The new element of international business
is the growth of FDI and the TNC. When we distinguish
between trade, long-term capital flows, portfolio investment and
FDI, we come to an important differentiation. Historically,
international business activity used to be dominated by the
development of vertical linkages, with a flow of goods between
locations, in response to varying elasticities of supply and
demand. Raw materials were transported from one location to
another, manufactured, and transported to a third location for
sale. Factors of production were immobile, and although capital
did in fact get relocated, these were capital flows rather than
capital embodied in physical assets or personnel and, there was
no significant integration of operations in disparate locations
within the control and management of the same individuals.
Firms were international, but neither multinational nor
transnational. International business and economic activity
were extensive in the sense that the value of goods and capital
exchanged were considerable, and involved numerous countries




Knowledge creation and why it matters




45


and actors, who were all dependent upon each others’
patronage. But it was not intensive, in that activities were
largely not integrated across borders.



Technological change and innovation are


acknowledged almost universally as determinants of
globalization. Technology implies the application of scientific
knowledge for practical aims. Technology is the application of
scientific concepts that help us to understand our environment,
and allow us to convert this knowledge to develop and fabricate
artefacts. Technology and science are cumulative, and build
upon previous science and technology. The practical dividing
line between science and technology is not always clear.
Science and technology advance through innovation, which
represents change in the stock of knowledge. Technology and
science are subsets of knowledge. The difference is sometimes
considered to be in the intent of the work, in that science is
conducted in the altruistic thirst for information, while firms
increase their knowledge base in order to create a product or a
service. But this difference has also been blurred.



In a very general sense, innovation may mean the


introduction of any novelty, but in economic and technology
literature it has come to have a more precise meaning. An
invention is an idea, sketch or model of any new or improved
device, product, process or system. Innovations only occur
when the new product, device or process is involved in a
commercial transaction. Multiple inventions may be involved in
achieving an innovation. In the Schumpeterian sense, scientific
discoveries and inventions would not be termed innovation
although they might fall within a second, broader, type of
definition, which is concerned with the entire process of
innovation, including antecedent work not necessarily
undertaken by the entrepreneur. The broad definition of
innovation as used here implies changes in the knowledge,
ability and techniques required to produce goods and services
of higher or better quality per unit price, while technology




Globalization of R&D and Developing Countries




46


represents the cumulative stock of these innovations. It is to be
emphasized that although knowledge creation and innovation
are often associated with manufacture and design of new, high-
technology products such as aircraft, computer components and
large industrial projects, this is not always the case. Innovations
can also be the discovery of a better or cheaper way to affix
labels to beer bottles, a more appropriate technology to extract
palm oil from palm kernels, a modified feed to improve the
milk production of cows, or a superior management information
system. Technology therefore – for the purposes of this paper –
includes all activities that provide assets with which an
economic unit can generate products or services. Science
provides us with more generic knowledge, which may or may
not generate products and services. As will be discussed in this
paper, the challenge for many developing countries is to
improve the process by which science and invention lead to
innovation, thus providing a tangible economic return.

2. Knowledge creation in developing countries


Knowledge creation is often associated with formal
activities within R&D that is undertaken in a systematic manner
within universities and specialized public and private R&D
facilities. However, these formal means represent only a small
proportion of knowledge creation. Knowledge creation is a
much larger and more systemic phenomenon, although formal
facilities account for a large percentage of output. There are
two points to be emphasized here.



• First, measuring the informal aspect of knowledge creation


is immensely difficult, since its benefits and value cannot
always be identified before it is used or sold. These
informal aspects are also hard to benchmark, because a
large proportion of them are qualitative in nature, in the
form of managerial or service innovations and
improvements in processes. Finding novel means to reduce
the costs of pesticide use on a farm may provide cost




Knowledge creation and why it matters




47


savings of a few pennies per kilo to a small farmer, and
represents the creation of new knowledge. However, it is
often not possible to measure its exact value or, to
determine whether this innovation is superior to a similar
technique developed by another farmer in another location.


• Second, in developing countries, the informal sector tends
to be very large. Developing countries undertake less than
8% of the formal R&D activities globally, and much of
these tend to be undertaken by public, state-supported
organizations such as universities and research institutes. It
is within the domain of R&D expenditures of private
enterprise in developing countries, that TNCs can play an
important role, although this varies considerably by
country.



In general, despite the large amounts of FDI in terms of


capital values, TNCs still tend to largely concentrate their more
strategic and core activities close to home. In other words, they
remain more deeply embedded in their home country than
elsewhere. A large proportion of even the most
internationalized TNCs tend to exhibit significant inertia
regarding their more strategic activities, such as R&D and
headquarters functions that tend to stay at home. General
Electric for instance has approximately 1,600 researchers in its
United States facility, and about 400 in its two international
corporate research laboratories. One point that derives indirectly
from these data is that if FDI by developed country firms in
other developed countries tends to have such low levels of
embeddedness in locations where they have been present for
many years, it is not surprising that TNCs in developing
countries have an even lower level of embeddedness.

3. Foreign affiliates within host-country systems


It has been pointed out that public-sector knowledge
creation is often the mainstay of R&D in developing countries,
and that within the private sector, TNCs play a leading role.




Globalization of R&D and Developing Countries




48


However, despite the relatively large share of investment
(relative to the size of the overall economy) in knowledge
creation, this does not always prove to be beneficial to
economic development. For developmental benefits to derive
from innovation, it is essential that knowledge flows efficiently
between different groups within an economy, and this is
unfortunately not always the case.



Innovation involves complex interactions between a


firm and its environment. The environment is not confined to
the firms’ networks of direct customers and suppliers only; it
stretches much further. It also includes the broader factors
shaping their behaviour and activities: the social and cultural
context; the institutional and organizational framework;
infrastructure; knowledge creating and diffusing institutions,
and so on. Within a system, there exists a broad knowledge base
outside industrial enterprises and, this base is central to
technological accumulation by industries. Learning and
innovation involve complex interactions between firms and
their environment. This is the essence of the systems approach
to technology.



A system, does not necessarily mean that the influences


on industrial innovation are systematically organized (Narula
2003). To put it simply, a system means a regularly interacting
or interdependent group forming a unified whole. A system is in
most cases the serendipitous intertwining of economic actors
that defines the stock of knowledge in a given location
(Etzkowitz and Leydesdorff 2000). For instance, changes in the
educational policies of the government are likely to affect other
actors and institutions, and influence the process and extent of
technological learning in the future.



Economic actors refer to two groups: The first group


consists of firms – private and public – engaged in innovatory
activity, and the second consists of non-firms that determine the
knowledge infrastructure that supplements and supports firm-




Knowledge creation and why it matters




49


specific innovation. Knowledge infrastructure is defined in the
sense proposed by Smith (1997) as being “generic, multi-user
and indivisible” and consisting of public research institutes,
universities, organizations for standards, intellectual property
protection etc, that enables and promotes science and
technology development.



In a system, the efficiency of economic actors – firm or


non-firm – depends on how much and how efficiently they
interact. The means by which interactions take place are
referred to as institutions in the economics literature, though
sociologists prefer to speak of social capital. Institutions are the
“sets of common habits, routines, established practices, rules, or
laws that regulate the interaction between individuals and
groups” (Edquist and Johnson 1997). Institutions create the
milieu within which innovation is undertaken; they establish the
ground rules for interaction between economic actors and
represent a sort of “culture”. Institutions are associated with
public sector organizations, but are not exclusively so. It is not
only the creation of new knowledge but also the diffusion of
extant knowledge that determine the national knowledge stock
and the accumulation of national absorptive capacity.



The role of formal institutions has traditionally been


considered under the rubric of political economy and has been
the focus of debate on the role of the state in establishing,
promoting and sustaining learning. Conventional wisdom now
argues that governments are essential to promoting inter-
linkages between the elements of absorptive capacity and to
creating the opportunities for economic actors to absorb and
internalize spillovers.



The importance of building institutions cannot be


overstated: efficient institutions can contribute more to
economic growth than location or trade (Rodrik et al. 2002).
Institutions can be formal or informal. Formal institutions
include the intellectual property regime, competition policy,




Globalization of R&D and Developing Countries




50


technical standards, taxation, incentives for innovation, and
education. Informal institutions are more difficult to define, but
are associated with creating and promoting links between the
various actors. For example, the government may play a role in
encouraging firms to collaborate with universities or in
promoting entrepreneurship.



Developing countries have switched reluctantly from


inward-looking strategies with a large role for the government
to market-friendly strategies that force them to face a new
multilateral milieu, one in which they have little experience and
with which they are often poorly prepared to cope. Institutions
continue to remain largely independent and national. While
formal institutions can be legislated, modifying and developing
informal institutions is a complex and slow process, since they
cannot be created simply by government fiat. Developed
countries have taken 50 years to liberalize and adjust, but even
they have faced considerable inertia. For instance, they have yet
to reform their agricultural industries.



Innovation systems are built upon a relationship of


trust, iteration and interaction between firms and the knowledge
infrastructure, within the framework of institutions based on
experience and familiarity of each other over relatively long
periods of time. It is certainly true that institutions are often
associated with spatial proximity (Freeman 1992). This is not
unusual, given the concentration of most firms’ production and
R&D activities close to, or in their home location over long
periods. Besides, knowledge diffuses more rapidly when actors
are geographically concentrated (Ehrnberg and Jacobson 1997).
This partly accounts for the tendency of firms to locate R&D
(or at least the most strategically significant elements) closer to
headquarters.



Nonetheless, as firms respond to demand conditions


and, because there is increasing need to seek complementary
assets in multi-technology, knowledge based industries, firms




Knowledge creation and why it matters




51


have spread out spatially and sought to relocate some of their
activities in host locations. In engaging in foreign operation in
new locations, these operations have gradually become
embedded in the host environment. It is germane to this
discussion to note that the routines and institutions associated
with systems of production in a particular location are related
but not identical to systems of innovation. That is, networks
associated with production in a location are not quite the same
for R&D.



In a purely domestic innovation system, comprised of


purely domestic or local sources of primary knowledge
(excluding the international and cross-border elements), the
path of technological development is determined primarily by
domestic factors. The technological development trajectory is
driven largely by the changing demand of local customers.
Likewise, domestic governmental organizations determine
domestic industrial policy, which in turn determines domestic
industrial structure. National non-firm sources of knowledge
and national universities also determine the kinds of skills that
engineers and scientists possess, and the kinds of technologies
that these individuals have appropriate expertise in, the kinds of
technologies in which basic and applied research is conducted
in and thereby, the industrial specialization and competitive
advantages of the firm sector.



However, few (if any) such purely national systems


exist. In reality, the sources of knowledge available in a typical
national system are a complex blend of domestic and foreign
ones. In most countries, it is increasingly difficult to separate
foreign knowledge sources from domestic ones. Although this
is partly the result of globalization, it is also the result of
changes in policy orientation. Some countries have voluntarily
accepted the limitations of an isolationist industrial
development model based on import-substitution and an
inward-looking orientation, others more reluctantly, as part of
World Bank instituted structural adjustment programmes.




Globalization of R&D and Developing Countries




52


Policies in most developing countries are oriented towards
export-led growth and increased cross-border specialization and
competition, and most countries are now trying to promote
economic growth through FDI and international trade. This
wave of liberalization is part of the new, received wisdom that
is focused on tackling the deep-rooted causes that underlie
market distortions.



Liberalization is an important force in economic


globalization since it requires a multilateral view on hitherto
domestic issues and promotes interdependence of economies. It
is implicit within this view that FDI and TNC activity can be
undertaken with much greater ease than previously. This view is
enforced because countries have explicitly sought to encourage
TNC activity as a source of much-needed capital and
technology. In addition to financial crises, the general warming
of attitudes towards FDI emanates from an accelerating pace of
technical change and the emergence of integrated production
networks of TNCs (Lall 2000).



There is a clear link between the geographical spread of


the TNC and the process of technological change. Firms (of
which TNCs are a subset) expand their (international) activities
depending upon the strength (or weakness) of their competitive
assets. These are not only confined to technological assets in the
sense of ownership of plant, equipment and technical
knowledge embodied in their engineers and scientists. Firms of
all sizes also possess competitive advantages that derive from
(a) the ability (i.e. knowledge) to create efficient internal
hierarchies (or internal markets) within the boundaries of the
firm and (b) from being able to efficiently utilize external
markets. These ownership-specific assets are unique to each
individual firm, because firms themselves consist of uniquely
individual human beings. Even where two firms have the same
product, one may be more profitable than the other because its
managers are more efficient in utilizing its resources. Some of
these are associated with the efficiency with which hierarchies




Knowledge creation and why it matters




53


are organized, and referred to as organizational innovations.
Improvements in the quality of these assets leads to a greater
quality per unit price. Thus they can be regarded as innovations
and as part of the firm’s core assets. Such assets form a
necessary (and sometimes sufficient) basis for a firm to remain
competitive. Such assets include inter alia knowledge of
overseas locations, capabilities associated with organizing
multi-location operations, marketing and logistics, transfer
pricing, etc. The point here is that ownership-specific assets –
be they technological in the narrow sense, or organizational –
all share the common characteristics that they are cumulative,
and evolve over time. That is, firms seek to maintain a stock of
these assets, and learn.

4. The challenges of promoting knowledge creation in


developing countries


It is relatively uncontroversial to argue that economic
growth occurs due to the ability of a nation’s industries to
develop and sustain their competitive position, and that this
requires growth of capital and labour productivity. We may
further postulate that economic growth concerns not just the
development of knowledge through innovation, but also the
diffusion of knowledge such that it may be utilized and
exploited in an efficient manner. In other words, accumulated
technology is an engine of growth only if it can be harnessed to
make the best use of available resources and therefore, must
also consist of the knowledge to organize transactions
efficiently, whether intra-firm, intra-industry or intra-market.



Developing countries tend to be constrained in terms of


resources, at several different levels. This also limits their
ability to promote knowledge creation. Some of these resource
constraints are associated with attitudes and the absence of
stability, trust, and transparent institutions. Others have to do
with capital scarcity, the limited availability of natural or
created assets, and the normal limitations that derive from a




Globalization of R&D and Developing Countries




54


weak economy. This severely limits the opportunities to
promote knowledge creation in developing countries using the
policy tools that are otherwise available to developed countries.
This is why TNCs provide a viable alternative that many
developing countries pursue. Nonetheless, simply attracting FDI
does not lead to knowledge creation. Market forces cannot
substitute for the role of governments in developing and
promoting a proactive industrial policy. TNCs and FDI may
well lead to an increase in productivity and exports, but they do
not necessarily result in increased competitiveness of the
domestic sector or increased industrial capacity, which
ultimately determines economic growth in the long run. FDI per
se does not provide growth opportunities unless a domestic
industrial sector exists which has the necessary technological
capacity to profit from the externalities from TNC activity. This
is well illustrated by the inability of many Asian countries that
have relied on a passive FDI-dependent strategy to upgrade
their industrial development (Lall and Narula 2004).



In many cases, foreign affiliates are so well embedded


that they are regarded as part of the domestic environment. This
reflects not just the length of time that these affiliates have been
present (e.g. ABB in Norway), or that the affiliate is jointly
owned (e.g. Hindustan Lever in India) or has been acquired
(e.g. Nycomed-Amersham, Unilever, Reed Elsevier), but also
the nature of the industry, and the growing trend towards
consolidation in industries with low growth and opportunities of
global rationalization (e.g. metals, banking, automobiles).
Nonetheless, the interaction between domestic firms and foreign
affiliates varies considerably, either because domestic firms are
largely present in different industries or, because the two have
evolved separately.



In the case of developing countries, such knowledge


dependencies are often more pronounced in the case of the non-
firm sector, in that universities and research organizations tend
to be linked with international agencies, universities and




Knowledge creation and why it matters




55


organizations in other countries, sometimes through
supranational organizations. Nonetheless, the role of TNCs
remains important even in developing countries, as foreign
affiliates tend to be linked with their parent corporations, as
well as other affiliates in other countries. The high cost of
maintaining a wide network of affiliates and the high cost of
innovating, means that TNCs are always on the look-out for
domestic firms in their host countries with whom they can
either collaborate or from whom they can acquire important
inputs for their operations. Domestic firms also seek (and are
sought as) partners in international R&D consortia because
there is a convergence in technological trajectories across
countries, as firms seek the best partners in a given industry
regardless of their national origin (Narula and Hagedoorn 1999,
Narula 2003). This creates considerable potential – which may
initially be modest – for smaller domestic firms and public
sector organizations to benefit from the presence of TNCs, and
to acquire and transfer knowledge assets. When TNCs establish
affiliates in a particular location they need to build linkages
with domestic agents in order to carry out their operations, and
these linkages constitute one of the ways in which skills and
technological transfer is thought to disseminate to the rest of the
economy. Thus TNCs can promote domestic enterprise and
technological learning in the entire national system, as they seek
cheaper local alternatives to inputs, and can act as catalysts for
system-wide learning.



It is worth pointing out that many developing countries


seem prone to technological learning and attracting TNCs in
“white elephant” projects, which neither fit their comparative
advantage nor are the capabilities of the systems able to supply
the needs of such projects. A typical example is Nigeria’s
investment in satellite technology. TNCs are unlikely to
respond to investment opportunities that provide little or no
opportunity for their own growth. Ceteris paribus, TNCs prefer
to use technologies that are suited to their own needs, and the
purposes for which they have made the investment. TNCs




Globalization of R&D and Developing Countries




56


generally do not make available their proprietary assets
available at the whims of governments; rather they tailor their
investment decisions to the existing market needs and locational
advantages, especially skills and capabilities in which the
domestic economy has a comparative advantage (Lall 2000).



The TNC investment motive and its overall strategy are


important factors to consider. For example, domestic market
oriented affiliates generally purchase more locally than do
export oriented firms because of lower quality requirements and
technical specifications (Reuber et al 1973, Altenburg 2000).
As a result, foreign affiliates are more likely to be integrated
backward in the host country when they source relatively
simple inputs. For example, in the case of FDI in agro-based
industries, there is a greater likelihood for affiliates to be
integrated backward, especially given the early stage of
development of the host country. Rodriguez-Clare (1996)
argues that more linkages are created when production by TNCs
uses intermediate goods intensively, when communication costs
between parent and affiliate are large and when the home and
host markets are not too different in terms of intermediate goods
produced.



Affiliates established through mergers and acquisitions


are likely to have stronger links with domestic suppliers than
those established through greenfield investment (UNCTAD
2000, Scott-Kennel and Enderwick 2001), since such FDI can
find established linkages upon acquisition that are likely to be
retained if they are efficient. Most importantly, linkages vary by
industry. In the primary sector, the scope for location-specific
vertical linkages is often limited, due to the production
processes and capital intensity of such operations. In
manufacturing, the potential for vertical linkages is broader,
depending on the extent of intermediate inputs to total
production and the type of production processes (Lall 1980).
Blomström and Kokko (1997) suggest that “some of the host
country characteristics that may influence the extent of linkages




Knowledge creation and why it matters




57


– and thereby in the longer term the extent of spillovers – are
market size, local content regulations and the size and
technological capability of local firms”. They argue that there is
a propensity for linkages to increase over time, as the skill level
of local entrepreneurs grows, new suppliers emerge and local
content increases. The time factor is highlighted also by Rasiah
(1994) and is related to the experience and integration of a
foreign affiliate in the host country through greater
indigenization of operations in terms of management,
knowledge about their location and operations. The
embeddedness of firms is often (but not always) a function of
how long the TNCs have been present in the host country, since
firms tend to build incrementally.



Technology diffusion through backward linkages


presupposes that first, domestic firms in the industry exist, and
second, they possess the capacity to usefully internalize the
knowledge being made available by the TNC. Diffusion to the
rest of the economy may not occur because of deficiencies in
the institutional capability systems of the host country or other
deficiencies in the absorptive capacity of domestic economic
agents in the host country. Wider technology gaps between
domestic firms and foreign affiliates are more likely to result in
fewer backward linkages as well as the type of technological
content of inputs sourced locally (Narula and Portelli
forthcoming).



It is obvious that national governments have a strong


interest in the ability of firms in a given location to conduct
competitiveness-enhancing activities, and particularly those
associated with the creation and deployment of knowledge
capital. These reasons can be qualified under two main
headings, viz. the promotion of the wealth creating assets of its
firms and, maintaining and improving indigenous resources and
capabilities. By doing so, it can help to maintain and improve
its own locational attractiveness to mobile and footloose
investors (of whatever nationality) to conduct high value adding




Globalization of R&D and Developing Countries




58


activities. These two issues are strongly related, since the
presence of highly competitive firms at a given location acts as
a location advantage, often prompting a virtuous circle.
Conversely, strong location advantages, such as the presence of
support institutions and firms, infrastructure and skilled
manpower will enhance the ownership advantages of firms
located there.



The role of governments in improving the quality of


human capital cannot be over-emphasized. One of the primary
determinants behind technological accumulation and absorptive
capacity is human capital. Qualified human resources are
essential in monitoring the evolution of external knowledge and
in evaluating their relevance and, for the integration of these
technologies into productive activities. Human capital
represents an important subset of absorptive capabilities, and
this is well acknowledged by policy makers everywhere.
However, the presence of a highly skilled labour force is a
necessary condition. Simply providing tertiary level education
and skilled manpower does not lead to increased R&D, nor is
there a direct connexion between education and technological
competence. The availability of a large stock of suitably
qualified workers does not in itself result in efficient absorption
of knowledge, as is well illustrated by the former centrally
planned economies of Eastern Europe. But the quality of the
training and the ability of industry to exploit available skills in
R&D or other technical effort matter a great deal.



5. Conclusion



The failure of most countries to successfully promote


knowledge creation and take advantage of TNC-assisted
knowledge creation reflects two difficulties. The first is the
difficulty to integrate various policies in a systemic way; the
second is the difficulty of transforming institutions associated
with the old order of import substitution. Policies,
administrators and policy-makers have largely attempted to




Knowledge creation and why it matters




59


graft the new model onto the remnants of the old model, partly
because political and social interest groups are resistant to
change, and partly because rapid and sweeping policy shifts
require considerable time for the informal institutions to adjust
(Lall and Narula 2004).





References


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corporations and small and medium-sized enterprises in
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Experiences-Best Practices. New York and Geneva: United
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Benito G, Grogaard B and Narula R (2003). “Environmental
influences on MNE subsidiary roles: economic integration and the
Nordic countries”, Journal of International Business Studies, 34:
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Blomström M and Kokko A (1997). “How foreign investment affects
host countries”. Policy Research Working Paper. Washington
D.C.: World Bank.


Edquist C and Johnson B (1997). “Institutions and organisations in
systems of innovation”. In Edquist C, ed., Systems of Innovation:
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Washington: Pinter.


Ehrnberg E and Jacobsson S (1997). “Technological discontinuities
and incumbents’ performance: an analytical framework”. In
Edquist C, ed., Systems of Innovation: Technologies, Institutions
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Etzkowitz H and Leydesdorff L (2000). “The dynamics of innovation:
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_____ (2000). “Transnational corporations and technology flows”. In
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_____ and Narula R (2004). “FDI and its role in economic
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_______ and Portelli B (forthcoming). “Foreign direct investment
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E.00.II.D.20.






The complexity and internationalization of innovation:
the root causes



Dieter Ernst1



The internationalization of innovation continues to lag


behind the internationalization of finance, distribution and
manufacturing but, it is now experiencing a rapid proliferation.
The main drivers are TNCs who are increasing their overseas
investment in R&D, while seeking to integrate geographically
dispersed innovation clusters into global networks of
production, engineering, development and research. This adds
an important new dimension to the evolution of cross-border
corporate networks. Global innovation networks are now being
crafted, in addition to the existing global production networks.



Since the late 1990s, this process has no longer been


restricted to the industrial heartlands of the OECD. The
internationalization of innovation is now expanding into new
locations in emerging economies, primarily in South, East and
South-East Asia. Going beyond adaptation, R&D in the new
locations now also encompasses the creation of new products
and processes. TNCs are at the forefront of these developments,
experimenting with new approaches to the management of
global innovation networks. However, local firms are playing
an increasingly active role as sources of innovation and in
shaping relevant standards.



As R&D and innovation are critical for economic


growth, competitiveness and welfare, the internationalization of
innovation creates new challenges and opportunities for a wide
range of public policies that affect FDI and economic
development. In the home countries of TNCs that are
internationalizing R&D and innovation, there are concerns that



1 The views expressed in this study are those of the author and do


not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the author is affiliated.




Globalization of R&D and Developing Countries




62


this may extend the “hollowing-out” of their economies well
beyond manufacturing to research and development, the most
fundamental sources of their economic growth.2 These fears
may feed into protectionism (Granstrand and Sjölander 1990).
On the other hand, emerging economies (the host countries of
international R&D and innovation) are all searching for
strategies that would enable them to benefit from integration
into global R&D and innovation networks. Prominent examples
are attempts by governments and domestic firms in East and
South-East Asia’s leading electronics exporting economies
(China, the Republic of Korea, Taiwan Province of China,
Singapore and Malaysia) to build innovative capabilities within
the above global networks.



Research on the internationalization of innovation has


recently received a boost, but it is still at a very early stage.
There are few robust data on the drivers and especially the
impacts of these processes. There are now concerted efforts to
close this research gap for the internationalization of innovation
among industrialized countries. However, there is limited
research on what precisely is driving the more recent extension
of R&D and innovation into new locations outside the
established centres of excellence in the United States, Japan and
Europe. Even less is known about possible impacts, and
effective policy responses.



This paper addresses a particularly important


unresolved question: What explains the internationalization of
innovative activities that involve highly complex technological
knowledge? In innovation theory, it is assumed that complexity
constrains the internationalization of innovation. This is based
on the proposition that physical proximity is advantageous for
innovative activities that involve highly complex technological
knowledge. In a frequently quoted article, the late Keith Pavitt
and his co-author Pari Patel (Pavitt and Patel 1991) used patent



2 See for instance, Friedman 2005.




The complexity and internationalization of innovation




63


data to demonstrate that innovative activities of the world’s
largest TNCs were among the least internationalized of their
functions. They argued that firms tended to concentrate
innovation in their home countries, in order to facilitate the
exchange of complex knowledge. Hence, complexity explained
why innovation remained an important case of “non-
globalization”.



However, chip design, a process that creates the high


value in the IT industry and that requires complex knowledge,
does not confirm this proposition. Over the past few years, a
heavy concentration in a few centres of excellence (mainly in
the United States, but also in Europe and Japan), has given way
to growing organizational and geographical mobility. Vertical
specialization within global design networks represents an
important test case for the study of global innovation networks.
Global design networks are shaped by the progressive dis-
integration of the design value chain and to its geographical
dispersion. Vertical specialization within global design
networks thus combines the “outsourcing” of stages of chip
design to specialized suppliers and its “offshoring” across
national boundaries. Of particular importance has been a rapid
expansion of chip design in leading Asian electronics exporting
countries that has been accompanied by substantial progress in
the complexity of design.

1. Spatial stickiness of innovation



For decades, the dominant position of researchers has


been that innovation, in contrast to most other stages of the
value chain, is highly immobile. Cognitive complexity is the
main reason for such spatial stickiness of innovation. It is
assumed in innovation theory that to cope with the demanding
requirements of cognitive complexity, firms have a strong
incentive to concentrate innovation in their home countries.
However, recent empirical research on globalization has clearly
established that the centre of gravity has shifted beyond the




Globalization of R&D and Developing Countries




64


national economy. International linkages proliferate, as markets
for capital, goods, services, knowledge and labour are
integrated across borders. While integration is far from perfect
in markets for technology (Arora et al. 2001), it is nevertheless
transforming the geography of innovation (Ernst 2002a). This
process is well captured in Cantwell’s important observation
that instead of a few pre-eminent centres of innovation, there
are now “multiple locations for innovation, and even lower-
order or less developed centres can still be sources of
innovation.” (Cantwell 1995: 172).3

2. Root causes of organizational and geographical mobility



To explain the internationalization of innovation, this


section highlights the following four general root causes that are
gradually reducing the constraints imposed by knowledge
complexity on the organizational and geographical mobility of
innovation (Ernst 2003a):

• institutional change through liberalization;
• the impact of general-purpose technologies (such as ICT);
• transformations in markets, competition and industrial


organization (especially vertical specialization through
network arrangements);



3 A particularly intriguing example is China’s pioneering role in


the development of the world’s first commercially operated nuclear
“pebble bed” reactor that offers the hope of cheap, safe and easily
expandable nuclear power stations (China in drive for nuclear
reactors, Financial Times, 8 February 2005: 4). Within Asia, new
innovation clusters have also emerged for broadband technology and
applications in the Republic of Korea and Singapore, for digital
consumer devices in the Republic of Korea, China, Hong Kong
(China) and Taiwan Province of China, and for software engineering
and project management in India. Other examples are Europe’s newly
emerging innovation clusters for microelectronics technology in
Crolles (near Grenoble), at the Inter-University Microelectronics
Center (IMEC) at Leuven, Belgium and in Dresden, Germany.




The complexity and internationalization of innovation




65


• adjustments in corporate strategy and business models.

a. Liberalization


Liberalization has four main elements: trade
liberalization; liberalization of capital flows; liberalization of
FDI policies; and privatization. While each of these has
generated separate debates in the literature, they hang together.
Earlier success in trade liberalization has sparked an expansion
of trade and FDI, increasing the demand for cross-border capital
flows. This has increased the pressure for liberalization of
capital markets, forcing more and more countries to open their
capital accounts. In turn this has led to a liberalization of FDI
policies, and to “privatization tournaments”.



The overall effect of liberalization has been a


considerable reduction in the cost and risks of international
transactions and a massive increase in international liquidity.
TNCs have been the primary beneficiaries: liberalization
provides them with a greater range of choices for market entry
between trade, licensing, subcontracting, and franchising
(locational specialization); it provides better access to external
resources and capabilities that a TNC needs to complement its
core competencies (outsourcing); and it has reduced the
constraints for a geographic dispersion of the value chain
(spatial mobility). During the last part of the 20th century, this
has given rise to the spread of global production networks.
Since the turn of the century, TNC-cantered network
arrangements are now also encompassing innovation, giving
rise to global innovation networks.

b. Information and communication technology


The second important root cause of the increasing
mobility of innovation is the rapid development and diffusion of
ICT. ICT has had a dual impact: it has increased the need for,
and has created, new opportunities for globalization. The cost




Globalization of R&D and Developing Countries




66


and risk of developing ICT has been a primary cause for market
globalization: international markets are required to amortize
fully the enormous R&D expenses associated with rapidly
evolving process and product ICT (Kobrin 1997: 149). Of equal
importance are the huge expenses for ICT-based information
management (Brynjolfsson and Hitt 2000). As the extent of a
company’s R&D effort is determined by the nature of its
technology and competition rather than its size, this rapid
growth of R&D spending requires a corresponding expansion of
sales, if profitability is to be maintained. No national market,
not even the United States market, is large enough to amortize
such huge expenses.



ICT-based information management also creates new


opportunities for globalization, enabling international
production rather than exports to become the main vehicle for
international market share expansion. Over time, the expansion
of global production networks requires the parallel extension of
engineering support services. This implies that knowledge
diffusion among different network nodes becomes the necessary
glue that enables global production networks to grow. At some
stage, once an individual global production network node has
reached a critical threshold, TNCs may need to upgrade these
activities to include product development and design. Much
depends of course on the development of local innovation
capabilities and systems (Ernst and Kim 2002).



Of critical importance has been the enabling role played


by ICT: these general-purpose technologies (Lipsey and Carlaw
forthcoming) have substantially increased the mobility, i.e.
dispersion of firm-specific resources and capabilities across
national boundaries; they also provide much greater scope for
cross-border linkages, i.e. the integration of dispersed
specialized clusters. This has substantially reduced the friction
of time and space, not only for sales and production, but also for
R&D and other innovative activities. A TNC can now serve
distant markets equally as well as local producers; it can also




The complexity and internationalization of innovation




67


now disperse more and more stages of its value chain across
national borders in order to select the most cost-effective
location.



In addition, ICT and related organizational innovations


provide effective mechanisms for constructing flexible
infrastructures that can link together and coordinate economic
transactions at distant locations (Antonelli 1992, Hagstrøm
2000). This has important implications for organizational
choices and locational strategies of firms. In essence, ICT
fosters the development of leaner, meaner and more agile
production and innovation systems that cut across firm
boundaries and national borders. The underlying vision is that
of a network of firms that enable a TNC to respond quickly to
changing circumstances, even if much of its value chain has
been dispersed.

c. Transformations in markets, competition and industrial
organization


The third root cause of the increasing organizational
and geographical mobility of innovation is found in the
transformations in markets, competition and industrial
organization that result from the interplay of liberalization and
ICT. “Globalization” is a widely used shorthand for
transformations in markets, defined as the integration, across
borders, of markets for capital, goods, services, knowledge, and
labour (Ernst 2005b). Barriers to integration continue to exist
in each of these different markets (especially for low-wage
labour), so integration is far from perfect but, there is no doubt
that a massive integration of markets has taken place across
borders that, only a short while ago, seemed to be impenetrable.



This has drastically changed the dynamics of


competition. The geographic scope of competition has
broadened and competitive requirements are now much more
complex. Competition now cuts across national borders - a




Globalization of R&D and Developing Countries




68


firm’s position in one country is no longer independent from its
position in other countries (Porter 1990). The firm must be
present in all major growth markets (dispersion). It must also
integrate its activities on a worldwide scale, in order to exploit
and coordinate linkages between these different locations
(integration). Competition also cuts across industry boundaries
and market segments: mutual raiding of established market
segment fiefdoms has become the norm, making it more
difficult for firms to identify market niches and to grow with
them.



This growing complexity of competition has changed


the determinants of location, as well as industrial and firm
organization. In the case of location decisions, while both
market access and cost reductions remain important, it has
become clear that they have to be reconciled with a number of
equally important requirements that encompass:
• the exploitation of uncertainty through improved


operational flexibility (Kogut 1985, Kogut and Kulatilaka
1994);


• a compression of speed-to-market through reduced product
development and product life cycles (Flaherty 1986);


• learning and the acquisition of specialized external
capabilities through asset-augmenting R&D (Hedlund 1986,
Kogut 1989, Kogut and Zander 1993, Dunning 1998,
Zander and Kogut 1995, Kuemmerle 1996, Patel and Vega,
1999, Le Bas and Sierra 2002);


• the need to access the evolving global talent pool (D’Costa
2004, Ernst, 2005a) and, a shift of market penetration
strategies from established to new and unknown markets
(Christensen 1997).



As TNCs seek to cope with the increasingly demanding


determinants of location, this induces them to consider the
offshoring of gradually more knowledge-intensive activities,
including some aspects of product development. In this sense, it
is possible to argue that the transition from the offshoring of




The complexity and internationalization of innovation




69


manufacturing to the “outsourcing of innovation” (Business
Week 21 March 2005) is an evolutionary process and, that
TNCs are gradually building global innovation networks onto
their existing global production networks.



Changes in industrial organization are equally


important. No firm, not even a dominant market leader, can
generate internally all the different capabilities that are
necessary to cope with the requirements of global competition.
Thus, competitive success critically depends on “vertical
specialization”: TNCs selectively “outsource” certain
capabilities from specialized suppliers, and they “offshore”
them to new, lower-cost locations. While vertical specialization
initially was focused on final assembly and lower-end
component manufacturing, it is increasingly being pushed into
higher-end value chain stages, including product development
and design capabilities. To make this happen, TNCs had to shift
from individual to increasingly collective forms of organization,
from the multidivisional (M-form) functional hierarchy
(Williamson 1975 and 1985, Chandler 1977) to the networked
global flagship model (Ernst, 2002b).



The electronics industry has become an important


breeding ground for this new industrial organization model. A
massive process of vertical specialization has segmented an
erstwhile vertically integrated industry into closely interacting
horizontal layers (Grove 1996). Until the early 1980s, IBM
personified ‘vertical integration’: almost all ingredients
necessary to design, produce and commercialize computers
remained internal to the firm. This was true for semiconductors,
hardware, operating systems, application software, and sales
and distribution.



Since then, vertical specialization became the industry’s


defining feature (Ernst 2003a). Most activities that used to
characterize a computer company are now being farmed out to
multiple layers of specialized suppliers, giving rise to rapid




Globalization of R&D and Developing Countries




70


market segmentation and, an ever finer specialization within
each of the above value chain stages. Over time, as firms have
accumulated experience in managing global distribution and
production networks and, as they are learning from successes
and failures in inter-firm collaboration, this has given rise to
new and increasingly sophisticated forms of corporate network
arrangements. It is on the basis of such learning processes that
TNCs are now pushing vertical specialization deeper into the
innovation value chain, gradually constructing global
innovation networks.

d. Adjustments in corporate strategy and business models


Vertical specialization went hand in hand with
adjustments in corporate strategy and business models that
further enhanced the organizational and geographical mobility
of innovation. In the IT industry for instance, these adjustments
were especially important in the choice of product and process
specialization, in investment funding and, in human resources
management. Feeding into each other, these adjustments are
“systemic” in that small changes in any of them require
adjustments in all the other aspects of the business model.



The spread of venture capital and related regulatory


changes in the financial industry4 have drastically changed
corporate strategies of investment funding. United States
venture capital firms provide access to a massive infusion of
capital from United States pension funds as well as hands-on
industrial expertise. As a result, start-up companies in the IT


4 Important complementary changes in United States financial
institutions include the launching of NASDAQ in 1971 (making it
much easier for start-up firms to go public), the reduction of the
capital gains tax by the United States Congress in 1978, from 49% to
28%, and, the Department of Labor decree in 1979 that pension fund
money can be invested not only in listed stocks and high-grade bonds
but also in more speculative assets, including new ventures (Lazonick
2005: 23).




The complexity and internationalization of innovation




71


industry now were able to raise capital for high-risk innovation
projects. At the same time, global IT industry leaders have
increasingly used stock to attract and retain global talent and to
acquire innovative start-up companies (Lazonick 2003). Both
changes in investment funding have led to far-reaching changes
in corporate governance, with the result that investment
decisions are now primarily oriented towards servicing
shareholder requirements. This has drastically changed the
parameters for innovation management. As IT firms can rely
more and more on stock and venture capital, they are under
increasing pressure to raise the productivity of their innovation
efforts and, to commercialize as fast as possible the resulting
IPRs.



As for the management of labour, the IT industry has


seen a dramatically diminished commitment to long-term
employment “on both sides of the employment relation”
(Lazonick 2005:2), giving rise to a substantial increase in the
inter-firm and geographical mobility of labour, especially for
highly skilled engineers, scientists and managers. In the United
States, the emergence of a “high-velocity labour market” (Hyde
2003) for IT skills is driven by the proliferation of start-up
companies; a drastic increase in the recruitment of highly
educated foreigners; and the spread of lavish incentives (such as
stock options) to induce job-hopping.



This has raised the cost of employing IT workers in the


United States. For instance, between 1993 and 1999, computer
scientists and mathematicians experienced the highest salary
growth (37%) of all United States occupations (NSF 2004,
chapter 3, page 14). Average real annual earnings of full-time
employees in California’s software industry rose from $80,000
in 1994 to $180,000 in 2000, only to fall drastically to below
$100,000 in 2002, after the bursting of the “New Economy”
bubble. However, even in the midst of the IT industry recession,
employees in the United States IT industry continued to earn,
on average, much more than in most other industries of the




Globalization of R&D and Developing Countries




72


economy and, between five and ten times more than their
counterparts in Asia (outside of Japan). In 2002, the average
annual wage in the United States IT industry was $67,440 (with
a high of $99,440 in the software industry), compared with
$36,250 in all private-sector industries (United States,
Department of Commerce 2003, appendix table 2.3). This has
created a powerful catalyst for IT firms in the United States to
increase their overseas investment in R&D, in order to tap into
the growing pool of educated and experienced IT talent that is
available in Asia at much lower wages.



3. Changes in innovation management


The above transformations in markets, technology,
competition and strategy have provoked fundamental changes
in innovation management, further enhancing the mobility of
innovation. A transition is under way towards gradually more
open corporate innovation systems, based on an increasing
vertical specialization of innovation. What explains the
dynamics of these changes, and how do they shape the
internationalization of innovation? This section highlights a
gradual opening and networking of corporate innovation
systems; examines the role played by evolving global markets
for technology and for knowledge workers in the transition to
global corporate innovation networks; and finally, discusses
possible strategic benefits for TNCs.

a. Opening and networking of corporate innovation systems


Corporate innovation management needs to address
four tasks simultaneously: to develop innovative capabilities
(including R&D);5 to recruit and retain educated and



5 “Innovative capabilities” are defined as the skills, knowledge


and management techniques needed to design, produce, improve and
commercialize “artefacts”, i.e. products, services, machinery and
processes (Ernst 2005c).




The complexity and internationalization of innovation




73


experienced knowledge workers; to develop and adjust
innovation process management (methodologies, organization
and routines) in order to improve efficiency and time-to-market;
and to match all three tasks with the corporation’s business
model, which determines customers, market segments, pricing,
the degree of in-sourcing and outsourcing and, which defines
the structure of required distribution, production and innovation
networks. All four tasks are intrinsically interdependent but, of
greatest importance is compliance with the firm’s business
model. In fact, if a firm pursues the first three tasks without a
clear definition of the business model, this is likely to produce
commercial failure.



The growing organizational and geographical mobility


of innovation creates new challenges, but also provides new
opportunities for innovation management. The challenge is that
no firm, not even a global market leader like IBM, can mobilize
all the diverse resources, capabilities and bodies of knowledge
internally. Instead, both the sources and the use of knowledge
become increasingly externalized. Now, firms must supplement
the in-house creation of new knowledge and capabilities with
external knowledge sourcing strategies. There are strong
pressures to reduce in-house basic and applied research and, to
focus primarily on product development and the absorption of
external knowledge (e.g. Chesbrough 2003, Arora et al. 2001).
No longer does this externalization of innovation stop at the
national border. Firms increasingly need to tap sources of
knowledge that are located overseas (Ernst 2002a).



At the same time, corporate innovation management is


under increasing pressure to commercialize existing intellectual
property rights through aggressive technology licensing.
Furthermore, recruitment of knowledge workers now draws on
an evolving global labour market, especially for scarce
bottleneck skills, in order to keep a cap on rising costs of R&D
and engineering. Finally, a corporation’s business model is no
longer exclusively shaped by peculiar characteristics of home




Globalization of R&D and Developing Countries




74


country markets, but needs to adjust to diverse idiosyncratic
overseas markets.



The result has been a gradual opening and networking


of corporate innovation systems (Arora et al. 2001, Chesbrough
2003, Ernst, 2005b). For instance, the Science and Engineering
Indicators 2004 report by the United States NSF highlights the
increasing importance of innovation networks that cut across
industries and national borders. The report argues that “the
speed, complexity, and multidisciplinary nature of scientific
research, coupled with the increased relevance of science and
the demands of a globally competitive environment, have …
encouraged an innovation system increasingly characterized by
networking and feedback among R&D performers, technology
users and their suppliers and, across industries and national
boundaries” (United States NSF 2004, Volume I, page IV-36).



Chesbrough’s concept of “open innovation” provides a


useful stylized model of this gradual opening of corporate
innovation systems. However, the model does not address
explicitly the international dimension, i.e. the development of
global innovation networks. In Chesbrough’s model, a
corporation has a “closed” innovation system, when it seeks to
discover new breakthroughs, to develop them into products, to
build the products in its factories and, to distribute, finance and
service those products; “all within the four walls of the
company” (Chesbrough 2003: 4).6 An “open” innovation
system, on the other hand, requires that the corporation redefine
its business model to commercialize technologies that it has at


6 Naturally, hardly any company has ever relied on a completely
closed, self-contained innovation system, except in times of war or in
dictatorial societies. Chesbrough’s concept of a “closed innovation
system” highlights two stylized organizational routines that over time
constrain the economic benefits from innovation: First, the firm
creates ideas for the sole purpose of using them, and second, the firm
only uses ideas that have been created internally, the so-called NIH
(“not invented here”) syndrome (Chesbrough 2003: 29).




The complexity and internationalization of innovation




75


its disposal, both from external sources and through in-house
development.

b. Global markets for technology


In an open innovation system, both the source and the
use of knowledge can be external for the TNC. The firm can
create ideas for external and internal use, and it can access ideas
from the outside as well as from within. Firms are able to move
to an open innovation system, because an increasing mobility of
knowledge has created an abundance of knowledge outside the
firm. “The proliferation of public scientific databases and online
journals and articles, combined with low-cost internet access
and high transmission rates…[provide]…access to a wealth of
knowledge that was far more expensive and time-consuming to
reach as recently as the early 1990s” (Chesbrough 2003: 44).



Arora et al. (2001) demonstrate that the gradual


opening of corporate innovation systems is driven by the
increasing division of labour in innovation.7 This gives rise to
the growth of “markets for technology”, which is further
enhancing the mobility of innovation. Markets for technology
affect corporate innovation strategy in multiple ways, creating
more space for a gradual opening and networking of corporate
innovation systems. TNCs can now outsource knowledge that
they need to complement their internally generated knowledge
and, they can choose to license their technology, and hence
enhance the rents from innovation.



The idea of knowledge outsourcing runs counter to


established wisdom in innovation theory. Barney (1991) for



7 The argument that technology and innovation can be the subject


of a division of labour goes back to Stigler (1951). That widely quoted
article argues that as the extent of the market is increasing, the
division of labour would also embrace innovation, leading to the rise
of stand-alone R&D laboratories that would sell their research results
to other parties.




Globalization of R&D and Developing Countries




76


instance, argues that for a firm to grow, it must control
resources that are valuable, rare and imperfectly mobile. The
underlying assumption is that technological assets cannot be
directly bought and sold, and the services of such assets cannot
be rented. Teece (1986) demonstrates that in the absence of
technology markets, firms must invest in creating “co-
specialized assets” (such as the production of core components
and accumulated knowledge of customer requirements) to
maximize their returns from innovation. And Edith Penrose, in
her pioneering study (“The theory of the growth of the firm”),
concludes that “... a firm’s rate of growth is limited by the
growth of knowledge within it” (Penrose [1959] 1995: XVI-
XVII), emphasizing the capacity for knowledge integration.



However, markets for technology broaden the choices


available to a firm. There is now much greater scope for
external technology sourcing. Markets for technology actually
increase the penalty for the NIH (“not invented here”)
syndrome, i.e. a reluctance to use external technologies. As the
mobility of knowledge increases, a firm’s competitive success
critically depends on its ability to monitor and quickly seize
external sources of knowledge (Iansiti 1997). As demonstrated
by Iansiti and West (1997), a company can leverage basic or
generic technologies developed elsewhere, which allows it to
focus on developing unique applications that better suit the
needs of specific overseas markets. Industry leaders can now
attempt to balance in-house innovation and external knowledge
sourcing. However, external knowledge sourcing can also
provide a short cut for late entrants from developing countries.
For instance, companies that trail behind industry leaders in
their in-house technological capabilities can now use external
technology sourcing to enhance their in-house innovative
capabilities (Ernst 1997 and 2000).



Markets for technology also create new opportunities


for appropriating innovation rents through technology licensing.
The underlying assumption is that once markets for technology




The complexity and internationalization of innovation




77


exist, knowledge will be sufficiently codified and IPRs will be
well defined and protected (Kogut and Zander 1993) but, theory
also shows that an excessive reliance on technology licensing
may be risky, as it cuts the company off from vital system
integration knowledge that is necessary for continuous
innovation (Grindley and Teece 1997).

c. Evolving global markets for knowledge workers8


Equally important for the gradual opening of corporate
innovation systems has been the increasing availability of
knowledge workers outside the dominant corporations and their
rapidly increasing geographical mobility, first within the United
States (e.g. the GI bill after World War II), then in Europe
(Marshall aid for reconstruction and later various rounds of EU
enlargement) and Japan and, after 1970, in the newly
industrializing economies of East and South-East Asia. In all of
these regions, as well as in China, India, Brazil and the Russian
Federation, government policies to improve education and
training, and to enhance their interaction with business needs,
have helped to increase the supply of knowledge workers.



The result is an evolving global market for knowledge


workers. According to the United States NSF (2004, Volume 1,
chapter 3), more and more governments are implementing
aggressive policies designed to attract highly trained and
experienced engineers, scientists and R&D managers from
abroad. TNCs are responding to the intensifying competition for
scarce global talent, “by opening high-technology operations in
foreign locations, developing strategic international alliances,
and consummating cross-national spinoffs and mergers” (ibid:
0-3). For some bottleneck skills, like experienced design
engineers for analogue integrated circuits, this may lead to
global “auction markets” for knowledge workers, enabling them
to sell their talents to the highest bidder. Overall however, the



8 This section draws on Ernst 2005a.




Globalization of R&D and Developing Countries




78


emergence of a global market for knowledge workers seems to
have kept a tight cap on increases in remuneration (Lazonick
2005). In summary, the leading TNCs can tap into global
markets for knowledge workers who are readily available for
hire and need not require extensive internal training or the
inducement of lifelong employment.



Until the turn of the century, the United States was the


main beneficiary of the globalization of knowledge workers, as
the main recipient of a global brain drain. A 1998 NSF study
showed that over 50% of the post-doctoral students at MIT and
Stanford were not United States citizens, and that more than
30% of computer professionals in Silicon Valley were born
outside the United States (United States NSF 2004). Data from
the most recent 2000 United States Census show that in science
and engineering occupations approximately 17% of bachelor’s
degree holders, 29% of master’s degree holders, and 38% of
doctorate holders were foreign born. This has enabled start-up
companies to pursue “learning-by hiring away” strategies. They
could rapidly ramp up complex innovation projects with highly
experienced personnel that were trained by other corporations
or countries. However, the main beneficiaries were major TNCs
who were able to reduce the cost of research, product
development and engineering by shifting from national to
global recruitment strategies.



It is important to emphasize that over the last few years,


the privileged position of the United States in global markets for
knowledge workers, has faced new challenges. In fact, the two
main concerns of the most recent Nation Science Board report
on “Science & Engineering Indicators”, are competing
recruitment practices of foreign governments and TNCs and
whether “post 9/11” visa restrictions to foreign students,
scholars and engineers will dry up the erstwhile readily
available supply of top talent for United States firms.




The complexity and internationalization of innovation




79


d. Strategic benefits for TNCs


An important strategic benefit that TNCs can draw from
the opening and networking of corporate innovation systems is
that this may facilitate the matching of business models and
technology road maps. For instance, external and international
knowledge sourcing can help to fill the gaps between both, at
least temporarily. It can also help to identify and address “blind
spots” that have gone undetected within a closed innovation
system. This is of critical importance, as the increasing
complexity of technology road maps poses a serious challenge
to corporate innovation management.



The International Roadmap for Semiconductors, was


co-published by the semiconductor industry associations of the
United States and other leading semiconductor exporting
countries (ITRS 2004). Until the mid-1990s, its primary
concern was to coordinate requirements within fabrication that
needed to be fulfilled to extend Moore’s Law.9 The road map
thus focused on defining interfaces between a variety of
complementary semiconductor manufacturing technologies,
including photolithography (the process of using light to etch a
circuit pattern on a chip), the mask (the device that contains the
circuit pattern), the chemical agents used to impart the pattern,
the physical size of the wafers used to hold the etched pattern
and, the equipment used to measure these tiny distances reliably
and accurately. For each of these different innovation agents,
the road map defined the sequencing of complementary
innovations, so that these technologies are produced right at the
time when other required technologies will also be available,
instead of being delivered too early or too late. Today, the
semiconductor road map is substantially more complex, and
needs to coordinate multiple interfaces between the design,
fabrication and application of semiconductor devices that


9 In 1965, Gordon Moore, one of the co-founders of Intel,
predicted that economical integrated circuit density would double
roughly every one to two years (Moore 1965).




Globalization of R&D and Developing Countries




80


increasingly integrate systems on a chip. Hence, it becomes
much more difficult to match technology road maps and
business plans. This has given rise to a progressive vertical
specialization of innovation within global design networks.



Furthermore, an open corporate innovation system can


help the company to hedge against failures of internal R&D
projects or against slippage in capacity expansion. It also helps
TNCs to multiply opportunities for technology diversification.
In other words, there is a choice between “build-or-buy” new
business lines. It may also accelerate the speed of the
innovation cycle and reduce the very high fixed cost of
investing in internal R&D capabilities.



In essence, the transition to more open innovation


systems through global innovation networks reflects the
recognition by incumbent market leaders that there is simply no
way to prevent knowledge diffusion. Even the most aggressive
attempts to slow down such diffusion (such as “black-boxing”
of technology)10 are unlikely to succeed (Ernst 2004). This
explains why incumbent market leaders now prefer to exploit
the diffusion of knowledge, rather than fighting rearguard
battles to protect themselves against knowledge leakage.



Finally, it is important to emphasize that once a TNC


relies on global innovation networks, internal R&D becomes
even more important than it used to be in a “closed” innovation
system. However, the internal research team now needs to
develop extensive linkages with outside and especially
international knowledge sources. This explains the drastic
changes in the organization, routines and incentives of


10 “Black box” technologies are defined as technologies “that
cannot be easily imitated by competitors because they are: (1)
protected under intellectual property rights, such as patents, (2) made
of complex materials, processes, and know-how that cannot be copied,
or (3) made using unique production methods, systems or control
technologies” (Ernst 2005c).




The complexity and internationalization of innovation




81


corporate innovation management that this section has
documented.



In sum, “vertical specialization” is no longer restricted


to the production of goods and services, but now extends to all
stages of the value chain, including research and new product
development. Over the years, this process has taken on an
increasingly international dimension, with the result that
corporate innovation management can now “integrate
distinctive knowledge from around the world as effectively as
global supply chains integrate far-flung sources of raw
materials, labour, components and services” (Santos, Doz and
Williamson 2004: 31). Most importantly, TNCs now can
proceed to construct international innovation networks that
improve the productivity of R&D “by accessing knowledge
from non-traditional cheaper locations” (ibid).



As the number of specialized suppliers of innovation


modules increases, this provides a powerful boost to the
organizational and geographical mobility of innovation. TNCs
are now seeking to integrate geographically dispersed
innovation clusters into global networks of production,
engineering, development and research. Since the turn of the
century, these networks have been extended to emerging new
innovation clusters, especially in Asia. This is expected to
provide TNCs with a new source of competitive advantage:
more higher-value innovation at lower cost.

4. Conclusion



An important lesson from this analysis is that the


internationalization of innovation, and its vertical specialization
within global innovation networks, is driven by a combination
of pull, push and enabling factors that are systemic. For host
country policies, this implies that a narrow focus on demand- or
supply-oriented forces can attract foreign R&D only if these
policies are based on a profound understanding of the




Globalization of R&D and Developing Countries




82


underlying changes in the methodology and organization of the
relevant innovation processes in the particular industry. Only
when pull, push and enabling factors are coming together,
creating a virtuous circle, will host country policies attract R&D
by TNCs and produce the expected results.



Another corollary of the analysis above is the critical


importance of the absorptive capacity of local firms, i.e. their
resources, capabilities and motivations. To stay on the global
innovation networks, local firms need to invest constantly in
their skills and knowledge bases. Policies to strengthen the
innovative capabilities of local firms are equally important. To
reap the benefits of integration into global innovation networks
requires an active involvement of local, regional, and central
government agencies, as well as a variety of intermediate
institutions. This involvement has to take on a very different
form from earlier top-down “command economy” type
industrial policies.



As an immediate policy instrument, it may be necessary


to import missing critical skills from overseas. This could help
to catalyze necessary reforms in the domestic innovation
system. But most important are support policies for local firms
through local supplier development, (co-funded) skill
development, standards setting, policies on IPRs and the
provision of investment and innovation finance through a
variety of sources, including venture capital, and initial public
offerings.11



11 An initial public offering is the first sale of stock by a private


company to the public. Smaller, younger companies seeking capital to
expand their businesses are the most frequent users of initial public
offerings.




The complexity and internationalization of innovation




83



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transfer and imitation of organizational capabilities: an empirical
test”, Organizational Science 5(1): 76-92.














R&D-related FDI in developing countries: implications


for host countries


Prasada Reddy1


The internationalization of R&D is not a recent
phenomenon. Since the 1960s, companies have been
performing some kind of R&D activities outside their home
countries for various reasons but, the magnitude, nature and
scope of the overseas R&D performed in the past were limited.
Much of such R&D was undertaken either to facilitate
technology transfer by adapting parent firms’ technology to
local operating conditions or, to gain a greater share of the local
markets by developing products that met the preferences of the
local customers better.



In the 1990s, the globalization of corporate R&D


attracted greater attention of economists and policy makers,
mainly due to its changing features and its potential
implications. The scope of work in overseas R&D units of
TNCs has gone beyond adaptation tasks to encompass
innovatory product development for global markets or even the
performance of basic research to develop generic technologies.



The objective of this paper is to analyze the driving


forces behind R&D-related FDI in developing countries by
TNCs and its implications for the developing host countries,
particularly for building up innovation capability.

1. Patterns and motives of the globalization of R&D



There are wide differences in the degree of


globalization of corporate R&D between different industries. In



1 The views expressed in this study are those of the author and do


not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the author is affiliated.




Globalization of R&D and Developing Countries




90


general, it is observed that technology-intensive industries, such
as electronics, biotechnology, chemicals and pharmaceuticals
tend to internationalize their strategic R&D to a greater degree
than other industries (Reddy 1997). Globally, the
pharmaceutical industry, followed by food and beverages,
machinery, and transportation equipment manufacturing, show
the highest levels of internationalization of R&D (Niosi 1999).
In the case of Japanese TNCs, most of their R&D units abroad
are in the electronic equipment, pharmaceutical and automotive
industries (Odagiri and Yasuda 1996).



The significant increase in the overseas R&D activities


of TNCs in recent years was motivated mainly by TNCs’ aims
to attain global competitiveness. Their new strategic approach
involves recasting the roles of individual affiliates and their
intra-group interdependencies. In the traditional approach, the
scope of R&D performed by an affiliate had to fit within the
framework of the bilateral relationship between the parent and
the individual affiliate. However, the new approach involves
performance of distinctive operations in a framework of
interdependent networks of mutually supportive facilities
(Pearce 1999: 160).



The growing trend of international technological


alliances is another important element in the globalization of
R&D. The traditional approach, using transaction costs as the
basis, viewed that TNCs tend to develop technology in-house
and internalize within their corporate networks by transferring
technology to their own affiliates, rather than selling it to other
companies. However, since the late 1980s, TNCs have been
entering into technological alliances with foreign companies
and research institutes in an effort to develop new technologies
and products. This new strategy runs contrary to the strategy of
internalization. Such alliances are viewed as evolving strategies
of the TNCs, designed to successfully compete in a turbulent
business environment.




Implications for host developing countries




91


According to Pearce (1999: 157) the growing
importance of overseas R&D units in TNCs’ strategies reflects:
• an increasing involvement in product development, at the


expense of adaptation;
• an interdependent, rather than dependent, position of


overseas laboratories in TNCs’ technology programmes;
• increased relevance of supply-side influences (host country


technology competencies, capacities and heritage); and,
• a decline of centralizing forces on R&D (e.g. economies of


scale, communication and co-ordination problems, concerns
of knowledge security).



The selection of locations for R&D by TNCs depends


on several criteria. These include: proximity to a manufacturing
site; the availability of local universities and professionals; the
ability to build up a critical mass of local researchers (critical
for global technological research); the attractiveness of sources
of technical excellence, e.g. universities, customers or suppliers
etc. and, the availability of excellent communication systems
(de Meyer and Mizushima 1989). The choice of location of
R&D also depends on the type of technology to be developed
and the advantages of national scientific capacity. For instance,
the United Kingdom has been attracting significant foreign
R&D investments in the pharmaceutical industry, because of its
high quality skills in the life sciences and in chemistry.
Similarly, Germany has been a centre for foreign R&D
activities in the electrical engineering and electronics industries,
reflecting German excellence in these areas (Wortmann 1990).



The scope and level of technological activities carried


out abroad by TNCs are determined by the national capabilities
of both home and host countries. Cantwell and Janne (1999)
suggest that when TNCs based in countries with more advanced
technological capabilities in a given industry invest in less
advanced countries in the same industry, they tend to
differentiate their technological activities. Conversely, when
TNCs based in less advanced countries move R&D abroad, they




Globalization of R&D and Developing Countries




92


tend to specialize within the same areas as the parent company
at home. They also suggest that the TNCs located in leading
centres of excellence of a particular industry tend to build up
specialization on the basis of the local technological capabilities
in host countries. At the same time, TNCs located in less
advanced centres tend to draw more on their home-country
capabilities, by replicating their home specialization abroad.



The globalization of corporate R&D has been mainly


limited to location of R&D units between developed countries
but, globalization of corporate R&D continues to evolve as a
phenomenon. In recent years, the globalization processes have
been encompassing more industries, as well as more
geographical areas. Hitherto uncommon locations are attracting
R&D-related FDI by TNCs (Reddy 1993).



Since the mid-1980s, as an offshoot of the globalization


of corporate R&D, TNCs have started performing some of their
strategic R&D in some developing countries. TNCs involved in
this new trend seem to be mostly those dealing with new
technologies. This strategic move by TNCs is facilitated by the
availability of large pools of trained manpower, at substantially
lower wages compared to their counterparts in developed
countries and, an adequate infrastructure.



The primary driving forces behind the new trends are:


• technology-related motives, i.e. to gain access to foreign
science and technology (S&T) resources;


• cost-related motives, i.e. to exploit the cost differentials
between different countries and,


• organization-related motives, i.e. rationalization of TNCs’
internal operations, where an affiliate in a developing
country is assigned a regional or a global product mandate.



The performance of strategic R&D, aimed at


developing products for global/regional markets or mission-
oriented basic research by TNCs, has implications for the




Implications for host developing countries




93


innovatory capabilities of developing host countries (Reddy
1993).



2. Types of R&D units


The different types of R&D activities carried out by
foreign affiliates of TNCs can be categorized into:
• Technology-transfer units, which facilitate the transfer of


parents’ technology to affiliates and, provide local technical
services.


• Indigenous technology units, which develop new products
for the local market, drawing on local technology.


• Global technology units, which develop new products and
processes for main world markets.


• Corporate technology units, which generate basic
technology of a long-term or exploratory nature for use by
the parent company (Ronstadt 1977).


• Regional technology units, which develop products for
regional markets. While markets worldwide are integrating
in terms of standards and technologies, some regional
clusters are also emerging. National markets in these
regional clusters share some common features and needs for
specialized products. Examples of this can be found in
biotechnology, food processing (special types of food, taste,
etc.), pharmaceuticals (drugs for regional diseases) or, in
software development (Reddy and Sigurdson 1994).



3. Waves of R&D globalization


The evolution of the globalization of R&D can be
analyzed in terms of waves (phases). Such a framework helps in
a comprehensive understanding of globalization as a broader
process, by analysing the driving forces in each time period, the
type of R&D located abroad and, the potential impact on the
host countries. Each wave represents a set of distinctive
characteristic features, yet reveals the continuation from one
wave to the other (Reddy 2000: 52-56). The division of time




Globalization of R&D and Developing Countries




94


periods should be taken as approximate indications and not as
precise cut-off dates.



a. The beginnings of the internationalization of R&D – the first
wave in the 1960s



The number of firms performing R&D abroad in the


1960s and earlier was extremely small. Most of the R&D
performed abroad was that of technology-transfer units. The
driving force during this first wave was to gain entry into a
market abroad. This required the adaptation of the product and
process technologies to local conditions and the need for the
continuous support of technical services. The establishment of
technology-transfer units was considered a more cost-effective
way of dealing with technical problems than sending R&D
missions from headquarters. The categories of industries
involved in this process were mostly mechanical, electrical and
engineering, including automobile industries.

b. The growth of international corporate R&D –the second
wave in the 1970s



By the 1970s, firms had started performing R&D


abroad in a significant way. The main driving force was to
increase the local market share abroad. This required increased
sensitivity to local market differences to enhance
competitiveness and TNCs’ general move towards serving
world markets. This was reflected in the fact that most of the
R&D units abroad had been established through acquisitions of
companies abroad (Behrman and Fischer 1980). Moreover,
host-country governments, using industrial policies stipulating
local-content, re-export or plant-location requirements, started
pressurizing TNCs to increase technology transfer. These
circumstances triggered what can be considered the second
wave of the internationalization of R&D, which differed from
the earlier wave in that an increasing number of indigenous
technology units were set up to develop new and improved




Implications for host developing countries




95


products for local markets. This type of activity was
predominant in branded and packaged consumer goods,
chemicals and allied products, etc.



c. From internationalization to globalization of R&D –the third
wave in the 1980s



A number of major changes have been taking place


since the 1980s in the nature and scope of R&D undertaken
abroad by TNCs. Increasingly higher-order R&D, such as
regional technology units, global technology units and corporate
technology units, had been located abroad in what can be
regarded as the third wave of globalization of R&D. Such R&D
abroad is carried out as part of long-term corporate strategy and
is often carried out through inter-organizational collaboration.
Hence, the change in the term from internationalization to
globalization, reflecting the characteristic differences from the
earlier waves. The main driving forces for this phenomenon had
been:
• first, the increasingly globalized basis of competition, aided


by the convergence of consumer preferences worldwide,
creating a need for learning;


• second, the increasing science-base of new technologies,
necessitating multi-sourcing of technologies;


• third, the rationalization of TNCs’ operations, assigning
specific global roles to their affiliates abroad.



These trends are visible mainly in microelectronics,


pharmaceuticals, biotechnology and new materials. The
improvement of information and communication technologies
and the flexibility of new science-based technologies, that allow
de-linking of R&D and manufacturing activities, vastly
facilitated this globalization process.




Globalization of R&D and Developing Countries




96


d. The evolving patterns of globalization of R&D -the fourth
wave in the 1990s



The key driving forces for globalization of R&D since


the 1990s have been the increasing demand for skilled scientists
and rising R&D costs. These forces are triggering the fourth
wave of globalization of R&D, encompassing some developing
economies and countries in transition. The mismatch between
the outputs of universities and the needs of industry is giving
rise to shortages of research personnel throughout the developed
world, especially in engineering fields related to electronics,
automation and computer-aided development/manufacturing
(OECD 1988), compelling companies to widen their research
networks in order to tap more geographically dispersed
scientific talent. The existence of an international market for
investments in research, education and scientific and
engineering personnel and the necessity of scientific knowledge
for competitiveness are leading corporations to direct their
investments to those geographical areas which can best meet
their research needs, including developing countries. TNCs are
also sensitive to variations in the cost of R&D inputs from
country to country (Mansfield et al. 1979). This move by TNCs
is facilitated by the availability of large pools of scientifically
and technically trained manpower in these countries at
substantially lower wages vis-à-vis the developed countries. The
categories of industries involved are microelectronics,
biotechnology, pharmaceuticals, chemicals and software.




Implications for host developing countries




97


4. Implications for developing host countries


A few studies have been done on the impact of TNCs’
R&D activities on the host country. Whatever the implications
suggested by these studies, they tend to be postulated as
hypotheses. Whether the performance of R&D by TNCs
contributes to the enhancement or retardation of independent
technological capability of the host country is a complicated
issue.



In general, there are now two opposing views regarding


the impact of TNCs’ R&D on the host countries. One view
considers inward R&D-related FDI to be beneficial to economic
growth, by providing technology and managerial skills, which
in turn create indirect positive effects for the host country at a
lower cost. These positive effects include technical support to
local suppliers and customers and contract jobs from foreign
R&D units to local R&D organizations, etc. The counter view
argues that R&D activities by foreign firms tend to tap into
unique local R&D resources with little or no benefit to the host
country. Concentrating on problems of little relevance to the
local economy, they may be a little more than disguised “brain-
drain”, diverting scarce technical resources from more useful
purposes (Dunning 1992).



In the context of developing countries, where the


scientific and technical resources are underutilized, the
counterview may lose strength. The benefits are larger, while
the costs involved may be smaller. In the case of developing
host countries, the cost factor may be that such R&D activities
may create islands of high-technology enclaves with little
diffusion of knowledge into the economy. However, over the
long term knowledge and skills cannot be isolated. The
mobility of researchers, the need for local procurement of
persons and materials etc. are bound to diffuse technologies
throughout the economy (Reddy 1993).





Globalization of R&D and Developing Countries




98


In general an R&D affiliate is expected to benefit the
host country in three ways (Pearce 1989).
• By adapting products and processes to local conditions, it


improves the efficiency of the local manufacturing
facilities. This, in turn, may benefit the host country by
increasing the size of output, employment and tax revenue
and, the consumers would have access to products better
suited to their requirements, at perhaps a lower price.


• By assisting the local production affiliate to introduce a new
product, R&D may help to improve the export performance
of the affiliate.


• Through its linkages with the local S&T community, an
R&D unit derives benefit as well as contributing to the
widening of the scope of capabilities of local S&T
resources.



While analysing the implications for the host countries,


it is important to consider the type of R&D being performed
and its direct and indirect effects. Depending on the type of
R&D being carried out, the impact on the host country varies.
Each type of R&D unit displays distinctive linkages with the
local affiliate, the corporate headquarters and, with the local
science and technology system. The stronger the ties with the
local organizations, be it the firms or research institutes, the
greater will be the diffusion of technology/knowledge into the
host country.



The ties are virtually non-existent for a technology-


transfer unit, whose main technology links are with the parent;
somewhat strong for an indigenous technology unit, which may
(but not always) to some extent draw on the local science and
technology system to develop products particularly designed for
the local market. In this type of R&D unit, its linkages with the
local marketing function assume greater importance than
linkages with the local S&T system; stronger for a global
technology unit and strongest for a corporate technology unit. In
these two types of R&D units, the primary motive being that of




Implications for host developing countries




99


exploiting local sources of S&T that cannot be accessed easily
from outside the country, strong local linkages are established
(Westney 1988).


The quantity and quality of R&D performed abroad by
a TNC, i.e. the degree of globalization depends on the type and
cost of knowledge available abroad that is complementary to
the TNC’s operations, i.e. the degree of complementarity. The
larger the degree of complementarity available abroad, the
larger the degree of globalization. Similarly, the degree of
integration of TNCs’ activities in a host country depends on the
degree of complementarity provided by that country. The larger
the degree of complementary knowledge or skills available in a
host country, the larger is the degree of integration. TNCs tend
to locate R&D in countries that offer a knowledge base that is
complementary to their home country’s knowledge base. This is
mainly because the home country still remains the base for the
largest proportion of R&D activities and, a TNC by globalizing
R&D either seeks to overcome shortages of specific inputs in
the home country or, expand its knowledge base into related
activities. So the larger the degree of complementarity between
the home country and host country, the larger is the degree of
globalization from the home country and the larger is the degree
of integration with the host country.



On one hand, the location of R&D facilities by TNCs


would increase the size of the technology-base of the host
country, through the employment of local research personnel
but, on the other hand, the recruitment of these resources by
TNCs, may pre-empt their availability to domestic firms. The
final impact depends on the type of R&D performed by the
TNCs, the type of local resources used by them and, the supply
conditions for such resources in the host economy (UNCTAD
1995).



The potential impact of R&D-related FDI on a


developing host country can be classified into direct effects,
spin-off effects and spillover effects.




Globalization of R&D and Developing Countries




100


a. Direct effects

• Transfer of technology. R&D-related FDI brings into the


host country new equipment (e.g. laboratory machinery and
testing equipment), transfer of application knowledge and
new research methodologies to local scientists and
engineers, and know-how relating to R&D management etc.
While scientists and engineers in developing countries do
possess the basic scientific and engineering knowledge,
they often lack the skills to convert this knowledge into
tangible products and processes. An inflow of R&D-related
FDI helps the host country personnel in acquiring such
application knowledge.



• Subcontracting R&D to local research institutes and firms.


Depending on the type of R&D being conducted by an
affiliate, it may sponsor research projects in local
universities, by providing finances, equipment and training.
For instance, the pharmaceutical TNC GlaxoSmithKline
established a trust fund (S$31 million) for a drug-screening
centre and another (S$30 million) for a neurobiology
laboratory focusing on the brain in the Institute of
Molecular and Cell Biology in Singapore.



b. Spin-off effects

• Transfer of technology to local firms. R&D affiliates of


TNCs may transfer some technologies developed by them
to local firms. During the course of R&D, an affiliate may
develop some by-products that the TNC may not want to
keep for itself. In such cases an affiliate may transfer such
technologies to local firms for commercialization. For
instance, AstraZeneca’s Research Centre India spent its
initial two years of its establishment in developing reagents
(the basic tools of recombinant DNA research) and
transferred these technologies to two local scientists in
India, who established a new company called GENEI (Gene




Implications for host developing countries




101


India) to commercialize these products. Prior to the
establishment of GENEI, these products were being
imported in refrigerated containers, which added costs and
delays to biotechnology research in India. Now GENEI
exports these products to several countries, including the
United States. From being a net importer of these products,
India has now become a net exporter. In addition, other
organizations in India involved in biotechnology research
benefit from low costs supplies and also avoid delays
associated with imports. AstraZeneca gains by securing
regular supplies at low costs.



• Emergence of spin-off firms set up by former employees.


There are several cases of scientists working in an R&D
affiliate leaving the TNC to set up their own subcontract
R&D firms. The technical, commercial and managerial
knowledge gained through work in the affiliate helps these
scientists in setting up such new firms. Affiliates often
support such former employees through awarding R&D
contracts to them. For instance, Parallax Research of
Singapore was established by a former research engineer of
Hewlett Packard. Parallax now carries out subcontracted
R&D for several TNCs, including Hewlett Packard, in the
areas of mechanical and electromechanical systems design
and development. For example, under such a subcontract
Parallax designed and developed an integrated chip for
infrared communications exclusively for Hewlett Packard.



• Acquisition of new skills and knowledge by supplier firms.


TNCs’ R&D activities are placing demands on their
suppliers in host countries for new products and services.
Consequently, these suppliers in the host countries are
acquiring new skills and knowledge necessary to meet such
demand either from other organizations located within the
country and abroad or developing such products and
services on their own. For instance, the inflow of R&D-
related FDI placed demands on Indian architect firms to




Globalization of R&D and Developing Countries




102


acquire new skills. The construction of R&D laboratories
requires high technologies and skills (e.g. laboratories need
to have rooms with highly sterile environments and/or
rooms that can withstand earthquakes and fire and, are also
aesthetically inspiring to researchers). Faced with this
challenge, Indian architect firms have acquired these new
skills/knowledge and are now competing for such contracts
abroad.



c. Spillover effects

• The emergence of a new class of entrepreneur. One of the


most important benefits is that international corporate R&D
activities are infusing the scientific community in
developing countries with commercial culture. R&D-related
FDI opened up new opportunities for scientists and
engineers in developing countries by training them in
converting their theoretical knowledge into tangible
products and processes and, by providing them with
opportunities to become entrepreneurs by helping them set
up subcontract R&D firms. The examples of GENEI and
Parallax reflect this trend.



• The emergence of an R&D culture in developing host


countries. Inflows of R&D-related FDI reinforce the R&D
culture of the host economies. Local firms in host countries
also tend to take up or increase innovation activities due to
the demonstration effect of TNCs’ R&D affiliates. For
instance, although precise figures are not available, the
R&D spending by Indian companies has gone up
significantly since the 1990s, when the R&D-related FDI by
TNCs started flowing into India. This is reflected in the
increasing number of national and international patents
granted to Indian companies and research institutes. India’s
spending on R&D as a proportion of GDP has also gone up
to more than one per cent mainly because of private sector
spending on R&D.




Implications for host developing countries




103



• Competition for R&D personnel. R&D affiliates of TNCs


tend to attract the cream of the scientists and engineers in
developing host countries through higher pay, better career
prospects and challenging tasks. This leaves only the
relatively less talented people for recruitment by host
countries’ firms and research institutes. This may affect the
quality and quantity of R&D focused on national social and
economic objectives. However, this negative effect is
mitigated to a large extent through the mobility of people
from TNCs’ affiliates to set up their own firms or join other
large local firms at a more senior level.



5. Conclusion


The emergence of R&D-related FDI seems to offer
some fresh opportunities for developing host countries. R&D
investments can bring international prestige as well as
employment opportunities for the highly educated. Potentially,
international R&D would be also an impetus to the R&D being
performed by the indigenous industry. Moreover, by creating a
proper framework, developing host countries could persuade the
TNCs to commercialize the research results in the country,
making the benefits larger and quicker. However, for the host
economy to show substantial improvements, the capabilities of
the majority of the population must be enhanced.



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Dunning JH (1992). “Multinational enterprises and the globalisation
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PART II


Case studies











Features and impacts of the internationalization of
R&D by transnational corporations: China’s case



Zhou Yuan1



In recent years, an increasing number of TNCs have


established R&D laboratories and increased their R&D
spending in China. This paper suggests that this
internationalization of R&D by TNCs can benefit developing
countries such as China, although it cannot automatically
upgrade the local S&T capabilities. Therefore, China must
upgrade, in parallel to FDI in R&D, its S&T competitiveness by
strengthening its national innovatory capacities.

1. R&D laboratories of TNCs in China



Since Nortel Networks Corporation and Beijing


University of Posts and Telecommunications jointly set up an
R&D centre in 1994, the number of TNCs’ R&D laboratories in
China has been growing steadily. This tendency was especially
pronounced in recent years. Statistics collected by the Ministry
of Science and Technology show that in 2002, more than 100
R&D laboratories were established by TNCs in China, and by
the end of June, 2004, over 600 of the world’s best-known
TNCs had set up their R&D laboratories in China.



In 2002, the Beijing Municipal Science and Technology


Commission carried out a sample survey among 82 R&D
laboratories of TNCs. That survey (China, MOST 2002)
concluded that:
• many large and well-known TNCs had set up R&D


laboratories in China. Of the 82 sample laboratories, 55 had
been set up by Fortune Global 500 TNCs;



1 The views expressed in this study are those of the author and do


not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the author is affiliated.




Globalization of R&D and Developing Countries




110


• TNCs’ R&D laboratories in China were unevenly
distributed: metropolises with relatively strong R&D
capacities, such as Beijing, Shanghai, Guangzhou,
Shenzhen, Xian and Chengdu, were by far the most
attractive locations for R&D. According to the survey, 60%
of the R&D laboratories of foreign TNCs were located in
Beijing, 18% in Shanghai and 6% in Shenzhen;


• TNCs’ R&D laboratories were active mostly in high-
technology industries, such as information technologies,
software and computers (58 laboratories), the chemical
industry (9), pharmaceuticals (7) and the automotive
industry (5);


• the majority of the parent companies of the 82 R&D
laboratories were headquartered in the United States (32),
Europe (20) and Japan (18); these three locations together
accounted for 85% of the headquarters. The Republic of
Korea, Hong Kong (China) and Taiwan Province of China
were found to be additional important sources of R&D by
TNCs.


TNCs invest increasing amounts of financial resources
into R&D in China. In 1999, of the 10 TNCs in Pudong,
Shanghai, whose output was in the range of RMB 1 to 6 billion,
only four spent more than RMB 100 million on R&D. By 2004,
Motorola alone had invested about RMB 1.3 billion in R&D.
R&D activities supported by foreign investment are playing an
increasingly important role in China. In 2000, the proportion of
foreign investment to overall R&D expenditure surpassed that
of Germany and Japan; the ratio in China is relatively high in
manufacturing (OECD 2003 and China, MOST 2002).

2. Reasons to invest in R&D in China



The boom of R&D is driven largely by the abundant


S&T human resources of China. Some TNCs like IBM and
Microsoft Research evaluate their R&D laboratories as a




R&D by TNCs in China




111


fundamental part of their global R&D activities. The mission of
these R&D laboratories is to become an international R&D
centre, rather than a support laboratory serving the local market.
These R&D laboratories value not only the Chinese market, but
also available talents and technological capacities.



The advantages of Beijing and Shanghai in particular,


lie in the great number of colleges and universities located
there, their large pool of S&T talents and, their well-developed
industries.



A second reason to invest in R&D in China is to


capture its huge internal market. Serving as a link between the
advanced technology of the TNCs and the specific demands of
China, R&D laboratories can adapt foreign products and
technologies to local needs. For instance, a local R&D
laboratory of Matsushita Electric Works adapts the technology
of the parent corporation for electrical appliances to Chinese
specifications. With that adaptation, Matsushita has gained a
good share of the Chinese market.

3. Forms of R&D laboratories in China



The following are the three most common forms of


TNCs’ R&D laboratories in China.


• The first form is an independent R&D laboratory. This is
the most mature, popular and advanced type, and is also the
core of TNCs’ R&D activities in China. Those laboratories
are branches of global R&D networks of TNCs, under the
direct management of the R&D headquarters, and are
financed by the TNCs. As this kind of R&D laboratory can
better protect intellectual property rights, TNCs, attracted
by the improving investment environment, tend to establish
this type of R&D laboratory in China. By the end of




Globalization of R&D and Developing Countries




112


October 2003, more than 260 independent R&D
laboratories had been established by TNCs in China.2



• The second is an R&D department, either under a business


section or, under a joint venture, or undertaking R&D
activities without establishing a specialized department.
Many TNCs try to improve their products and services in
order to better gear their products to local demand.
Motorola, for instance, established R&D departments in the
Personal Communications Sector and the Global Telecom
Solutions Sector respectively, to carry out specific R&D
studies. Moreover, since most foreign affiliates in China are
high-technology companies, almost all of these enterprises
have their own R&D departments or technology
development support companies, in order to ensure normal
production and introduce internationally advanced
technologies. Foreign affiliates producing software in
particular, need a number of personnel to carry out R&D
activities; accordingly, they invest in R&D activities,
although they do not necessarily have an independent R&D
department. This is popular among small foreign affiliates
in software development.



• The third form is a cooperative R&D unit with Chinese


universities, R&D laboratories and enterprises. A limited
number of TNCs subcontract some R&D to local higher
learning R&D laboratories and enterprises, taking
advantage of their personnel. A survey among foreign
enterprises undertaken by the Chinese Academy of Social
Sciences shows that 77% of the foreign enterprises had
never formally cooperated with Chinese R&D laboratories
and 79% of them did not have any plan in this regard.





2 According to the statistics of the Ministry of Science and


Technology.




R&D by TNCs in China




113


4. Impacts of R&D laboratories of TNCs on China


TNCs’ investment in R&D in China has had a positive
impact on the development of human resources, R&D
management and on industrial technology. On the other hand, it
may have had a negative impact on Chinese R&D laboratories.

a. Positive impacts



First of all, TNCs’ investment in R&D has resulted in


the development of human resources on a large scale. TNCs
emphasize the training of personnel, and regard improving the
quality of personnel as a key factor of their competitiveness.
Although China has abundant R&D personnel, most of these
talents used to end up in higher learning and R&D laboratories
to undertake basic research. Moreover, these talents did not
meet the demands of the market. TNCs offer them relevant
training. This contributes to the development of Chinese human
resources and the enhancement of their talents.



Second, R&D laboratories established by TNCs bring


advanced R&D management to China. TNCs not only have
experience with advanced innovation systems and global
innovation networks, but also with developed management
systems and methods of R&D networking. Therefore, TNCs’
R&D, and the training of local people who have been involved
in TNCs’ R&D management, can have a positive spillover
effect on the R&D management of Chinese institutes and
enterprises. In a short period of time, for instance, Microsoft
Research Asia developed an excellent software R&D laboratory
with a worldwide reputation and, it might be possible to
emulate some of the methods used to achieve this.



Third, TNCs’ R&D laboratories raise the overall level


of industrial technology in China and contribute to the
adjustment of its industrial structure. As TNCs’ R&D




Globalization of R&D and Developing Countries




114


laboratories are technology intensive, TNCs increase the overall
industrial technology level of the economy by carrying on R&D
activities and applying for patents in the area of their activities.
Their output of S&T development and innovation may give
birth to the development of relevant products along the product
chain, and also produce spillover effects on product and
technique innovation.

b. Negative impacts




TNCs’ R&D laboratories can also exert a negative
impact on Chinese R&D.
• Chinese R&D laboratories may find it more difficult to hire


talent attracted by TNC laboratories.
• There is a risk that State technological secrets might be


disclosed to foreign firms as a result of personnel
movements and in-depth cooperation with TNCs.


• Some less efficient local R&D laboratories may be forced
to close down because of strong competition by TNCs. In
cases of calls for public bids for instance, foreign affiliates
may be in a better position to win due to their advanced
research capability, equipment and management experience.
The trend of crowding out local laboratories might increase
after China’s accession to the World Trade Organization.


• The internationalization of TNCs’ R&D alone cannot
upgrade China’s S&T competitiveness. The level of
diffusion of the competitive technology of TNCs in China is
still low. According to a survey undertaken by the Chinese
Academy of Social Sciences in Beijing, Shanghai, Suzhou
and Donguan, 91% of foreign affiliates do not apply for
patents, and 13% apply for international patents only.
Moreover, most of the TNCs’ R&D expenditure is within
their own affiliates. In 2002, Chinese universities and
public laboratories derived a mere 1% of their resources




R&D by TNCs in China




115


from foreign TNCs and their affiliates.3 From the point of
view of the structure of R&D expenditure by foreign TNCs
and their affiliates in China, 88% was devoted to business
R&D spending, 8% to laboratories and 4% to higher
learning (China, MOST 2002). Thus, TNCs’ R&D activities
in China focus on applications, rather than basic research
undertaken by higher learning and governmental R&D
laboratories (the relevant technologies that are decisive to
national competitiveness on the macro level).




5. Conclusion


In general, China can benefit from the
internationalization of R&D by gaining advanced R&D
experience and developing its human resources. Nevertheless, a
developing country such as China needs to rely primarily on its
own forces to upgrade S&T competitiveness. TNCs’ R&D
activities alone cannot provide the support needed for national
and business S&T competitiveness. The enhancement of
China's competitiveness lies first and foremost with the
Government of China and Chinese enterprises.





References
China, MOST (2002). China Science and Technology Indicators


2002. Beijing: Ministry of Science and Technology (in Chinese).


OECD (2002). OECD Science, Technology and Industry Outlook
2002. Paris: Organisation for Economic Co-operation and
Development.





3 76% was derived from government sources, 11% from local


firms and 12% from other sources. See China, MOST 2002.










International R&D strategies of TNCs from developing
countries: the case of China



Maximilian von Zedtwitz1



International R&D is a by-product of intensified merger


and acquisition activity (Gerpott 1995) and more deliberate
internationalization of corporate innovation (Bartlett and
Ghoshal 1989). Research on the latter has provided information
on different typologies of corporate technology activities
(Medcof 1997), R&D internationalization strategies (see the
special issue in Research Policy in 1999),2 R&D location
decision-making (Voelker and Stead 1999), multi-site R&D
project management and technology transfer (Chiesa 2000), and
intra-organizational technical communication (Katz and Allen
1984). Most of this research — with few exceptions — focused
on R&D conducted in developed countries, partly because these
countries were responsible for the bulk of global R&D
conducted, partly because their protagonists were more easily
accessible and forthcoming and, partly because R&D in
developing countries was insignificant in scale. For instance, a
review by von Zedtwitz and Gassmann (2002) indicates that on
average, European firms conduct around 30% of their R&D
abroad (half of which in other European countries). The same
ratio is about 8-12% for United States firms and no more than
5% for Japanese firms. Data and research on R&D in
developing countries is scattered and few. Only a handful of
economies outside the developed countries receive some
research attention, among them are Singapore, the Republic of
Korea, India and, most recently, China.



The principal research purpose of this paper is to shed


more light on R&D internationalization by firms in developing



1 The views expressed in this study are those of the author and do


not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the author is affiliated.


2 Volume 28, Issues 2-3.




Globalization of R&D and Developing Countries




118


countries, with a focus on China. First, it assesses the extent of
international R&D emerging from developing countries,
proposing a 2x2 model of past research on international R&D.
Based on research conducted on Chinese technology-intensive
companies, strategies and struggles of R&D internationalization
are investigated and analyzed. The data seems to suggest that
due to their special position, firms from a developing country
organize their international R&D activities as both capability-
enhancing and capability-exploiting structures. The paper
concludes with open research areas and some preliminary
implications for research, management and policy making.



1. Research framework and directions



R&D has always been considered a domain of firms in


technologically advanced and economically developed
countries. In fact, the ten largest countries in terms of GDP also
lead in terms of technology-intensity (except for China and
Brazil). TNCs account for substantial shares (between 33% to
57%, according to a mid-1990s study reported in Gassmann and
von Zedtwitz 1999) of their total national R&D expenditures.
TNCs dominate private international R&D investments. Of the
100 largest TNCs in the world (in the year 2000), 94 were
headquartered in developed countries, three in China, and one
each in Mexico, Venezuela, and the Republic of Korea. Patent
applications in the most important markets are led in numbers
by large TNCs from the United States, Japan, and Western
Europe. Clearly, firms in developed countries dominate
domestic and international R&D. (Dunning 1988, UNCTAD
1999 and 2001).



R&D in developing countries has figured less


prominently. Most research has concentrated on technology
transfer to these countries, and their capacity to absorb
advanced technologies from abroad (Kim 1980 and 1997, Lall
1990). Without doubt, the level of science, technology, and
innovation has been increasing over the last years but, the




TNCs from China




119


investment ratios of S&T to GDP are still far behind developed
countries (see Schaaper 2004, OECD 2002). Moreover, the
leading TNCs from developing countries tend to be low on
technology-intensity, and concentrate on natural resources such
as real estate, oil & exploration, and mining & materials. R&D
by the few technology firms in these countries tends to be
comparatively weak. Lack of S&T resources and lack of local
market demand for sophisticated and expensive technology
goods discourage private efforts in serious R&D.



For the first time since the mid-1980s, when


international R&D became a more widespread practice among
technology TNCs, we are witnessing the emergence of a new
class of high-technology companies from developing countries,
most notably India and China. These companies compete in
highly technology-intensive industries, in which customers
demand great rates of innovation and, in which timely
application of technical know-how is paramount. They have one
thing in common: they are headquartered in large developing
economies. They differ from their predecessors in the Republic
of Korea and Japan in that they are facing international
competition in their home markets, that technological change
has accelerated since the 1970s and, that know-how — and the
workforce — has become more mobile. In other words, the
environment has become more global.



Competition among these companies can be extremely


intense, which does not favour internationalization into foreign
markets. However, a few companies have emerged that pursue
R&D of international calibre nevertheless, such as Embraer in
Brazil (the world’s third largest supplier of mid-range aircraft),
Huawei (a leading telecommunications firm from China), and
Infosys (a global IT services provider in India). The evolution
of companies from developing countries, and the development
of their innovative capacity has been the subject of recent
investigations (Lee et al. 1988, Bell and Pavitt 1993, Sung and
Hong 1999, Xie and Wu 2003, Xie and White 2004). However,




Globalization of R&D and Developing Countries




120


the extent to which firms from developing countries develop
international innovation capacities and build global R&D
networks has not yet been studied in detail. Here too the best
explanation is that until recently there were probably a very
limited number of firms from developing countries able to
undertake such international R&D.



Figure 1 summarizes some of the previous research


trajectories in international R&D research. The first type
concerns “traditional” R&D internationalization among
developed countries, i.e. mostly within the triad countries of
North America, Western Europe, and Japan. This area of R&D
internationalization has been widely researched, and yielded a
very valuable and rich literature as well as a fundamental albeit
initial understanding of transnational innovation management.
Most of the international R&D flows are covered by Type 1
research, as indicated by the preferred routes of FDI (the Triad
countries accounted for 71% of all FDI inflows and 82% of all
FDI outflows in 2001). However, the rise of China (and to some
extend India) as a principal recipient and source of FDI in 2002
and 2003 has led to a new, “modern” category of research,
denoted Type 2 in figure 1. Examples of Type 2 R&D
internationalization are IBM’s establishment of R&D in India,
Microsoft’s Research laboratory in China and, Fujitsu’s
Development Center in Malaysia. This modern form of R&D
internationalization became popular in the late 1990s, driven in
part by improved economic conditions in South-East Asia,
China and Central and Eastern Europe, in part by strategic
considerations of parent companies to set global standards and
build global brands and, in part by a growing understanding and
financial commitment of TNCs to support local sales with local
R&D efforts.





TNCs from China




121


Figure 1. Types of R&D internationalization, based on the
dates of establishment of international laboratories, early


1970s to 2004


Home
Country


Host
Country


Type 4


EXPANSIONARY


(e.g., China Æ Brazil, India Æ China)


Type 2


MODERN


(e.g., US Æ China, EU Æ India)


Type 3


CATCH-UP


(e.g., China Æ US, India Æ EU)


Type 1


TRADITIONAL


(e.g., US Æ EU, JP Æ US)


Developing Advanced


Developing


Advanced


Source: the author.

Type 3 and 4 in figure 1 denote a novel, so far mostly


ignored direction of R&D internationalization. Arguably,
researchers such as Lall (1987, 1990) and Kim (1980, 1997)
have studied the acquisition and development of technological
competencies in developing countries but, the notion of firms
headquartered in developing countries establishing R&D
capabilities outside their home countries is new. The espoused
view was that firms in developing countries were too busy
absorbing technology transferred from abroad, and hardly
capable to push technological boundaries themselves. They
would use their new competitive advantages to defend and build
domestic market shares and, if they were sufficiently attractive
enough, they would be acquired by much larger foreign TNCs.
Some countries imposed policies protecting domestic
technology companies, either by making foreign acquisitions
more difficult or by curbing competition from foreign affiliates.
In any case, the internationalization of business and technology
has largely been unidirectional from developed to developing
countries.




Globalization of R&D and Developing Countries




122


Figure 2. International R&D units and their classification,
based on data collected up to 2004


Home
Country


Host
Country


Type 4: Expansionary


22 (3%)


Type 2: Modern


194 (25%)


Type 3: Catch-Up


64 (8%)


Type 1: Traditional


496 (64%)


Developing Advanced


Developing


Advanced


Source: Based on own research of the locations of 776 international R&D
locations (von Zedwitz and Gassmann 2002)


Type 3 describes firms from a developing country
conducting R&D in a developed country. Because of their
principal motivation of catching up with developed countries,
this type of R&D internationalization is labelled catch-up, with
examples such as Samsung of the Republic of Korea investing
in R&D in Europe, and Acer of Taiwan Province of China in
the United States. These firms are naturally attracted to using
developed countries as R&D bases, partly in order to acquire
local technology and science, and partly in order to support
local product development.



Type 4 R&D internationalization is when a firm in one


developing economy invests in R&D in another developing
country. The reasons for this kind of investment may be in
supporting second-generation technology transfer (when the
earlier recipient of a technology transfers a technology on to an
even less developed country) or, to support other local business
activities. An example is Acer’s R&D laboratory in China, and
Huawei’s R&D centre in Bangalore, India.




TNCs from China




123



As can be seen in figure 2, the instances of Type 3 and


4 internationalization are not trivial. Using a database
comprising the locations of 1,269 R&D units, 776 locations
were identified as international, meaning that the parent
company was headquartered in another country. 64 belonged to
Type 3 or the catch-up type, while a respectable 22 belonged to
Type 4 or the expansionary type (496 R&D units belonged to
Type 1 or the traditional type, and 194 to Type 2 or the modern
type of R&D internationalization). At least in this database,
international R&D from developing countries already
constitutes about 11% of all international R&D.



These Types 3 and 4 of R&D internationalization are


not well understood and - to some extent - even contradict
established views on international R&D. For instance, firms
from developed countries invest in R&D in developing
countries in order to exploit labour and operating costs
advantages. Hence, under what circumstances would a company
from a developing firm consider giving up this particular
advantage by going into a country with a highly adverse
purchasing power parity or, as long as companies from
developing countries are still struggling with the incorporation
of mature technologies transferred by joint venture partners,
how can they assume that they are ready to absorb far more
sophisticated technology currently under development in
developed countries? Furthermore, these foreign advanced
technologies are probably without differentiation potential for
firms from developing countries in the more important domestic
markets.



With its high GDP growth rate and rapid


industrialization of the coastal areas, as well as a growing
number of technology-based companies, China provides a very
fitting example of a developing country. China also faces many
of the same problems other developing countries need to
confront, such as a high degree of state control, low purchasing




Globalization of R&D and Developing Countries




124


power of its domestic currency, comparatively low rates of
tertiary education and, a lag in developing an economic and
legal framework conducive for private business. More
specifically, the research presented in this paper pursued the
following research questions.



• How significant a role do companies from developing


countries, in particular China, play in worldwide R&D?
How relevant is this topic for future research?


• What motivates companies from China to conduct R&D
elsewhere? What are the push and the pull factors?


• What strategies do Chinese firms employ in order to expand
R&D internationally?


• What barriers and challenges do Chinese companies face in
doing so that may be more specific to them as being from a
developing county?



2. Research methodology



The aim of this analysis was to investigate a well


researched phenomenon (internationalization of R&D) in a new
environment (China). With this objective, an empirical,
quantitative research approach would have been appropriate.
However, initial exploratory interviews indicated a low
intensity of international R&D in Chinese companies as well as
a high disinclination to cooperate in academic research on R&D
management. In one of the closest comparables to the present
research, Jin Chen of Zhejiang University attempted to study
international innovation by Chinese companies but received
only 28 valid questionnaires out of 279 sent out (Chen 2003).
With response rates this low, and the main focus of the research
questions to be qualitative in nature, it was concluded that
survey-based research would be ineffective in gathering the
information necessary for purely quantitative empirical
analysis. Instead, it seemed more fruitful to focus on the top
Chinese companies and to conduct in-depth research.





TNCs from China




125


Data for this research was thus collected mostly by
personal research interviews, and complemented by database
research. Research interviews focused on senior R&D managers
in selected Chinese companies, most of which are leading firms
in their industry (Lenovo, Huawei, Haier, Kelon, Founder, ZTE,
Longshine, China National Petroleum, Datang, Dongfeng,
NetEase). Only the first six of these companies operate
international R&D units, while the last five did not posses
foreign R&D presence at the end of 2004. However, both
groups were investigated, as the research objective also
included the identification of barriers and challenges of R&D
internationalization. Most of the interviews were conducted in
late 2003 and 2004. Database and Internet research was
conducted by researchers familiar with the Chinese language,
thus including the much richer documentation available in
Chinese. Research reports were sent back to the interview
partners and feedback was requested to correct erroneous
interpretations and, to ensure greater validity of the data. In
each case multiple sources of information were used to increase
the reliability of observations. Although only representing a
small selection of Chinese companies, the collected R&D data
were compared to an international database of R&D locations
and investment hosted by the Research Center for Global R&D
Management at Tsinghua University in Beijing.

3. The significance of Chinese R&D internationalization



Most Chinese companies are relatively young (and


therefore comparatively small) and focused on domestic
markets. A World Bank survey of 1,500 high-technology
companies in China found that they averaged only about 600
employees and were between 10-15 years old. Even well-
known Chinese TNCs tend to be small: Lenovo, China’s largest
personal-computer manufacturer, has a turnover of only 4% of
IBM’s (at least before its acquisition of IBM’s personal
computer business in late 2004), and Haier, China’s most
famous brand (according to a 2003 survey) had sales of $9.7




Globalization of R&D and Developing Countries




126


billion in 2003. Furthermore, 50% of the Chinese firms’ supply
network is located within their cities, and 75% within China, as
Ed Steinfeld (2002) notes in his analysis of the World Bank
2001 report. Much of the spending on R&D seems to be
directed towards technological learning (Kim 1997), but little of
it results in truly innovative products. Rather than building
dominance in a particular industry through technological
progress, Chinese companies tend to diversify into other sectors
in order to exploit economies of scale. As Steinfeld (2002: 14)
notes, Chinese “firms focus on activities with low barriers to
entry. Once the cost pressures become too intense, rather than
moving upward into higher end activities or taking the time to
develop proprietary skills, the firms diversify into other low
entry barrier markets. The products themselves … are
standardized.” As a result, most of Chinese R&D is
opportunistic and hardly standard-setting.



Given these rather sobering interpretations of the


quality of Chinese R&D, what is the scale of international R&D
by Chinese companies? Unfortunately, no representative data
exists, but an effort was made to get an indication of the
magnitude of this R&D using data from other developing
countries. Earlier research indicated that at least in developed
countries, up to 70% of international R&D was conducted by
the top-150 global companies. In an attempt to approximate the
volume of international R&D conducted, the author took the
fifty largest TNCs from developing countries, eliminated non-
technology companies (33 remained), summed up their
weighted foreign sales (UNCTAD 2001a), and assumed an
average of 2% R&D intensity per firm. Given an average lag of
approximately 50% of R&D internationalization behind foreign
sales (estimated on the basis of von Zedtwitz and Gassmann
2002), this resulted in a total overseas investment in R&D of
about $500 million annually for the leading firms from
developing countries. This is equivalent to the R&D budget of a
single reasonably sized technology-intensive TNC and hence
hardly impressive given the scope of this research.




TNCs from China




127


The Chinese firms in the studied sample operated 77
R&D units, 40 in China and a surprisingly high number of 37
abroad (see figure 3). However, most of these R&D units are
quite small in size, with a few exceptions such as Huawei’s
software laboratory in Bangalore (550 engineers in 2003 and
expected to grow to more than 2,000 by 2005). Haier alone
operated ten small-scale research units abroad, which focused
on technology monitoring and other non-indigenous research
activities. The 26 R&D units in developed countries were
predominantly located in the United States (11) and Europe
(11), and mostly serving as listening post or in product design
roles. Japan, with only two Chinese R&D units seems to be
somewhat under-represented in this sample, probably due to the
small sample size. However, even in the complete database of
776 international R&D units, Japan only accounts for 55 or
approximately 7% of total foreign R&D laboratories.



Eleven of those 37 foreign R&D units (just under one


third) are located in developing countries, thus falling into Type
4 laboratories (figure 4). Chinese firms account for about half of
all international R&D sites owned by another developing
nation. Some of these R&D units are extremely small (e.g. there
are literally just a handful of people in Pakistan and the Islamic
Republic of Iran), but India has attracted quite substantial
Chinese R&D investment.




Globalization of R&D and Developing Countries




128


Figure 3. International spread of leading Chinese R&D-
intensive TNCs, 2004


40


Source: information collected by the author.



Figure 4. International R&D of Chinese TNCs in developed
and other developing countries, 2004




Home
Country


Host
Country


Type 4: Expansionary


51 / 11
All / Intl


Type 2: Modern


0 / 0
All / Intl


Type 3: Catch-Up


26 / 26
All / Intl


Type


Developing


Developing


Advanced


1: Traditional


0 / 0
All / Intl


Advanced


Source: information collected by the author.




TNCs from China




129



To conclude, even if only physical internationalization


of Chinese R&D is considered (ignoring, for the moment,
funding of research at non-Chinese universities and
participation in international research programmes), China’s
R&D globalization has already reached a level comparable to
some smaller but more developed European countries.

3. Determinants of R&D internationalization of Chinese


TNCs

a. Motivation and objectives



“Every multinational will set up in China. Margins are


low here. If we don’t go outside, we cannot survive” (Haier’s
chief executive officer Ruimin Zhang, quoted in The Economist
2004: 72). Haier, with three industrial parks in the United
States, Jordan and Pakistan, ten listening posts in Seoul,
Sydney, Tokyo, Montreal, Los Angeles, the Silicon Valley,
Amsterdam, Vienna, Taiwan Province of China and Hong Kong
(China) and design centres in Lyon, Los Angeles, Tokyo and
Amsterdam, is well on its course towards R&D
internationalization. A recent addition to their R&D network is
a design centre in India, opened in late 2004.



What drives Chinese companies to set up R&D


overseas? Given the fact that China itself is a huge and still
growing market, most market-oriented R&D is likely to be
retained and developed at home. Given also that China still
receives a great amount of foreign technology (see Jolly 2004
for the results of a survey of the motivations of Sino-Chinese
joint ventures), we can hypothesize that Chinese firms
internationalize R&D in order to develop alternate channels of
technology sourcing from developed countries – hence, mostly
home-base augmenting sites in Kuemmerle’s (1997) notation.
Automobile manufacturer Dongfeng Motors has established
four listening posts in the United States, Germany, the United




Globalization of R&D and Developing Countries




130


Kingdom and France for the purpose of being close to major
competitors (not markets) and their technological bases.3



Efficiency-driven rationales (see Gassmann and von


Zedtwitz 1999 for an overview) such as the exploitation of
multiple time zones, the critical mass of R&D, and local cost
advantages, hardly play a role for Chinese companies abroad. In
fact, many foreign companies go to China because of cost
advantages. Hence, Chinese R&D abroad tends to be more
expensive than at home, and also less likely to be set up in the
first place. However, in cases where Chinese firms operate large
manufacturing sites abroad, local R&D has been seen to emerge
in support of product localization and process innovation (e.g.
Haier’s R&D site located with its Camden plant in South
Carolina, United States).



While input-related rationales are probably the


strongest reasons for Chinese R&D internationalization in
developed countries, market and output-related determinants
may explain the establishment of R&D in other developing
countries such as the Islamic Republic of Iran, Jordan and
Chile. Haier prides itself for customer sensitivity. For instance,
it developed air conditioners to cope with particularly adverse
desert conditions in the Middle East, and designed washing
machines that could also handle cleaning vegetables in rural
Asia. ZTE’s R&D sites in Chile and Pakistan are dedicated to
local product adaptation, thus supporting local business
development. However, the emergence of R&D in other
developing countries is still in its infancy.





3 Note that Dongfeng recently reorganized itself to become a
major 50% joint venture company with Nissan Motors of Japan. The
new Dongfeng-Nissan R&D centre in Guangzhou has an investment
of $40 million and serves as a platform to combine Japanese
automotive technology with Chinese standards and product
requirements.





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131


Political, regulatory and governmental factors were not
mentioned as having a strong impact on the decision where to
set up international R&D sites. However, as more and more
Chinese companies develop indigenous intellectual property,
foreign companies and states are attacking Chinese companies
abroad over their earlier infringements on intellectual property
rights at home. As a result, Chinese companies are barred from
entry into foreign markets based technologies that they use
domestically. Local R&D centres could overcome these
difficulties by developing local technology, which, in the
process, would build new technological competencies for
Chinese firms abroad.



International R&D is often also a consequence of


mergers and acquisitions. Although Chinese companies have
been more of a target than a source of mergers and acquisitions,
this seems to be changing, as shown by the investments of
Shanghai GM in GM Daewoo and the acquisition of Germany’s
Schneider by TCL. Thus, R&D units of acquired companies
become part of the Chinese firm’s R&D network, often making
international coordination necessary.

b. Evolution of R&D



The past two decades produced a number of


descriptions of strategies for internationalization of R&D and
innovation. Based on Perlmutter’s (1969) and Bartlett and
Ghoshal’s (1989) model of internationalization of organization,
Gassmann and von Zedtwitz (1999) developed an evolutionary
model of international R&D organization, which fits our
purpose of studying the early stages of international Chinese
R&D. They describe five types of international R&D
organizations: ethnocentric centralized R&D (with a dominant
R&D centre serving far-away markets), geocentric centralized
R&D (where the R&D centre engages in cooperative projects
with customers and other research institutes), the R&D hub
(with the R&D centre serving as the central information and




Globalization of R&D and Developing Countries




132


decision-making platform for all global R&D units), polycentric
decentralized R&D (of R&D units with little global alignment
and coordination) and, the integrated R&D network (in which
all R&D units are equal partners and information and decision-
making is freely shared).



Companies without international R&D units have either


ethno- or geocentric centralized R&D organizations. In the
research sample, this is the case for Lenovo, Netease, CNPC
and Longshine. Netease, an Internet service company with
almost 200 million registered accounts, actually shifted its
development centre from San Francisco, California, where it
was originally founded, to Beijing and Guangzhou, as the
company relocated to China. Most of the technology is
imported from the United States, but a large engineering staff
writes code and programmes targeted at the Chinese market.
Some of its engineers are foreigners who prepare Netease for
more global innovation challenges. Other companies have
engaged in a number of cooperative projects and alliances, for
instance, Lenovo with Intel and Microsoft, and CNPC with
Shell and ExxonMobile. They are becoming more open, and
hence overcome ethnocentrism for the benefit of a more
geocentric outlook.



Moving towards greater physical international R&D


presence are companies like Datang, Founder, Kelon and
Dongfeng. Datang had some less successful experience of joint
ventures with foreign companies such as Lucent of the United
States, but have now formed joint ventures with Philips,
Samsung, and UTStarcom. It seems on track with R&D
internationalization as it explores greater use of its Iranian R&D
site. Its chief executive officer has a PhD from a Belgian
university and work experience in a Siemens R&D laboratory.
Founder recently set up an R&D laboratory in Scotland, which
it plans to expand into its new European headquarters.
Dongfeng’s alliance with Nissan has obvious consequences of




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internationalization of product development between China and
Japan at the least.



Some companies have firmly established global R&D


networks, such as ZTE, Huawei, 3NOD, and Haier. ZTE
established its first three foreign R&D centres in the United
States and Chile in 1998, and has since founded more R&D
laboratories in the Republic of Korea and Sweden. Huawei also
has solid international R&D experience. It was the first Chinese
company to set up an R&D centre in Bangalore in 2000,
earmarking over $100 million for the Indian R&D site, which it
expects to serve the Indian subcontinent, West Asia and Africa
as strategic markets. With 550 engineers in 2003, it was
expected to grow to a staff of 2000 by 2005. Eighty-five per
cent of the R&D staff are Indian nationals, as the purpose is to
tap into the rich Indian expertise in software design, 3G mobile
communications, wireless infrastructure, and network
management, etc. Huawei also operates joint ventures with
Siemens, 3C, Qualcomm and Microsoft to position itself
favourably in the upcoming next-generation mobile
communication technology. Almost 46% of its employees are in
R&D, although due to the lower labour costs in China, the
overall R&D to sales ratio of 10% is more in line with industry
averages.



c. Barriers and problems



What are some of the greatest barriers and problems of


Chinese companies to expand R&D internationally? In part,
they are reflected in typical internationalization problems of
companies from developing countries, but some are more
specific to China, and some are specific to R&D. Chinese
companies face three principal challenges in that respect
(Steinfeld 2002).
• They have a size disadvantage: due to their inferior size,


they cannot compete head on with much larger TNCs.




Globalization of R&D and Developing Countries




134


• They continue to emphasize local business integration
despite increasing international sales. For instance, supply
chains are still highly local or regional, and there is little
integration with global technology suppliers. As a
consequence, Chinese companies are often barred from
more value-added activities, and focus on low-cost
competition, and hence are unable to engage in product
differentiation as a source of competitive advantage.


• They also lack sufficient product innovation. Such
innovation would be required for higher profit margins,
rather than just reducing costs through efficiency
innovation. While simple efficiency innovation produces
advantages for manufacturing and customers, it also locks
in Chinese companies in mostly domestic-oriented
innovation.



Additionally, some companies have to deal with a


number of drawbacks relating to lack of resources, lack of
experience, and entry barriers in new markets.
• Lack of cash and resource.: Although China is an


expanding market, profit margins are low and therefore
only little can be reinvested in R&D. Investment in
groundbreaking R&D (as opposed to technology adaptation
and product localization) is more costly, and the first
movers are likely to experience a loss of market share.
Hence, there is less investment in indigenous R&D , which
is the lifeblood of global R&D networks.


• Lack of management expertise. Chinese companies have
little experience in running or just participating in
international companies, and so few of them are qualified
for international R&D management assignments. Overseas
returnees have been invited to take a stronger lead, but
essentially one of the most important phases of corporate
internationalization would thus be carried out by outsiders.



There is little efficiency advantage to go elsewhere for


R&D as China is already offering a very favourable price-to-




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performance ratio for R&D and engineering work. Any local
R&D work must be paid for with local revenues, which are
generated as local start-up businesses and hence are often
reinvested in business development rather than long-term
product development.



While younger university graduates speak English


better, senior and middle R&D staff have no or little command
of English, which is the international language of business and
technology. It will take several years before more linguistically
trained engineers will have entered the rank and file to support
R&D internationalization (incidentally, many of Haier’s middle
managers are quite young, i.e. in the late 20s).



Chinese management also emphasizes personal


networks (guanxi) to take decisions and get things done. In
international settings, where people are far away from centres of
decision-making and corporate networks, foreign R&D
managers are at a disadvantage to support their causes and risk
permanent loss of social power if removed for too long. Recent
initiatives, such as Dongfeng’s ‘web-enabled R&D systems’ are
expected to alleviate this problem.





d. Strategies of R&D internationalization

Overall, it seems that truly global R&D in Chinese


companies is still far away. Current international R&D
structures function because of strong personal leadership or
because of a military-style command structure. There is little
evidence to suggest that foreign R&D networks managed in this
manner are sustainable over the long run, but perhaps we are
about to witness the creation of a unique Chinese approach to
R&D internationalization. Based on the China example, we can
make the following propositions.
• Firms from developing countries are more likely to


internationalize R&D into developed countries because of




Globalization of R&D and Developing Countries




136


their shortage of domestic technologies, and because of
various limitations to serve foreign markets technologically.


• Firms of developing countries will internationalize R&D
into other developing countries opportunistically, i.e. when
following local customer requests. As a consequence, they
may reap long-term first-mover advantages in less
privileged regions of the world.


• Thus, companies with more developed R&D networks
create two superimposed R&D networks: one which is
innovation capability enhancing, i.e. developing the R&D
network’s capabilities to understand and conduct cutting-
edge technology development by absorbing know-how
from developed countries, and one which is innovation
capability exploiting, i.e. passing on technologies and
technical know-how which has been absorbed earlier and
refined for use in other developing countries.



The innovatory capability enhancing/exploiting concept


is related to Kuemmerle’s (1997) home-base
augmenting/exploiting notation, but differs in two important
aspects.
• The unit of analysis is the R&D network and its various


coordination mechanisms and interactions, rather than a
dyadic knowledge transfer relationship between the
overseas R&D unit with its home base.


• The focus is on innovation capability and its context-
specific actualization, rather than knowledge and
information exchanged between R&D units.



4. Limitations



This paper has presented research that suffers from


limitations, which ongoing research is trying to overcome.
1. The data set is limited and biased towards a) Chinese


companies and b) IT companies. The population size
limitation must be solved by systematically screening all
Chinese firms of a consistent criterion (e.g. total sales or




TNCs from China




137


total R&D investment). The focus on Chinese companies
offers greater in-depth analysis, but limits the potential for
generalizing the findings. Similar research needs to be
conducted in other countries of similar levels of economic
development. The bias towards IT companies is
representative of the greater levels of international R&D
involvement of Chinese IT companies.


2. The use of R&D units is not a perfect proxy for real R&D
internationalization, as a) the average size of R&D units in
China may be different from the average size of R&D units
elsewhere, and b) the denotation of R&D in China may
differ from international usage. However, data on R&D
investments and staff deployment are difficult to obtain
systematically.


3. With respect to the 2x2 matrix of the four types of
international R&D research, the selection of parent
companies for inclusion of R&D sites of their international
affiliates must follow globally consistent and reasonable
criteria. The current data of international R&D locations has
been collected using the top companies of developing
countries and benchmarking them against top companies of
developed countries. Although the latter group is much
larger than the former, it must be ensured that companies
are considered for the same reason and up (or rather) down
to a certain level of e.g. annual turnover or R&D
investment. Research is ongoing to compensate for this
shortcoming.



This analysis is thus still preliminary, and the suggested


findings must be considered in the light of these weaknesses.


5. Conclusion

In this paper, the argument was made that


internationalization of R&D from developing countries is rising.
Four types – and phases – of international R&D were discerned.
As an example of Type 3 and Type 4 R&D internationalization,




Globalization of R&D and Developing Countries




138


Chinese companies illustrated some of the motivations,
strategies, and difficulties that such companies face. More
research is required in terms of deepening the understanding of
Chinese technology-intensive firms’ strategies as well as those
companies from other developing countries such as the
Republic of Korea and India. While this research is still
incomplete and the conceptual development ongoing, this paper
attempts to offer a new framework to analyze international
R&D management research as well as a new perspective on
specific management models of R&D in developing countries.



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141



Technological learning, R&D and foreign affiliates in


Brazil1


Ionara Costa2


Brazil has been one of the main developing country
destinations of R&D-related FDI. According to a 2004 survey
carried out by the Economist Intelligence Unit (EIU), it was in
the sixth position among all countries of the world where TNCs
are planning to offshore R&D, and in the third position among
developing countries. 11% of the respondents mentioned Brazil,
compared to 39% mentioning China and 28% India (EIU 2004).
These figures give rise to two questions. (1) What makes Brazil
an important site for offshoring R&D? and (2) Why is Brazil
lagging behind China and India?



In order to throw some light on these questions, this


paper presents some aspects of the technological learning of
foreign affiliates located in Brazil and their potential to attract
corporate R&D in a context of increasing globalization of such
activities. It also addresses how government policies in Brazil
have dealt with the technological activities of foreign affiliates.



1 This paper is based on discussions and studies undertaken at the


Observatory of Strategies for Innovation (FINEP - OEI/DPP,
coordinated by João Furtado, USP/Poli); and more recently, in the
framework of a research sponsored by FAPESP on the
internationalization of R&D and TNC affiliates in Brazil (coordinated
by Sérgio Queiroz, DPCT/Unicamp). The author is grateful to all
researchers of the OEI network and to those working in the FAPESP’s
project, especially to Sérgio Queiroz, whose comments are always
constructive. None of them bear any responsibility for eventual errors
in this paper.


2 The views expressed in this study are those of the author and do
not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the author is affiliated.




Globalization of R&D and Developing Countries




142


The point to be made here is that local policies can push further
the level of technological learning by foreign affiliates, taking
advantage of the process of globalization of R&D.



Foreign affiliates have a solid and strong presence in


Brazilian manufacturing. They are amongst the largest firms in
the country in terms of value added, employment, new
technologies, exports and other economic indicators. The deep-
rooted participation of foreign affiliates in Brazilian economic
life is the result of a long history of TNC investment.



In Brazil, three major periods of FDI inflows can be


distinguished.


• Mid-1950s to the late-1980s: this period was characterized
by a strong presence of foreign affiliates, which were
instrumental in the process of import substitution
industrialization. In technological terms, some adaptive
R&D was carried out resulting in minor adaptations and
adjustments necessary to better fit imported technologies to
local conditions.


• The 1990s, mainly after 1994, were associated with a broad
process of technological upgrading and economic
restructuring in response to a much more competitive
environment. Technological developments mainly involved
the adoption of modern technologies, both of product and
process, and new organizational practices, leading to gains
in productivity and economic efficiency.


• More recently, from the late 1990s onwards, there have
been signs that a further stage in terms of technological
learning is taking place, as TNCs have increasingly
included their Brazilian affiliates in their strategies of R&D
globalization.



This paper is organized as follows. The next section


discusses the characteristics of the third period (the focus of this




R&D and foreign affiliates in Brazil




143


chapter), arguing that, in general terms, the main drivers of
R&D-related FDI in Brazil include technological capabilities
previously accumulated by affiliates, mainly for supporting
their productive activities; technological competences of other
players in the local system of innovation; and specific
technological regimes or sectoral patterns. A subsequent section
provides an overview of public policies and their impacts on
R&D-related FDI. The last section concludes.



1. Innovation and technological efforts on foreign affiliates


Foreign affiliates are important players not only in the
Brazilian productive sector, but also in its system of innovation.
In fact, the two dimensions are interlinked. Recent innovation
surveys3 have suggested that foreign affiliates innovate more
than domestic firms. For instance, according to a composite
index of systematic effort, built up from the data of the
“Pesquisa da Atividade Econômica Paulista” on R&D
personnel, foreign affiliates were given a score of 20, while
domestic firms on average had a score of 6, from a maximum
level of 100 (Costa and Queiroz 2002, Costa 2003).4 This
suggests that the technological efforts, particularly R&D,
carried out in Brazil are still modest when compared with
international levels. Moreover, technological learning and R&D
remain at adaptive levels (Costa and Queiroz 2002).





3 Mainly Fundação Sistema Estadual de Análise de Dados,


“Pesquisa da Atividade Econômica Paulista” PAEP 1996 and PAEP
2001 (www.seade.gov.br/produtos/paeponline) and Instituto Brasileiro
de Geografia e Estatística, “Pesquisa Industrial de Inovação
Tecnológica”, PINTEC 2000 and PINTEC 2003
(www.pintec.ibge.gov.br).


4 The maximum level for this index is derived from the
“international frontier” (the efforts of United States firms). The United
States data are available from the National Science Foundation
(www.nsf.gov/statistics).




Globalization of R&D and Developing Countries




144


In view of the globalization of R&D by TNCs and the
fact that Brazil has been receiving some FDI in R&D, it is
important to analyse whether and how such recent processes
can prompt technological learning in the country. Can the trend
of globalization of R&D open opportunities for Brazil to move
beyond adaptive levels?



In order to clarify this point, it is necessary to look


inside the innovation process of foreign affiliates, and learn
more about the forces behind the growth of R&D. In the
Brazilian case, three factors should be emphasized: production
capacity and technological capabilities; specific features of
technologies and products; and local competences.

a. Production capacity, technological competences and R&D


It can be argued that there is a strong relationship
between production capacity, technological capabilities and the
potential to attract R&D (Queiroz et al., 2003). The size of the
Brazilian market reinforces this argument, as it has been a
driving force behind the R&D activities performed by foreign
affiliates. Foreign affiliates with large and long established
production capacities are in a good position to conduct
corporate R&D, as the performance of productive activities has
led to the accumulation of technological competences and
skills.



Cases of global product mandates or development


centres are mostly observed amongst long established affiliates
that have accumulated technological capabilities in some
product or process technologies. In such cases, knowledge
embedded in local R&D teams represents assets TNCs can
exploit in order to consolidate their market positions. As
observed by Queiroz et al. (2003), the capabilities of local
affiliates serve to complement those of parent firms.





R&D and foreign affiliates in Brazil




145


The automotive industry brings some emblematic cases
of strong association of production with R&D, particularly “D”
(Consoni 2004, Consoni and Quadros 2003, Furtado et al.
2003). For decades, the largest affiliates of carmakers based in
Brazil – Volkswagen, GM, Fiat and Ford – have built up
significant levels of managerial and technical skills and
capabilities, embedded in large engineering teams; and
technical facilities, like styling and prototype centres,
laboratories and proving grounds (Queiroz et al. 2003).



The activities of technological development by car


makers in Brazil have been focused both on adaptations to local
and regional conditions, and the development of local
derivatives from global platforms. This process of market-
oriented R&D has come to be known as tropicalization
(Queiroz et al. 2003).



Some affiliates of car makers have been able to move


forward in the development process (Consoni 2004). For
instance, the engineering team for product development of
General Motors Brazil was engaged in the development of the
sub-compact model Celta. More recently General Motors Brazil
proposed to its headquarters the concept of a global derivative
based on the new Corsa, the Meriva model. General Motors
Brazil was in charge of the coordination of all stages and teams
of the Meriva project (Consoni and Quadros 2003). A similar
example is the Tupi project of Volkswagen Brazil, which
consisted of the development of a derivative based on the new
Polo platform, the Fox model. The Volkswagen Brazil product
engineering team, composed of around 700 engineers, was in
charge of this project. Furthermore, it has received both the
production and development mandates for an entry-level model
for the global market (Queiroz et al. 2003).



Therefore, “(…) there has been a change on the quality,


complexity and responsibility of the activities the Brazilian




Globalization of R&D and Developing Countries




146


engineering has carried out, about to qualify some of the local
affiliates to play a major role on global DP [product
development]. The tacit knowledge acquired and incorporated
by the Brazilian engineering [team] has been an important
differential in this process” (Consoni 2004: xv).



In general, the competencies accumulated by local


affiliates allow them to compete with their sister companies
based in other countries for assignments of R&D activities. The
disputes amongst affiliates around the world for roles in the
TNCs’ network seem to be a relevant aspect of the process of
globalization of R&D. Individual countries’ systemic
capabilities can play another important part in these situations,
helping to define for instance, which affiliate will “win” a new
R&D laboratory.

b. Technological capabilities and local systems of innovation


While the automotive industry illustrates the case that
technological activities by foreign affiliates have been mainly
driven by the level of learning they have reached along with
their productive activities, the telecom equipment industry
sheds light on another important factor: the systemic
capabilities, that is, competencies and skills accumulated by
other players in the system of innovation. This is reflected in the
number of partnerships with universities and research centres.
This observation helps to explain the geographical
concentration of telecom equipment suppliers in the region of
Campinas, in the State of São Paulo. In this area, during the
period of state monopoly, competences in telecom technologies
were developed in institutions like the Telebras R&D centre
(CPqD), and in the State University of Campinas (Unicamp)
(Gomes 2003, Queiroz et al. 2003). Nowadays, Campinas has a
sound knowledge base for software development and telecom
technologies, and a highly qualified workforce in these areas. In




R&D and foreign affiliates in Brazil




147


fact, “software development is the most important competitive
telecom segment in Brazil (…)” (Queiroz et al. 2003: 13).



In some cases, these competencies were developed by


domestic firms, many of which were taken over by TNCs in the
1990s during the privatization process. For instance, Zetax and
Batik, both domestic firms with strong development capabilities
on small switches, were acquired by Lucent in the late-1990s
(Galina 2003). As observed by Galina and Plonski (2002: 12),
“[s]ince the headquarters of the company [Lucent] did not have
this kind of product [small switches], the Brazilian subsidiary is
now the world R&D center of this technology”. Therefore, it
can be claimed that technological competences in some niches
can help local foreign affiliates to take part in the global R&D
networks. These niches depend to a large extent on the
particularities of technologies and products. For instance,
“small switching systems are most used in small towns or
neighborhoods and it has good potential, especially in
developing countries” (Galina and Plonski 2002: 12).



c. Finding niches: technology, product characteristics and local
adaptation


The kind of product and/or the sort of technologies are
other important factors that help to explain the room for local
performance of R&D activities by foreign affiliates. It is not
only the need for adaptation of technologies to local conditions,
but also the need for taking into account particularities of the
local and regional markets into the process of development,
and/or the creation of new products that provide room for local
R&D activities.



The automotive and telecom industries are both good


examples of this. In the automotive industry the importance of
taking into account the preferences of consumers during the
various stages of conceptualization and development of a new




Globalization of R&D and Developing Countries




148


model has been crucial for market success. It helps to explain
why the carmakers changed their strategies in terms of product
development, giving more room for local engineering teams. In
the telecom equipment industry the fact that there are distinct
technical patterns in different locations (like “Code Division
Multiple Access”/”Time Division Multiple Access”, “Global
System for Mobile Communications”), both in fixed and mobile
technologies, imply the need for local development (Galina
2003). In some cases, different generations of a technology may
also open some opportunity for local affiliates. For instance,
Ericsson Brazil assumed the development of the second
generation of “Code Division Multiple Access” focused on the
regional market, while Ericsson United States (San Diego)
could concentrate on the third generation of such technologies
(Galina 2003).



The pharmaceutical industry is another interesting


example, albeit in the opposite direction. As drugs are basically
global products, and the development of new drugs is a time
consuming and expensive process, local R&D activities by
foreign affiliates are almost non-existing. It is worth mentioning
that while pharmaceutical TNCs have had productive activities
in Brazil for more than 50 years, the competencies they have
accumulated along the productive process seem to have
contributed little to local technological development.



As illustrated by the examples above, a clear view of


the specificities of each industry and segments within them is
required in order to better understand the position of foreign
affiliates in the globalization of R&D and their potential for
moving further in this process. Likewise, it is helpful to
comprehend how government can play an active and strategic
role in this process.




R&D and foreign affiliates in Brazil




149


2. Host-country policies: some lessons from previous
experiences


The fact that foreign affiliates constitute a crucial part
of the Brazilian innovation system makes the case for
elaborating strategic and active policies in order to target new
foreign investments into more complex activities, like R&D,
and induce already established foreign affiliates to strengthen
and deepen their local technological capabilities. How can local
policy influence TNCs in terms of their global R&D strategies?
The failure or success of previous local policies help to clarify
this question.



Since the period of import substitution, Brazilian


policies towards FDI have been mainly focused on production
capacity building and modernization. Further technological
learning has not been a major concern, as attention is
concentrated on the amount of FDI into the country rather than
on the kind of TNCs’ activities attracted.



However, over the past half decade, the debate on the


role that foreign affiliates play in terms of technological
development seems to have been taking on a new direction.
Both scholars and policy makers have been increasingly
interested in how activities with greater potential for higher
added value can be developed. TNCs have been considered
important agents in this respect for two main reasons: first their
potential to export, second their better position to carry out
R&D and engineering activities. The underlying argument is
that the more foreign affiliates based in Brazil are deeply
integrated into global R&D networks the higher the value they
add locally. This argument is behind the new industrial,
technology and foreign trade policy, named as PITCE, which




Globalization of R&D and Developing Countries




150


was launched in March 2004 and focuses on innovation, and
technological development and foreign trade (PITCE 2003). 5



Having focused on R&D performed by foreign


affiliates (and then on the process of globalization of those
activities), this paper now turns to related issues, in order to find
out to what extent they helped (or not) to define the
technological activities carried out by foreign affiliates. Once
again, the automotive, telecom equipment and pharmaceutical
industries are illustrative cases.



Regarding the auto industry, local policies have


supported the productive and technological dynamic. The
Brazilian Automotive Regime launched in July 1995 played an
important part in stimulating product development by local
foreign affiliates. However, this policy was not concerned with
R&D investment by foreign affiliates. Its focus was mainly on
attracting new investments, increasing production capacity,
upgrading products and manufacturing processes and, reaching
a broader and deeper insertion of Brazil into the global
economy (Furtado et al. 2003; Queiroz at al. 2003). Thus, fiscal
incentives were given without any conditionality in terms of
local technological development.



Differing from the Automotive Regime, the


Information Technology Laws (“Leis de Informática”: Law


5 The interest of policy makers in the process of globalization of
R&D has been increasing. For instance, in some of the preliminary
seminars (in March 2005) for the Third National Conference on
Science, Technology and Innovation held in October 2005, organized
by the Ministry of Science and Technology Policy, there were debates
on “R&D by TNCs in Brazil” (4th seminar, March 2005), and
“Globalization of R&D: opportunities for Brazil” (5th seminar, March
2005). It is worth mentioning that the PITCE is the background for all
debates in preliminary seminars and in the conference itself (see
http://www.cgee.org.br/cncti3).




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8248/1991, Law 8387/1991, Law 10176/2001, Law
10664/2003, and later Law 11077/2004) explicitly emphasize
technological development (Queiroz et al., 2003). In order to be
eligible for fiscal incentives, firms are required to carry out
R&D investments and, establish partnerships with local
universities and research centres (Galina 2003; Roselino and
Garcia, 2003; Roselino, 2003). Moreover, the Information
Technology Laws were complemented by a traditional policy on
local content for telecom equipments, implemented by BNDES
(the National Bank for Economic and Social Development). In
order to receive financial support from BNDES, telecom
carriers have to buy locally produced equipment (Furtado et al.
2003).



It is worth mentioning that the PITCE appears to


reinforce the technological trajectory in the telecom equipment
industry, as software and semiconductors are amongst the five
industries it targets. In this sense, the new Information
Technology Law (Law 11077) launched in December 2004 is an
important step, since it is explicitly concerned with where
technological development takes place; when the development
is locally performed, the fiscal incentives are higher.



In the pharmaceutical industry there has been a clear


health policy in terms of enlarging the production base of
generic drugs. However, no gains can be observed in terms of
local development of technology. In spite of a sound local
production capacity, pharmaceutical TNCs appear to have no
investment plans for more sophisticated activities by their
Brazilian affiliates. “After all, generic drugs are practically
commodities that do not require a substantial technological
effort” (Furtado et al. 2003: 117). It seems that the PITCE is not
changing this orientation, as the pharmaceutical industry has
been defined as a priority industry having in mind not local
technological development but, the health policy and local
production of currently imported drugs.




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152


These three examples reinforce the argument made in
this chapter that local policies can play a role as far as R&D
activities by foreign affiliates are concerned. The challenge is to
learn about the innovative profile of different agents within the
local system of innovation, perceiving their technological
strengths and weaknesses. In the case of foreign affiliates, it is
important to understand the forces behind the role they have
played in the global R&D networks.



3. Concluding remarks


Relying on three industry cases, this paper has shed
some light on the technological dimension of activities
conducted by foreign affiliates in Brazil, in order to have a
better understanding of the position of the country in the
process of globalization of R&D. Three factors are emphasized
here: previous accumulation of capabilities within foreign
affiliates; competencies within other agents of the local
innovation system; and characteristics of technologies and
products. It also outlined some characteristics of local policies,
and concludes that they have an important part to play in this
process.



The position Brazil has occupied in the globalization of


R&D by TNCs can be explained in terms of market reasons.
Two related dimensions are stressed: first, the importance of the
large size of the Brazilian market and second, the level of
technological capabilities accumulated by foreign affiliates that
can be exploited by their corporations. Both dimensions define
a market-oriented feature of the FDI-R&D related flows into
Brazil, as illustrated by the automotive industry. R&D facilities
are mainly established in order to support productive activities.
Cases of stand-alone laboratories are almost non-existent in
Brazil.





R&D and foreign affiliates in Brazil




153


Moreover, both the telecommunications equipment and
the pharmaceutical industries point to how government policies
play a role in the process of globalization of R&D. While in the
telecom equipment industry government policies have helped to
make Brazil an attractive site for offshoring R&D, in the
pharmaceutical industry they have been passive. Public policy
can be effective in attracting FDI-related R&D-if combined
with prior accumulation of capabilities, and/or a good human
resource base, good quality universities and research institutes
and further local development.


References
Consoni, F. C. (2004). “Da tropicalização ao projeto de veículos: um


estudo das competências em desenvolvimento de produção de
produtos nas montadoras de automóveis no Brasil”. PhD Thesis,
Science and Technology Policy, IG/DPCT, UNICAMP, Campinas.
Available at: libdigi.unicamp.br/document/list.php?tid=7.


_________ and Quadros R (2003). “Between centralisation and
decentralisation of product development competencies: recent
trajectory changes in Brazilian subsidiaries of car assemblers”. Paper
presented at the XI International Colloquium of GERPISA on
“Company Actors on the Look out for New Compromises:
Developing GERPISA’s New Analytical Schema”, Paris, 11-13
June.


Costa I (2003). “Empresas multinacionais e capacitação tecnológica na
indústria brasileira”. Ph.D. thesis, IG-Unicamp, Campinas, available
at: libdigi.unicamp.br/document/list.php?tid=7.


_______ and Queiroz S (2002). “Foreign direct investment and
technological capabilities in Brazilian industry”, Research Policy
31: 1431-1443.


EIU (2004). “Scattering the seeds of invention: the globalisation of
research and development”. London: Economist Intelligence Unit,
available at:
graphics.eiu.com/files/ad_pdfs/RnD_GLOBILISATION_WHITEP
APER.pdf.




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Furtado J, Zanatta M, Costa I, Strachman E and Queiroz S (2003). “FDI
and technology policies in Brazil”. European Association of
Evolutionary Political Economy (EAEPE) Conference, Maastricht,
7-10 November.


Galina SVR (2003). “Desenvolvimento global de produtos: o papel das
subsidiárias brasileiras de fornecedores de equipamentos do setor de
telecomunicações”. PhD Thesis, University of São Paulo, São Paulo.


_________ and Plonski GA (2002). “Global product development in the
telecommunication industry: an analysis of the Brazilian subsidiaries
involvement”. 9th International Product Development Conference –
European Institute for Advanced Studies in Management (EIASM).
Sophia-Anipolis, France. May 2002. Available at:
www.fia.com.br/pgtusp/pesquisas/arq_pronex/sub01/SGalina%20-
%209th%20IPDMC.PDF.


Gomes R (2003). “A internacionalização das atividades tecnológicas
pelas empresas transnacionais: elementos de organização industrial
da economia da inovação”. Ph.D. thesis, IE-UNICAMP, Campinas,
Available at: libdigi.unicamp.br/document/list.php?tid=7.


PITCE (2003). “Diretrizes de Política Industrial, Tecnológica e de
Comércio Exterior”. Brasília: Governo do Brasil, available at:
www.federativo.bndes.gov.br/bf_bancos/estudos/e0002388.pdf.


Queiroz S, Zanatta M and Andrade C (2003). “Internationalization of
MNCs’ technological activities: what role for Brazilian
subsidiaries?” Paper presented at SPRU Conference in honour of
Keith Pavitt, Brighton, 13-15 November, available at:
www.sussex.ac.uk/Units/spru/events/KP_Conf_03/documents/Queir
oz.pdf.


Roselino, J. E. (2003). “Informática – Software – OEI/DPP Relatório
Setorial”. Available at: www.finep.gov.br/portaldpp.


__________ and Garcia R (2003). “Considerações sobre a Lei de
Informática: uma avaliação de seus resultados como instrumento
indutor de desenvolvimento tecnológico e industrial”. In: VII
Encontro Nacional de Economia Política. Florianópolis. Available
at: www.sep.org.br.






Globalization of R&D and economic development:


policy lessons from Estonia1


Marek Tiits, Rainer Kattel and Tarmo Kalvet2

Ever since the evolution of Italian city-states during the


Renaissance and the Dutch and German cities in the 16th and
17th centuries, the concept and success of a modern economy
have been based on geographical borders that make
specialization possible, i.e. allow for the creation of economic
clusters enhancing welfare. Economic theory has been based
upon the principle stated by Adam Smith, according to which
there is a positive link between welfare and the size of a market,
because a larger market allows for greater specialization and
thus also contributes to the increase of productivity and
improvement of living standards (Smith [1776] 1991, Young
1928).3



Recent advances of ICT and the liberalization of


markets and trade have significantly changed the meaning and
role of geography and the proximity of markets. The value
chains of the global economy are no longer formed in line with
geographical or national borders, but more and more within
particular industries. At the same time, an increasing number of
economic units are being established and positioned in the
states and regions where the socio-economic environment is the
most suitable for the production system in question. This means
that simpler production tasks are transferred to regions with
lower labour costs, but still of relatively high productivity,
whereas more complex, higher value-added activities remain in


1 This paper is based on Tiits et al. 2005.
2 The views expressed in this study are those of the authors and do


not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the authors are affiliated.


3 Most of the early development economics is based on the same
assumption; see Nurkse 1953.




Globalization of R&D and Developing Countries




156


countries with higher living standards. The situation has
become increasingly complicated for the regions that can offer
neither knowledge-based activities nor low relative labour costs.



In this context, both the enhancement of the competitive


advantages of indigenous companies and the selection of
locations for FDI are based increasingly on particular economic
and technological factors. This makes part of the traditional
policies and strategies supporting economic development
obsolete or, leaves them without the intended impact. Yet it is
obvious that a target of public policies should still be to support
the modernization of the economy based on a vigorous private
sector.4 No wonder that the European Commission considers
the implementation of the Lisbon Strategy5 as the highest
priority of the EU. However, the Lisbon Strategy does not
provide the specific list of the individual steps member States
should take in order to accomplish quickly the established
objectives. Such detailed regulation does not and cannot exist,
because the situations of different European countries are
different.6



4 Ever since David Ricardo ([1817] 1821), the prevailing idea that


a company operating in a particular location should first of all commit
itself to activities where the existing environment offers some
advantages has remained. However, modern economic theories do not
consider such advantages spontaneous; instead, the business
environment created by the State has the decisive role in the formation
of specialization (Romer 1986).


5 A ten-year strategy of the EU to become the most competitive
and dynamic knowledge-based economy in the world capable of
sustainable economic growth with more and better jobs and greater
social cohesion.


6 For theoretical foundations, see Rodrigues 2002. See also the
website of the European Commission:
http://europa.eu.int/comm/lisbon_strategy/index_en.html.




Policy lessons from Estonia




157


1. EU membership and economic development

Estonia joined the EU in May 2004 and found itself in a


new economic policy environment. Going beyond the
transposition of the acquis communitaire, Estonia’s economic
convergence will require a development strategy supporting a
more dynamic specialization of the country in the common
market. In many respects, the macroeconomic situation
environment of Estonia is already similar to that of the older 15
countries of the EU. After the forthcoming introduction of the
euro, supervision of monetary policy will be transferred to the
European Central Bank, while the Stability and Growth Pact of
the EU will establish limitations on fiscal policy. The
competence of the EU also includes agriculture and foreign
trade, including the application of a customs union towards
third countries. For the EU as a whole, such a situation leads to
an enormous challenge to develop the economic environment in
a manner that is simultaneously appropriate for member States
at very different stages of development and, for industries with
highly different development trajectories and international
networks.



What might Estonia’s specialization within the EU be


in ten years time? The developments of the past decade will by
and large determine the technological and industrial structure of
the Estonian economy in the next five to ten years. In Estonia,
as in the other Baltic States, most growth has been generated
through efficiency gains produced by one-off structural
adjustments, privatization and the closing down of unprofitable
ventures. An analysis of the development of Estonia since mid
1990s demonstrates that the technological structure of
manufacturing has not become more knowledge-intensive or
complex, rather the other way round (Tiits et al. 2003).7
Together with some other new EU members, Estonia is



7 Similar developments have been observed across Central and


Eastern Europe; see Watkins and Agapitova 2004, Havlik et al. 2002.




Globalization of R&D and Developing Countries




158


competing for FDI projects with China, India, Latin American
countries and the Russian Federation (Reinert and Kattel 2004).



Until recently, relocation of certain parts of the


relatively labour- and/or resource-intensive production has been
one of the main motivations behind decisions to invest in
Central and Eastern Europe.8 In most cases, foreign affiliates
have outperformed domestic enterprises both in terms of
knowledge intensity and sales (Damijan et al. 2003). Positive
spillovers from FDI however have been relatively limited.
Looking at the structure of exports and the competitiveness of
manufacturing, it appears that while the other Central and
Eastern European countries specialize in various medium-
technology activities, Estonia has until now exclusively
specialized in timber processing (including furniture, print and
paper industries),9 and certain low-value added activities of
Northern European IT and electronics firms.



The sustainability of Estonia’s specialization on timber


– a resource-intensive and relatively low-technology industry –
is far from granted. Nor would it be reasonable to return to
Soviet-era light industries or mechanical engineering. Instead,
Estonia would need to gradually expand its presence in the
medium- and high-technology industries of the next generation,
i.e. in the value chains of IT, biotechnology and
nanotechnology. The development of such new industries
would need to be linked to the existing economic structure and
specialization of Estonia. Otherwise the contribution of new
high-technology industries to the improvement in living



8 Several authors have concluded, that the interest of foreign


investors has been more to exploit, and less to develop local resources
(Johansen 2000, Männik 2001: 216).


9 The Estonian timber processing industry is part of the
Scandinavian forestry cluster. Over the past 10 years, it has become
the most important source of productivity increase in Estonia (Havlik
et al. 2002, Stephan 2003).




Policy lessons from Estonia




159


standards in Estonia would remain only modest, irrespective of
the success of individual companies.10



In Estonia, the creation of new jobs is directly


dependent on the existing knowledge and skills of the labour
force and the compatibility of the education and research
system with technological developments in the world and in the
Estonian economy. This implies that policies aimed at the
continuous modernization of industry and the education and
research system which, owing to the logic described above,
would need to be industry-specific and, at the same time well
coordinated. Whilst the establishment of an efficient system of
vocational education, advanced training and retraining and the
increase of resources for R&D are equally crucial for the
creation of new jobs, none of the aforementioned elements is
capable alone of inducing the structural changes in society that
are needed for a transition to a knowledge-based economy.

2. Main issues

a. Structure of education and science



Whereas the nominal educational level continues to be


relatively high, Estonia has relatively limited lifelong learning,
i.e. the renewal of people’s skills and knowledge in line with
the changing needs of society. While the economy has
undergone drastic structural changes, the structure of education
and science has evolved de-linked from economic changes. The
public R&D funding system as it stands today tends to
reproduce past activities rather than contributing to the creation
of new ones (Nedeva and Georghiou 2003).





10 Such developments can now be observed in the IT and
electronics industries of Estonia and Hungary, where foreign affiliates
dominate exports, yet their contribution to the value added remaining
in the country and, accordingly to the improvement of living standards
is more modest (Kalvet 2004).




Globalization of R&D and Developing Countries




160


At the level of general principles, Estonia has in recent
years fully embraced the goals of European innovation policy.
However, in practice changes have been slower. R&D and
innovation policies usually follow a linear approach to the role
of knowledge (including scientific research) in socio-economic
development, based upon the belief that massive investment in
basic research and the resulting technological development
would almost automatically lead to the efficient development of
the economy. However, that model that once enabled several
technological breakthroughs for world powers (Bush 1945) is
not necessarily applicable to small or medium-sized market
economies facing resource constraints (Freeman 2002, Nature
2004).



In Estonia, notwithstanding the high rate of


unemployment that amounts to as much as over 20% among
people under 24 years of age, companies have unremittingly
pointed out problems of finding suitably qualified labour
(Jürgenson et al. 2005). At the same time, as a result of
demographic changes, the number of young people graduating
in Estonia from secondary and vocational schools will drop
from the year 2008. Since demographic challenges are similar
practically everywhere in Europe, severe competition can be
expected from better qualified immigrants (OECD 2004: 37,
Kauhanen and Lyytinen 2003).



When considering an increase in public investment in


education and science, Estonia would first of all need to make
the strategic choice regarding in which industries it desires to
take the lead, in which industries it would be important to
participate actively in EU-wide R&D projects and, in which
industries Estonia would want to sustain a minimum level of
competence. In addition, modernization of the system of
(higher) education in a small country with an aging population
requires both the immigration of qualified persons and, a
willingness to become an exporter of high-level training.




Policy lessons from Estonia




161


b. Preferential treatment of IT, bio- and material technologies

Although priority to IT,11 biomedicine12 and material


sciences has been clearly established in the Estonian research
and development strategy Knowledge-based Estonia 2002-2006
(RTI 2001), no R&D programme has been initiated yet in these
areas, nor are there in place any R&D or innovation policy
measures targeting these industries. Prompt action would be
required in the development of human resources and the
economic environment of these areas if Estonia would like to
maintain or increase its living standards in the long run. For
public policy to be effective, the establishment of priorities
must be followed by corresponding substantial changes in
institutions and financing.

c. Low private-sector investment into R&D



Having drawn on the lessons of successful Finnish


policy in the 1990s, Knowledge-based Estonia 2002-2006
stresses the importance of the practical application of science.
However, as the current structure and competitive advantages of
the Estonian economy are more similar to those of Finland in
the 1970s and not in the 1990s, the policy of contemporary
Finland cannot be directly applied in Estonia.13



11 In the OECD countries, more than half of the increase in


productivity is derived from innovation in IT and its application. The
IT revolution has not ended with the extensive spread of personal
computers and the Internet. When it comes to the economic effect of
ICT, the actual revolution is likely to be only beginning (Perez 2002).


12 Massive investment in recent years into bio- and
nanotechnologies and new energy technologies in the United States,
Western Europe, the Republic of Korea, China and many other
countries increases the probability that these industries will in the
coming decades experience breakthroughs that will radically change
the world.


13 In the 1970s, massive investments were made in forest-related
Finnish industries (including pulp and paper), making the country one
of the world’s technological leaders in that industry.




Globalization of R&D and Developing Countries




162


Due to the structural problems of the labour market,
Estonian companies are short of workers with much lower
qualifications than required for proper R&D. At the same time,
because of the current investment based phase of development
of the economy and the small size of the country, R&D per se is
not the primary source of competitive advantages or motive for
Estonian economic development. It is rather the rapid
application of various innovative technologies created
elsewhere that prompts Estonian development (Kurik et al.
2002).



In the business enterprise, innovation is almost always


about novel applications of existing technologies, knowledge
and skills. As far as economic development is concerned, the
issue is not so much the limited investment of the public sector
in R&D, but literally the cost of new technologies and
knowledge that Estonian companies need to purchase. Here, it
is clear that while the market and competition set the limits of
risks, it is the role of public policies to lower those risks for a
majority of enterprises and, to create an additional stimulus for
the renewal of their competitive edges.



Unfortunately the Estonian education, science,


technology and innovation policies are relatively weak on
assisting structural change in the economy or supporting
technology transfer for upgrading traditional industries. In a
market economy, it would be still the task of the state to design
an institutional environment suitable for balanced socio-
economic development. Consequently, for a substantial part of
the Estonian private sector, R&D and innovation are just too
expensive and risky.

d. Role of FDI in R&D and innovation



In a small country with an open economy the role of


FDI is inevitably large. FDI can substantially strengthen the
economy through spillovers and transfer of knowledge to




Policy lessons from Estonia




163


existing industries and, more importantly, initiate the creation
and development of new high-technology industries. These
roles of FDI have been acknowledged only to a certain degree
in Estonian public policy. Little attention has been paid to what
motivates investors to invest in Estonia, including in R&D. An
overall reduction of the tax burden alone would not be enough.
Such a policy could even inhibit the increase of knowledge-
intensity of the economy (Bhattacharya et al. 2004, Buffet
2003).



Being a small country, Estonia lacks resources for R&D


to the extent necessary to ensure the creation of new
international corporations and high-technology industries
through spin-off business. However, Estonia can learn from the
success achieved by Finland, Ireland, Switzerland and
Singapore as a result of a purposeful engagement of FDI in the
modernization of the economy. Furthermore, investment by the
State in the development of human resources and local
competitive assets plays a crucial role in attracting the “right
type” of FDI.14



Countries such as Estonia would need to exercise


caution when developing new high-technology industries, since
the development of some science-based industries (e.g. bio- or
nanotechnology) alone may not have any immediate effect on
living standards. Such high-technology industries are not
necessarily connected to the rest of the economy, thereby
limiting the value-added created in Estonia. In order to preclude
such developments, it is very important to ensure the transfer of
knowledge and skills into more traditional spheres that
dominate the economy.



14 In that broader context, the success of the Finnish firm Nokia


could be due more to “luck” than “regularity” (van Beers 2003, van
Grunsven and van Egeraat 1999).




Globalization of R&D and Developing Countries




164


e. Design and coordination of public policy

Even though Knowledge-based Estonia 2002-2006 is an


important strategic document, Estonia today mostly lacks a
political and administrative mechanism that would ensure the
actual transition of the Estonian economy toward greater
knowledge intensity. A regular evaluation and coordination of
policies in education, employment, research and development
and innovation is almost non-existent. Therefore, practically no
one has an overview of the impacts, weaknesses or strengths of
the existing policies. As a result, public policy is not
sufficiently balanced and lacks a specific goal as regards the
improvement of competitiveness (Estonian State Audit Office
2003 and 2004). The connexion between public policies and the
problems of the real economy is rather weak. Estonia lacks
policy measures that would enable the State to deal with the
factors inhibiting the growth of productivity of companies in the
timber, electronics, chemical or engineering industries, i.e.
industries that currently dominate the economy and exports or,
to specifically contribute to the creation of new high-technology
industries.



Although policy coordination is a task of the


Government and the Prime Minister, policy-making suffers to a
large extent from the lack of an interim level of administration
that would coordinate the implementation of general horizontal
strategies (like education, research and development, and
employment). This has resulted in conflicting approaches
between different sectoral activities. Very few long-term
priorities have been set for education, research and innovation
policies. However, it is obvious that the more general the public
policy measures, the less they are effective.



There would be a need to redesign the system of public


policy-making so as to ensure the coordination of policies
aimed at a longer-term perspective and the regular analysis of
the impacts of such policies. The elaboration of National




Policy lessons from Estonia




165


Development Plans for the application of the EU Structural
Funds could give an impetus to general policy coordination.
Yet more needs to be done to achieve better synergies between
education, R&D and innovation policies.



In summary, in order to facilitate Estonia’s


development, a cluster-based strategy for the enhancement of
competitiveness would be needed. That strategy could be based
upon strategic road maps for particular technologies and
economic clusters, while taking into account possible
developments both in new high-technology industries and, in
the traditionally significant industries (e.g. energy, agriculture
etc.). The definition and implementation of such a strategy
could only happen through cooperation between scientists,
companies and policy-makers aiming at the enhancement of the
competitiveness of a particular cluster through the application
of essential technological developments (Porter 1990, OECD
2001).

3. Policy recommendations



a. Technology programmes for the enhancement of the
competitiveness of economic clusters



In principle, the public sector of Estonia would need to


resolve the question of how to ensure that the private sector’s
problems are properly taken into account in the design and
evaluation of policies. A system needs to be established
whereby the State can receive feedback on the actual
development of the private sector and technology on a
continuous basis. To that end, a system of consistent monitoring
of industries needs to be created. The establishment of such a
system could be one of the key components of a future
development strategy. Such a system of design and coordination
of policies could highlight as priorities for the five or six
economic clusters that are most essential for the technological
and socio-economic development of Estonia (e.g. the timber




Globalization of R&D and Developing Countries




166


and forestry cluster or, the IT and electronics cluster etc. which
in terms of value chains, in the aggregate cover the bulk of the
economy).15



In practice this means the establishment of permanent


working groups of the private and public sectors, the tasks of
which would include the production of regular overviews of the
possible future developments, current problems and alternative
solutions thereof in specific industries. These working groups
would need to participate in the coordination, design and
evaluation of industrial, educational, science and innovation
policies. In the current institutional structure of Estonia, such
working groups could logically operate within the field of
administration of the Prime Minister and the Research and
Development Council.16



The primary practical output of the working groups


could consist of the development and subsequent evaluation and
continuous modernization of the technology programmes that
are essential for the development of the clusters in question.
The programmes to be created could range from new curricula
to schemes aiming at involving foreign affiliates and their
parent companies, thus creating:



• new industries where Estonia possesses strong R&D


potential in the EU context;
• R&D activities that are connected with real economic


activities;
• R&D activities that are interdisciplinary; and


15 As a final outcome, it would be logical to launch national R&D
programmes in the fields of administration and by way of cooperation
between relevant ministries so as to support the implementation of the
relevant industry-level development strategies.


16 Since the Estonian economy has been rather closely integrated
with the Baltic Sea region, that system should also engage the foreign
affiliates of TNCs from other Baltic and Northern European countries
operating in Estonia.




Policy lessons from Estonia




167


• R&D activities that are based on cooperation between local
and, if necessary, foreign centres of excellence.



b. Horizontal measures



In addition to the commissioning of cluster


programmes, Estonia could concentrate on the following four
lines of action:



• attracting talented people to work in Estonia and creating


an attractive environment for them;
• supporting the transfer of knowledge and technology from


foreign affiliates to domestic manufacturing and service
industries;


• supporting TNCs and their local affiliates in the fields of
R&D and innovation, including reciprocal opening of R&D
programmes in the Baltic Sea region and beyond;


• enhancing the capability of companies to apply knowledge
created abroad and the capability of scientific research
establishments to create new (exportable) knowledge,
including training and advanced training; basic research
necessary for being current with global scientific and
technological developments and, ensuring the required level
of the education system.



4. Conclusion


Globalization provides ample opportunities for a more
efficient international division of labour, thus contributing to a
rise in living standards. The benefits of opening up markets
depends on the policy measures implemented in individual
countries in response to the strong pressures created by
globalization to change existing specializations. There is a role
for the State to play in creating positive externalities that would
allow domestic enterprises move gradually to more knowledge-
intensive, higher value-added activities. Labour, education and
innovation policies, focused on some key technologies and




Globalization of R&D and Developing Countries




168


supported by industrial policies, can potentially allow for
structural changes in the economy, increase innovative
capacities of the industry and, finally raise living standards.





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PART III
Policy issues









Linking national science, technology and innovation


policies with FDI policies1


Thomas Andersson2


Much research has been undertaken to settle the
controversial issue of whether FDI is good or bad for countries.
Most studies concluded that there were positive impacts,
because FDI brings efficiency gains, technology and skills
transfers, etc. and, because TNCs responsible for FDI generally
are unable to internalize all the gains. However, in recent years
it has become apparent that the impact of FDI cannot be taken
for granted, but critically depends on circumstances. The
determinants include policies, TNC strategies, and how the two
interact.



Meanwhile, in the wake of globalization, liberalization


and technical progress, notably in ICT, the world economy is
marked by sweeping structural change.3 Above all, declining
costs of diffusing codified information add to previous reductions
in communication and transport costs, and create new tools for
firms to divide and specialize operations internationally. At the
same time, tacit knowledge remains vital (Pavitt 1998). Firms
intensify efforts to upgrade core business, while outsourcing



1 Torbjörn Fredriksson (UNCTAD) has provided valuable


comments. A grant from SIDA for research on the knowledge
economy is gratefully acknowledged. The author alone is responsible
for errors and omissions.


2 The views expressed in this study are those of the author and do
not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the author is affiliated.


3 Throughout the developed world, technology- and skill-intensive
activities are advancing (OECD 2003). In international trade, the share
of high-technology products has increased markedly over the last two
decades, although a certain reversal has taken place since 2000 with
the consolidation in ICT (UNCTAD 2003).




Globalization of R&D and Developing Countries




176


other functions, and strive to become fully effective in
developing, accessing and exploiting – on a global basis – all
relevant knowledge in their particular areas of specialization. A
key concept is that of innovation (box 1). Dependent on the
ability of individuals and firms to discover and implement new
ways of doing things, innovation is influenced by a range of
capabilities, institutions and policies.



Box 1. The changing nature of innovation



Innovation may be defined as the development of new commercially
relevant products or processes. Traditional perspectives have viewed
innovation as closely related to science and technology. Mastering the
expanding opportunities in scientific and technical progress is
becoming an increasingly important source of innovation generating
high value-added in developed countries. On the other hand,
innovation can take many forms, including the commercialization of
science and technology and the development and implementation of
new ideas more generally, as in the form of organizational change or
inventing new ways of doing things. Innovations that enhance
attractiveness and accessibility to customers and users are often
essential for commercialization. Furthermore, innovation is the key
not only to economic progress, but also to identifying new solutions to
pressing social issues, such as an ageing population or environmental
degradation. Innovations may be categorized in different ways,
including product and process innovations, although there is no clear-
cut dividing line between the two.

Innovation must not be conceptualized as a one-dimensional, linear
process leading from certain input factors. Innovation is the result of
efforts by multiple actors and, is enhanced by their constructive
interactions. No single actor generally manages all the skills that are
useful, but, complementary competencies are crucial, allowing for a
constructive interplay and information exchange between the supply
and the demand side in local as well as international markets.
Fostering conditions that are favourable to innovation may require
reforms in a number of seemingly disparate policy domains.

Source: the author.





Linking science and R&D policies




177


The establishment of local R&D generally goes
together with a deepened commitment by TNCs to learn about
local markets. It may be essential for the generation of
knowledge that allows for enhanced efficiency as well as the
diffusion of benefits to the host country (Bernstein 1989, Correa
2000). Meanwhile, there are now much enhanced opportunities
for investors to establish such facilities in developing
economies and countries in transition (UNCTAD 2005). This
applies to Central and Eastern Europe and to rapidly developing
major industrial strongholds in Asia, such as in China, and in
some Latin American countries. Most foreign R&D in
developing countries however, remains attracted by a small
group of relatively well-off economies, whereas poorer
developing countries are neglected. This is particularly
worrisome, as official development assistance has diminished in
scope, as accessing technologies in other ways is difficult and,
as intellectual property rights regimes are fragmented and
display deficiencies.



Whereas inter-country flows of technology and skills


matter crucially for innovative performance, a country’s ability
to attract and gain from FDI and foreign R&D will much
depend on domestic innovative performance. Any country or
region ought to offer conditions that are favourable for the
management and exchange of knowledge and technology in
ways that support and upgrade their specific assets. Against this
backdrop, innovation policy and FDI policy, especially in
regard to foreign R&D, hinge together. Yet, the link between
them is seldom explored. In this paper, we discuss how these
two areas relate to each other, notably in developing countries.
The next section reviews the rationale for R&D
internationalization and factors influencing technology
transfers. In the subsequent section, policy issues in innovation
as well as in FDI and foreign R&D are introduced. The
interrelated nature of these domains is discussed in the
penultimate section. The last section concludes.




Globalization of R&D and Developing Countries




178


1. Organizational changes


For most firms it is becoming untenable to rely on
domestic skills and technologies alone. One of the demonstrated
benefits of R&D is that it increases the ability of firms to absorb
knowledge over great distances (Andersson 1998). TNCs are
now faced with significant needs to diffuse and/or absorb
technologies worldwide, to an extent that requires a direct
presence of R&D facilities in multiple locations. Substantive
benefits are derived from the proximity to similar units,
favouring clusters and “herd” behaviour in location decisions
(von Hippel 1994, Saxenian 1994, Almedia and Kogut 1997).
The earlier purpose of primarily adapting products to local
markets is now mixed with the motivation to source technology
(Sachwald 1998, Mudambi 2002). Firms balance and combine
internal capabilities and external uptake for the purpose of
innovating more successfully (Cassiman and Veugelers 2002).
A tendency towards intensified conflict between home
operations and affiliates has also been observed, as reflected in
difficulties for TNCs to coordinate global operations (Rajan et
al. 2000, Forsgren and Pedersen 2000).



The prevalence of technology and skills transfers in part


depends on organizational forms. Backward linkages exist when
foreign affiliates acquire goods or services from domestic firms,
and forward linkages when foreign affiliates sell goods or
services to domestic firms (both denominated vertical linkages).
Horizontal linkages involve interactions with domestic firms
engaged in competing or similar activities.



In most industries backward linkages serve as


instruments for spillovers. The drive to raise the quality of
inputs serves as an incentive for TNCs to transfer skills to local
providers (Chen 1996). Forward linkages are also known to be
important, e.g. due to increased competition in supply markets
and consumer benefits (Aitken and Harrison 1991, Pack and
Saggi 1999). However, in this case the mechanisms for transfers




Linking science and R&D policies




179


are less well known. Fors (1996) found technology transfers from
parents to be strengthened by forward vertical integration,
measured as imports of intermediates from the parent company.
R&D in affiliates was found not to be decisive, neither for their
own productivity nor for other parts of company groups but, a
highly significant interactive effect of affiliate R&D and parent
R&D on the productivity of affiliates was identified. Given that
R&D in affiliates raises the ability to utilize parent technology,
foreign R&D would not be expected to substitute for R&D in
headquarters. To the extent that the internationalization of R&D is
explained by the advancement of intra-firm exports from home
countries, it should strengthen knowledge-creation in
headquarters. On the other hand, when foreign R&D is driven by
horizontal integration, there are fewer prospects for
complementarity. Norgren (1995) observed a growing
replacement of foreign R&D for home R&D in Swedish TNCs
during the 1980s.



As noted, FDI and foreign R&D may also be motivated


by options for technology sourcing.4 This is an important reason
behind FDI flows between developed countries (van
Pottelsberghe de la Potterie and Lichtenberg 2001). There is
evidence that sourcing is on the rise as a motive for FDI in
developing countries too, and for flows from developing to
developed countries. A technical laggard may choose to enter a
foreign market through FDI even where that involves
substantial costs, because positive spillover effects emanate
from locational proximity to a technological leader. (Fosfuri
and Motta 1999, Siotis 1999).



4 Various studies conclude that technology sourcing has become


an important determinant of the international location of R&D by
TNCs (Niosi 1999, Serapio and Dalton 1999, Driffield and Love
2002). According to Narula and Wakelin (2001) for instance,
domestic patents were an important long-run determinant of FDI from
the United States into Germany, the Netherlands, and Sweden for the
period 1973-1993.




Globalization of R&D and Developing Countries




180


Sourcing can occur through the acquisition of firms that
possess valuable capabilities or, through the positioning of an
affiliate in an environment where participation in local
knowledge-generating networks enable uptake. The terms of
uptake will depend on the interplay between the TNC on the
one hand, and local institutions and market conditions on the
other hand. Scientific excellence provides one kind of raw
material. Diversity in terms of alternative sources of seed and
venture capital funding, and intensive entrepreneurship, account
for competition and high prices from the TNC perspective but,
is likely to generate more refined input. Technology may further
be obtained from other foreign affiliates, meaning that TNCs
learn from each other in third countries. This is consistent with
the empirical evidence of increasing internationalization of
R&D (Cantwell 1995).



In general, TNCs are more prone to network if the local


industry is more competitive, that is, if it consists of attractive
partner firms. A small technology gap between the foreign
affiliate and domestic firms generally facilitates spillovers.5 A
dynamic domestic industry may however, serve as an attraction
both for FDI motivated by the exploitation of its own
technology and those driven by technology sourcing. If the
latter motive dominates, entry through M&A may be
anticipated. Conversely, a strong domestic industry and, the
prospects for technology diffusion to make it even more
productive, may represent a threat to a foreign investor. The
greater the dependency of a TNC on its own technology and the
greater the potential for technology diffusion, the smaller its
tendency to engage in intensive clustering and, the greater its
reliance on greenfield investment. If TNCs establish affiliates in
enclaves, where neither products nor technologies have much in



5 Girma and Wakelin (2000) define a low gap in terms of a 15%


difference in technology intensity, a medium gap as 15-33% and a
large gap as more than 33%.




Linking science and R&D policies




181


common with those of local firms, spillovers in either direction
are likely to be weak.



In either case, local R&D may represent an instrument


for TNCs to become more effective in channelling and
adjusting technologies and skills for their enhancement locally
and/or, in packaging them locally for the sake of generating
benefits for the company group as a whole. Strategies to exploit
own technology vs. sourcing local technology cannot simply be
associated with the benefits or costs for a host country nor for a
home country. A dynamic knowledge-intensive region may be
anticipated to display extensive knowledge-transfers in both
directions. In such an environment, firms and individuals
possess high competencies in identifying the most favourable
locations and organizational forms for various ventures in
research, commercialization and production. Whereas it is
generally impossible to make any sharp distinction between the
noted functions in practice, various factors may push TNC and
affiliate behaviour in one direction or the other. An environment
plagued by heavy distortions and a mix of certain strengths but
severely lacking capabilities in other respects, is likely to
experience one-sided knowledge flows and various undesirable
consequences.



Put together, current trends are commonly interpreted


as a move from “competence exploitation” to “competence
creation” in foreign affiliates or, of a shift from “assembly-type
operations” towards “research intensive operations” or
“strategic asset-seeking investment”. There is the notion of a
shift in the orientation of affiliates from “home-base exploiting
activity” to “home-base augmenting activity” (Kuemmerle
1996). Furthermore, the geographical reach of affiliates has
generally increased significantly. All of these factors in which
the internationalization of R&D plays an important role, have
consequences for the functioning of affiliates and how they
interact with the local environment.




Globalization of R&D and Developing Countries




182


2. Innovation and FDI policy domains

Many countries, developed and developing, now place


innovation policy at the very top of their policy agenda,
although not always with a clear view of what it entails. The
evolution of innovation policy is commonly influenced by its
origin, as it has generally emanated from a traditional approach
motivated to establish a science base complementary to higher
education. Innovation used to be viewed as the linear, one-
dimensional output of science and technical progress. However,
a number of countries face “paradoxes” in innovative
performance, in the sense that R&D is not accompanied by
growth. Innovative performance depends on how a range of
players interact in bridging the demand for new and better
products and, the supply of technology and knowledge.
Reduced transaction costs due to the advance of ICT serve to
ntensify interactions and the innovation process (figure 1). i



Figure 1. The intensifying innovation spiral


Customer
Entrepreneurs


Supply:
R&D


Ideas
technologies


Competitors
Researchers


Innovations
Demand:
Market


Increased intensity
in linkages through ICT



Source: the author.



Innovation depends on a number of related factors.


How much R&D is pursued in an economy matters but
represents merely one aspect. The composition of R&D is




Linking science and R&D policies




183


important, as is the access to R&D in the rest of the world. The
ability to make use of the results of R&D further depends on
knowledge and skills in the work force, on competition,
governance, organizational modes, on conditions for
entrepreneurship and risk-taking, the quality of public
institutions, and so on. Both well-functioning private markets
and public service functions are needed, and mismatch between
them causes problems (Metcalfe 1995).



It matters greatly whether countries are able to


coordinate reforms in ways that can allow firms and individuals
to be subjected to consistent incentives and support in regard to
their means to innovate. One aspect concerns the degree to
which countries pursue governance approaches and evaluations
so as to allow for orderly learning processes and thereby, also
facilitate gradual improvement. Such learning should not be
piecemeal, but allow for gains in efficiency as well as across
policy domains and in the division of public-private
responsibilities which, on purpose or inadvertently, exert an
important influence on conditions for innovation (Andersson et
al. 2004). The economies generally viewed as having organized
themselves the best in this area include notably Australia,
Finland, Singapore and the United Kingdom. Others, such as
Chile, China, France, Germany, the Republic of Korea, the
Netherlands, Sweden, Switzerland, Taiwan Province of China
and the United States, are viewed as strong in individual areas.
For all economies however, specific weaknesses or bottlenecks
tend to weaken their overall performance. In addition,
institutions and policy frameworks are adjusted only slowly,
whereas the needs of technology and the economy evolve more
quickly.



Traditionally, FDI policies have been based on a


reasoning different from that of innovation policies. In order to
enhance the local gains of FDI, some governments levied
performance requirements on TNCs in the 1960s and 1970s.
The effectiveness of such measures was gradually called into




Globalization of R&D and Developing Countries




184


question, either because they discouraged FDI in the first place
or, because investor behaviour was distorted in unwanted ways.
In multilateral negotiations, countries have gradually opted to
reduce their room for discretion in levying mandatory
requirements on investors, whereas incentives promoting
voluntary actions remain viable.



Today, most countries, and also many regions, pursue


policies to attract FDI, including particularly high value-added
activities. Beyond the measures directly targeting foreign
investors, other relevant policies include privatization,
regulatory reforms and competition policies, the provision of
physical or legal infrastructure, tax incentives, and measures to
enhance cooperation between foreign affiliates and local players
in order to underpin the establishment of long-term links, the
training of local staff, the transfer of skills to domestic firms,
and so on. Whereas outright subsidies to foreign investors are
(at least publicly) shunned, competitive pressures lead countries
into taking various initiatives in order to come out on top in
firms’ investment decisions, some of which may take the form
of a detrimental race for attracting FDI (Oxelheim and Ghauri
2003). However, the complexity of the interplay between
foreign and domestic players, with the nature of links and
spillover effects dependent on the way in which the strategies of
foreign affiliates and local players relate in the specific case,
calls for precision rather than generality in FDI-policies. There
is a rationale for underpinning the establishment of centres of
excellence in priority areas, cherishing specific forums and
networks for exchange of information between key domestic
and foreign actors and, fostering rather than countering the
development of professional networks of business angles and
venture capitalists.

3. Interrelated agendas


Countries around the world display markedly varying
conditions for innovation. However, they are sharing the




Linking science and R&D policies




185


experience that no single policy measure or piece of reform is
likely to be effective in bringing a radical improvement in
innovative capacity. Improving innovative performance may
require both enhanced capabilities and revised incentives
among a number of actors. On the other hand, specific
deficiencies and weaknesses may hamper the overall setup. It is
no coincidence that bottlenecks often remain and are difficult to
remove over extended periods of time. The prevailing
institutional, industrial and social fabric in an economy tends to
shape sets of interdependent structures that are not easily
overturned. In particular, inefficiencies commonly derive from
the influence of well-organized vested interests, which are
likely to suffer inevitable losses once their privileges are
undercut, whereas the gains are spread relatively thin on the
vast number of, often unaware, much less well organized
consumers and producers (Olson 1965).



Whereas each country is unique, certain kinds of issues


tend to be particularly important in different kinds of countries.
There are now examples of impressive leapfrogging processes
in the adoption of sophisticated technologies in some LDCs,
e.g. through the diffusion of cellular technologies. Even where
more basic infrastructure in transport and communication are
lacking, LDCs invest disproportionately in ICT and are able to
reap significant favourable impacts, if sound regulatory
conditions are in place (UNCTAD 2002). However, progress
needs to be cherished and recorded differently than in
developed countries (Diyamett and Wangse 2001). Developing
countries face stern challenges when it comes to raising the
capability of private firms to absorb and use the kinds of
technology that enter through TNCs.6 The academic research
community and innovative capacity in industry are often de-
linked, hampering the establishment of effective incubators and
science parks, seed and venture capital funding, etc. At the


6 See Kokko (1994) in the case of Mexico, Kokko et al. (2001) for
Uruguay, and Kathuria (2002) and Görg and Strobl (2001) for India.





Globalization of R&D and Developing Countries




186


same time, technology and modern skills need to harmonize
with traditional social and community-based conditions that are
key to their broad-based application.



In LDCs, innovation is likely to be closely associated


with incremental improvement rather than science-based
discovery. Here, public support of orderly transactions and the
provision of basic education, micro-credit, and also the
endorsement of entrepreneurship irrespective of gender and
ethnic belonging, are more important for spurring innovation
than academic credentials or the protection of intellectual
property rights. While managing assets related to the
environment and cultural heritage may hold the key to societal
gains in local communities (Finger and Schuler 2002),
overcoming barriers to learning and new initiatives emanating
from traditional perceptions and attitudes may be a prerequisite
for adjustment and innovation (Hamel 2005). Capacity building
and reform in such respects must precede or match, the
attraction and arrival of foreign R&D facilities, if there is to be
any wider receptive basis in the form of skilled workers and
constructive customers and citizens.



In advanced developing countries, such as Malaysia,


Thailand and Brazil, gains from FDI and foreign R&D have
been seen to depend on skills upgrading (Best 2001, van
Assouw et al. 1999). TNC investment in skills is unlikely to
suffice unless synergies can be put in place with local training
policies and complementary services. On the one hand, inward
FDI may account for the decisive impetus for setting off broad-
based innovation processes. On the other hand, TNCs cannot be
anticipated to induce what is required in a developing country.
Whether foreign R&D will be established based on a long-term
strategy for knowledge-generation will much depend on the
local outlook. Domestic firms, universities and public
authorities all count, including in their capacities as prospective
partners of relevance to R&D. Some studies have concluded
that policy makers should support local competitors in the




Linking science and R&D policies




187


domestic business community, rather than target FDI (Wang
and Blomström 1992).



In order to build appropriate conditions, remove


barriers and gain inspiration, international comparison and
drawing lessons from other countries can be helpful.
Nevertheless, sound innovation policies are not merely
legislated from above. Own competencies need to be developed,
which is not facilitated by the superficial marketing of the
approaches developed by others (Ellerman et al. 2001). Paving
the way for innovation requires the involvement of multiple
stakeholders or, at least their willingness to accept novel
solutions to prevalent problems.

4. Conclusion



Beyond the mere size of FDI and foreign R&D, the


question is the roles they play in an economy. Various factors
influence observed outcomes. Although most empirical studies
conclude that FDI tends to be positive for home as well as host
countries, recent work has rendered ambiguous conclusions,
and pointed to a complex picture. FDI and globalization bring
structural changes that adapt to prevailing conditions and
incentive structures.



Today, there is a strong drive for TNCs to diffuse R&D


facilities internationally and to allow for enhanced creativity
and strategic initiative in individual units. Foreign R&D brings
a potential for enhanced commitment to local markets, and
adjustment and enhanced diffusion of technology and skills. At
the same time, TNCs need to foster an appropriate division of
labour between their units for the purpose of internalizing
benefits within the group. Individual units are generally
motivated to manage knowledge and process or product
development in ways that benefit the group as a whole. It is an
open question whether they will source technology locally or
add technologies so as to help upgrade and strengthen the local




Globalization of R&D and Developing Countries




188


environment. Broadly speaking, R&D-facilities in developing
countries continue to have limited scope. Given insufficient
infrastructure, deficiencies and rigidities in work force skills
and labour mobility, weak product/market competition, the
absence of local research institutions that can support
commercialization of technology in early stages, public
authorities and governance that provide risks for technological
lock-in and, disconcerting disturbances in playing rules over
time, TNCs cannot be expected to establish strongly committed
R&D facilities in any particular host country. On the other
hand, a country that is not only offering promising growth
prospects but, which has put in place an institutional and micro-
based fabric conducive to mutually enhancing knowledge
exchange, has considerably better chances of enticing foreign
technology in ways that will add to the dynamism of the local
environment. It is essential that policies in support of FDI and
foreign R&D are designed and implemented in tandem with an
upgraded broader policy agenda to enhance innovation and
growth.


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FDI, R&D and technology transfer in Africa: an


overview of policies and practices


John Mugabe1


Generally, FDI flows to Africa have expanded only
marginally and are still at levels behind those of other
developing regions. Africa accounted for less than 1% of global
FDI inflows in the late part of the 1990s (UNCTAD 2001).
While inflows to developing countries as a group increased
from $20 billion to $75 billion between 1981 and 1985, Africa’s
share of that inflow dropped (UNCTAD 1999). Historically,
low rates of FDI inflows to the region have been explained by
hostile policies, unstable political environments characterized
by civil wars and armed conflicts, a lack of effective regional
integration efforts, poor and deteriorating infrastructure,
burdensome regulations or, a lack of institutional capacity to
implement FDI policies and, a lack of institutional clarity to
promote investment in Africa.



There is scant information on the sectoral composition


of FDI in Africa. However, available data show that more than
50% of total FDI inflows to the region target natural resource
industries, especially mining. The strong relationship between
FDI flows and natural resources has been well researched and
evidenced. For example, in Ghana investors from the United
States, Canada and Australia have been interested in gold.
Between 1988 and 1998, more than 60 prospecting and
reconnaissance licences were awarded to companies from these
countries. In Guinea, more than $130 million had been invested
in the Aredor mine by 1996. In the United Republic of
Tanzania, mining is the largest industry for FDI and gold is the
largest branch. By 1998, total cumulative FDI in mining was



1 The views expressed in this study are those of the author and do


not necessarily reflect the views of the United Nations, its Member
States, or the Institutions to which the author is affiliated.




Globalization of R&D and Developing Countries




194


estimated at $370 million. Mining attracted 65% of FDI,
services 19% and manufacturing 16%. More than 90% of the
$1.5-billion FDI inflows to Nigeria in the 1990s targeted the
petroleum and natural gas industries. The petroleum industry
also dominates FDI in Angola (UNCTAD 2001).



The agricultural industry of the region has attracted


more modest FDI. Some of the major projects of the 1990s
included Del Monte’s investment of more than $9 million in
banana plantations in Cameroon, Lonrho’s $7.5-million
investment in tea estates in the United Republic of Tanzania
and, Aberfoyle Holding’s multimillion dollar investment in
palm oil in Zimbabwe. In the same vein, a large part FDI
inflows to Uganda went to the beverages, sugar, and food
processing industries and coffee and tea plantations. Uganda
also attracted some manufacturing investment in the textiles and
packaging industries. Outside manufacturing and agriculture,
liberalization of the telecommunication industry attracted
considerable investment, while in Ethiopia the hotel industry
was the largest recipient (UNCTAD 2001).



African countries are reforming their policies,


legislation and institutional arrangements to attract FDI. They
treat FDI as a major source of capital for their economic change
and development. Some of them are putting emphasis on FDI as
a carrier of new scientific knowledge and technological
innovation. Investment policies and laws of a growing number
of African countries contain provisions aimed at encouraging
foreign investors to contribute to the strengthening of the
national scientific and technological bases by targeting R&D.
Despite these efforts, the R&D content of FDI flows to Africa is
very low. This is mainly because of weak domestic R&D
capabilities and, in many cases, the absence of institutional
mechanisms that provide explicit incentives to investors to
target knowledge-based and -intensive activities.





FDI and R&D in Africa




195


Most African countries have embarked on wide-ranging
policy, political and institutional reforms aimed at reducing
(and, if possible removing) barriers to entry of foreign capital,
particularly FDI. Trade and investment liberalization,
privatization and the creation of various incentives for foreign
investment have received considerable attention from
governments. Regional economic integration bodies and free
trade zones have been created to enlarge the size of markets and
to adopt common investment regimes at subregional and
regional levels. These efforts are based on the recognition that
FDI can stimulate economic growth, generate new employment
opportunities, promote the transfer of new technologies and
contribute to environmental sustainability in the region.



The surge of interest in FDI and TNCs has been so high


that in many countries there have been high expectations in
terms of what these companies can do, and generally on the
development effects of FDI. While FDI can indeed, contribute
to national economic and social development in many ways, the
engagement and performance of domestic actors are crucial.
The effect of FDI largely depends on the policies of the host
country. This goes beyond the mere liberalization of economies.
Deliberate measures to develop human capital and the physical
and social infrastructure can also be valuable ways to enhance
the quality of FDI that countries can attract.



The role of TNCs and FDI in promoting the scientific


and technological development of African countries is the
subject of increasing policy debate and academic research
(Oyelaran-Oyeyinka 2004). There is concern about the extent to
which FDI stimulates R&D in and transfer of new technologies
to Africa. The nature of policies and institutions that are
necessary to encourage R&D-based FDI is at the heart of the
debate. The main focus of policy makers is on the necessary
reforms that should be instituted by their countries to attract the
type of FDI that builds or strengthens their domestic R&D
capabilities and stimulates local technological learning.




Globalization of R&D and Developing Countries




196


It has been demonstrated in Africa that TNCs tend to
invest in R&D in those countries that:
• have a minimum domestic R&D capacity;
• provide legal and economic incentives for knowledge-based


investments; and
• provide flexibility for local institutions to forge R&D


partnerships with foreign affiliates.


The cases of Kenya and South Africa show that for FDI
to contribute to R&D, host-country technology policies should
converge with FDI legislation. In the case of Kenya, restrictive
measures pertaining to the granting of research permits to
foreigners and the absence of a national strategy focusing on
knowledge-based investment have restrained FDI to a few
R&D-oriented activities, mainly in agriculture. In the case of
South Africa, there are explicit strategies to encourage foreign
affiliates to engage in R&D. In South Africa local companies
and affiliates of TNCs are increasingly investing in R&D. FDI
is a growing but not really significant carrier of R&D in the
automobile industry, ICTs and agriculture.





References
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globalization?” ATPS Special Paper Series 17. Nairobi: African
Technology Policy Studies Network.


UNCTAD (1999). World Investment Report 1999: Foreign Direct
Investment and the Challenge for Development. New York and
Geneva: United Nations. United Nations publication, Sales No.
E.99.II.D.3.


________ (2001). World Investment Report 2001: Promoting
Linkages. New York and Geneva: United Nations. United Nations
publication, Sales No E.01.II.D.12.














PART IV
Comments















FDI and the strengthening of the science and


technology capacities in Cameroon


Efa Fouda1


Unfortunately, a large part of FDI in African countries
such as Cameroon is only linked to the exploitation of primary
commodities, notably petroleum extraction and mining. Related
to the need for better transforming primary products, it would
be desirable to reinforce the R&D and innovatory capacities of
these developing countries through attracting FDI in R&D
activities. From this perspective, initiatives such as the New
Partnership for Africa’s Development (NEPAD) should be
encouraged. Regarding R&D, national NEPAD programmes,
and measures aiming to encourage the establishment of R&D
units of the TNCs of developed countries should be put in place.
Countries need to reinforce their national science and
technological infrastructures (through the creation of science
and technology parks, universities and research centres), their
programmes to develop human resources and, the
implementation of incentive schemes encouraging businesses,
including foreign affiliates, to invest in R&D.




To operationalize this vision, the Government of
Cameroon has for some time implemented, through the
Ministry of Scientific Research and Innovation, a policy aimed
at developing scientific knowledge and its application. The final
goal is to elaborate sustainable solutions to the socio-economic
and cultural problems of Cameroon. The main strategic axes of
this policy are:
• the strengthening of scientific and innovatory capabilities;
• the development of human resources (researchers,


engineers, research technicians) able to create the scientific


1 The views expressed are those of the author and do not
necessarily reflect the views of the United Nations, its Member States,
or the Institutions to which the author is affiliated.




Globalization of R&D and Developing Countries




200


knowledge and innovations necessary for the development
of Cameroon;


• the elaboration and implementation of research projects
contributing to solving the development problems of
Cameroon.



The Ministry of Scientific Research and Innovation of


Cameroon also seeks to ensure that the national scientific
community is able to compete and to communicate with the best
scientific teams worldwide in various domains. This way the
national scientific community should be aware of, and benefit
from, scientific progress and innovation that Cameroon may
need, wherever that knowledge is to be found.



The main actors of R&D in Cameroon are the public


R&D and innovation units, the State universities and the
international R&D organizations established in Cameroon. The
Ministry of Scientific Research and Innovation supervises eight
public R&D and innovation organizations, employing 500
researchers together:



• L’Institut de Recherche Agricole pour le Développement


(agriculture);
• L’Institut de Recherches Géologiques et Minières (geology


and mining);
• L’Institut de Recherches Médicales et d’Etude de Plantes


Médicinales (medicine and medicinal plants);
• L’Institut National de Cartographie (cartography);
• La Mission de Promotion des Matériaux Locaux (locally


produced raw materials);
• Le Centre National d’Education (education);
• Le Comité National de Développement des Technologies


(technological development); and
• L’Agence Nationale de Radioprotection (protection against


radiation).




Cameroon




201


Since the reform of higher education in 1993,
Cameroon now has six State universities. In 2003, 71,091
students were registered at these universities (of which about
2,000 were Ph.D. students). There are eight international R&D
organizations established in Cameroon. They are carrying out
joint projects with local laboratories. Cameroon, through the
Ministry of Scientific Research and Innovation, has developed
scientific collaboration with, on the one hand, several countries
(France, the United States, the United Kingdom, Belgium, etc.)
and, on the other hand, international organizations dealing with
science and technology, such as the relevant bodies of the EU,
the French public science and technology research organization
“Institut de Recherches pour le Développement”, the World
Bank, the International Atomic Energy Agency, the World
Intellectual Property Organization, the African Development
Bank, the Food and Agriculture Organization and, the United
Nations Educational, Scientific and Cultural Organization.



Thanks to this intensive international cooperation, the


R&D organizations of Cameroon are integrated in the global
networks of R&D, allowing them to strengthen the competences
and productivity of their researchers. The majority of these
researchers have already worked with colleagues from
developed countries within the framework of joint projects. The
Ministry for Scientific Research and Innovation should ensure,
using a comprehensive system of evaluation, that local
researchers are in a position to compete, and also cooperate,
with the best scientific teams of the world in various fields, so
as to be aware of scientific progress necessary for the
development of Cameroon. The implementation of these
research programmes has had promising results in areas as
varied as agriculture and livestock farming, energy, hydrology,
cartography, health and nutrition and, the development of
materials and natural resources.



The local R&D expertise developed through these


measures could be used in various ways, including in projects




Globalization of R&D and Developing Countries




202


carried out for foreign affiliates of TNCs established in
Cameroon. Generally speaking, TNCs have not yet established
R&D units in Cameroon. Nevertheless, the agricultural
industry would offer important opportunities for them.
Agriculture is an important part of economic activity in
Cameroon and, there are important R&D capacities in that
industry, notably the Research Institute for Agricultural
Development and the University of Dschang. The Research
Institute for Agricultural Development is one of the
Government’s main instruments in the implementation of the
national agricultural policy. The Institute carries out a large
number of the activities financed by foreign affiliates of foreign
TNCs located in Cameroon. The expertise and the innovations
provided by the researchers of the Research Institute for
Agricultural Development have contributed to the development
of an industrial-scale agricultural activity carried out by
affiliates of TNCs in the production of bananas, cotton, palm
tree oil, cocoa, coffee, maize, rice and beer.



To summarize, the Government of Cameroon is


committed to the improvement of the country’s attractiveness
for FDI in R&D. To that end, concrete measures are being taken
to improve the governance of R&D units and to attract
investors. Actors operating in the fields of education, R&D and
innovation are required to react better to the technological,
scientific and professional needs of the private sector and, to
contribute to making Cameroon an attractive location for
foreign investors looking for human capital.






FDI and R&D: Sri Lanka’s experience


Dilip S. Samarasinghe1

Many governments have now realized that a key


element in achieving economic prosperity, as the
developed nations have done in the past, will be to acquire
the capability to produce advanced or high value goods.
The approach taken by Asian Governments and their
investment promotion agencies (IPAs) has been to actively seek
FDI, notably in the area now known as business services
outsourcing. While India has been the main beneficiary of this
trend, other countries, such as Sri Lanka, have also made a few
inroads in this direction. One of the main reasons why
companies in the developed world opt to set up offices in South
Asia is in the competitive relative wages of the sub-continent.
Fluency in English is another key consideration. Modern
communication systems are another important part. A good
example is a United-Kingdom-based medical insurance
company that has set up a back office operation in Colombo, Sri
Lanka. Every day letters and claims are scanned and sent to
Colombo where they are processed. This happens when it is
night time in the United Kingdom. By saving on time through
back office operations, companies are able to offer a better
service to their customers.



FDI in outsourcing has provided benefits to the Asian


host countries, including jobs for young people in activities that
are new, and indeed never existed before. It is a critical area
because it also includes high-technology activities, such as
R&D. The jobs created by foreign affiliates of TNCs are also
seen as one way to slow down or reverse the massive brain
drain from which the sub-region suffers. FDI in advanced areas



1 The views expressed are those of the author and do not


necessarily reflect the views of the United Nations, its Member States,
or the Institutions to which the author is affiliated.





Globalization of R&D and Developing Countries




204


of research offers new opportunities for the skilled, educated
and talented people of South Asia to remain in their countries.



TNCs are technological leaders and their presence in a


country will inevitable result in a certain level of technological
transfer. They can bring in knowledge on how new goods and
services can best be produced. This leads to the enhancement of
the skills of labour forces and also brings in more advanced
management know-how. It is strategically vital for developing
countries and, in particular, those of South Asia to succeed in
entering the select club of nations that produce complex or high
technology goods and services.



The pursuit of FDI also serves as a basis to channel


factors of production in an efficient manner. Countries that have
succeeded in attracting FDI have experienced a significant
growth and diversification of their exports. In Sri Lanka,
companies that come under the purview of the country’s IPA
produce 60% of export in general and 80% of all industrial
exports. In Sri Lanka, FDI based investment represents much of
the modern sector of the economy.



A key issue that developing countries need to address is


how they interact with TNCs. It is now generally accepted by
most developing countries that the presence of TNCs in a
country is an indicator of the confidence of a large investor in
that country. It is very much like a certificate guaranteeing that
the country is politically stable and economically sound. Hence,
a country that is able to secure the establishment of TNCs on its
territory will be considered, to use a newly coined word,
“investment friendly”.



In Sri Lanka a central authority, the Board of


Investment of Sri Lanka (BOI), handles all FDI. The BOI was
founded in 1978 by a government that was seeking to liberalize
the country’s economy, which had been administered for over
two decades under socialistic policies with strong controls and a




Sri Lanka




205


commitment to import substitution. Sri Lanka was the first
South Asian country to move in the direction of economic
liberalization before India, Pakistan and Bangladesh.



What makes the BOI different to most IPAs is the sheer


scale of its mandate. By the end of 2004, a total of 1,760
companies had invested in Sri Lanka. These employ an
estimated 400,000 workers both within and outside the 12
export processing zones. Employees in the zones amount to
121,118. While other IPAs restrict their activities to the
attraction of investment, BOI officials call their organization the
Investment Management Agency, since it is responsible for
attracting investment and processing applications, managing Sri
Lanka’s export processing zones, managing a separate customs
and tax regime aimed at foreign investors and, attracting
investment related to infrastructures and other areas. As a result,
the organization has a staff of over 1,200 and this size has often
led to questions being raised.



While there are many issues confronting FDI in


developing countries, the most important consideration a
government faces is the type of investment it is seeking to
attract. One of the main differences between developing and
developed countries is that the developing nations that are
seeking to attract FDI are often “generalists”. They will not be
selective in the type of investment they are seeking to attract,
accepting projects from a wide array of sectors and industries.



However, such countries may risk having foreign


affiliates whose activity offers very few benefits in economic
terms. IPAs of developing nations therefore must move to a
more focused approach when seeking investments. Sri Lanka
has made some moves in this direction by identifying 12
industries for investment. The BOI has identified those specific
priority industries for investment, of which, the eighth is
entitled “Research and Development”. Unfortunately, there




Globalization of R&D and Developing Countries




206


have been very few inflows in the area of R&D despite the
incentives offered.



In R&D, to qualify for incentives, a foreign investor


needs to invest a minimum of $50,000. If the project is
approved by the BOI, and the agreement signed, the
government of Sri Lanka will grant the investor a five-year full
tax holiday. Thereafter the investor will pay a 15%
concessionary tax. The investor will also benefit from import
duty exemption on capital goods. However, this will not be
granted for raw materials imported and, there is no exemption
from exchange controls.



One of the main reasons for the limited amount of


R&D-related FDI flows has been the relatively small size of Sri
Lanka. Projects that involve higher technology usually require a
more technically qualified workforce, which may not always be
available in the quantities sought by the TNCs.



Another reason is the relatively limited number of jobs


created through R&D. Governments have always been much
more keen to attract investment in areas which provide large-
scale employment. Employment generation has been also a
traditional objective in Sri Lanka. Job creation has been clearly
a primary objective of the Government, especially in industries
that can employ lower income sections of the community.



Nevertheless, officials of the BOI have also shown


interest in high-technology projects, as they help in skill
creation, the diversification of the economy and, result in a
certain amount of technology transfer.


The success of developing countries in the future will
undoubtedly depend on how they succeed in transforming
themselves from generalists to specialists and, by that means
attract investments that result in greater technological skills.
Within the developing world, Sri Lanka has made its first steps




Sri Lanka




207


towards identifying its priorities, although the results so far are
more moderate. It remains to be analysed further why very few
inflows in the area of R&D have taken place despite the
incentives offered.








Summary of the Expert Meeting on the Impact of FDI
on Development, held in Geneva, from 24 to 26


January 20051


1. Introduction


In accordance with its agenda, the Expert Meeting on
the Impact of FDI on Development discussed the globalization
of research and development (R&D) by transnational
corporations (TNCs) and its implications for developing
countries. The topic reflected a growing recognition in
developing countries of the role played by innovation and R&D
in development. Innovation and R&D are essential for
upgrading technologies, moving up the development ladder and,
catching up with developed countries. In technology generation,
transfer and diffusion, developing countries are involving TNCs
that are major players in global R&D.



In his opening address, the Chairperson of the Expert


Meeting stressed the timeliness of linking the topics of R&D
and TNCs. He noted not only that selected developing countries
now receive more FDI in R&D, but also that the nature of this
FDI is changing, in that it is no longer intended only for local
market adaptation. The critical question is whether this
phenomenon will spread in the future to a larger number of
countries and, if so, under what conditions. (None of this is to
deny that there are other key actors in many countries engaged
in R&D, namely the public sector and the local private sector).
The related practical question is what countries can do to
harness the activities of TNCs to their own development
objectives. On that point, he asked if R&D is a luxury only to
be enjoyed by relatively rich societies, and suggested that its



1 The summary was prepared under the responsibility of the


Chairperson of the meeting, H.E. Mr. Enrique Manalo, Ambassador
Extraordinary and Plenipotentiary, Permanent Representative of the
Philippines to the United Nations Office and other International
Organizations in Geneva.




Globalization of R&D and Developing Countries




210


relevance to developing countries in general depends on their
aspirations and policies.



Experts discussed the definitions of critical terms in the


subject matter. Some stressed the importance of broadening the
discussion from R&D to knowledge creation and innovation.
Other experts highlighted the importance of looking at cases of
R&D in service industries, not just in manufacturing, given that
the bulk of world GDP these days is produced by service
industries, and R&D is itself a service activity.

2. TNCs and the internationalization of R&D


Several experts stressed that TNCs are only one player
in national innovation systems, alongside universities, research
centres, domestic firms and other government institutions.
TNCs do not generally conduct basic research, and perhaps it is
not even desirable to push them into that area. In the interaction
of TNCs with other players, the main question is how
developing countries can become more actively involved in the
process of global knowledge generation and diffusion by
leveraging the activities of TNCs in a way that complements
domestic efforts.



R&D and innovative activities have generally been


confined to the home countries of TNCs much more than
manufacturing activities have been. The standard explanation
refers to the complexity of R&D activities and the need for
geographical proximity. Nevertheless, in recent years R&D
activities have become more internationally mobile, and
developing countries are starting to become nodes in global
innovation networks. In fact, examples of highly complex
R&D-related work – such as chip design – were highlighted by
some experts to indicate that complexity may no longer
constitute a barrier to the internationalization of innovation. It
was also noted that the markets for knowledge workers and
technology are also becoming increasingly international.




Summary of the Expert Meeting




211



Some experts stressed the importance of distinguishing


between different phases in the internationalization of R&D.
Until the 1960s, R&D tended to be very “sticky” and stayed in
home countries. Starting in the 1960s, the first wave of R&D
internationalization involved mainly asset-exploiting R&D
aimed at adaptation of products for local markets. The second
wave began in the 1970s, and was primarily directed towards
adapting specific new products to particular local markets. In
the third wave – starting in the 1980s – R&D
internationalization was driven by the need for firms to find
complementary expertise abroad, notably in other developed
countries. This trend was intensified from the 1990s onward
and, in the fourth wave there was increasing demand for
scientific expertise of a scale and scope that could not be easily
met without expanding internationally. In this phase, “asset-
augmenting” R&D has also grown in importance.

3. Regional patterns


While most R&D activities remain in developed
countries, experts concluded that developing countries are
becoming more important as both host and home countries of
FDI in R&D. In recent years, China and India have become the
leaders of the developing world in FDI in R&D, partly because
of their large and fast-growing markets and, their large supply
of low-cost engineers and scientists. While noting that
important examples of R&D by foreign affiliates could be
identified in all parts of the developing world, the experts
indicated that these two countries have been particularly
successful in attracting “asset-augmenting” R&D conducted
with a view to developing processes and products for global
markets.



Experts noted that in Latin America and the Caribbean,


R&D activities of TNCs are relatively limited, especially when
compared to Asia. One of the reasons for this is that in most




Globalization of R&D and Developing Countries




212


Latin American and Caribbean countries, FDI policies focus on
attracting large quantities of FDI and do not pay much attention
to the nature of FDI. R&D-related FDI in the region is of an
adaptive type, with some degree of new product development
for local or regional conditions. However, more recently, some
countries such as Brazil have begun to attract increasing FDI in
R&D oriented towards global applications (for instance in the
case of R&D in automobile components).



Experts also observed that Africa attracts low levels of


FDI in general and negligible R&D-related activities. The few
R&D activities to be found are restricted to the application of
existing knowledge rather than the development and application
of new ideas. This was attributed to three main reasons: first,
the mismatch between science and FDI policies (in many
African countries, science, technology and innovation have not
been mainstreamed in development strategies); second, a lack
of linkages between investment promotion policies and research
polices – indeed most FDI policies focus on financial capital
rather than knowledge accumulation and human capital
(investment promotion agencies (IPAs) for instance, focus more
on turnkey projects); and third, the lack of a culture of public-
private partnerships. The need to develop proper technology
and innovation polices was stressed. In this respect NEPAD
was urged to make efforts to improve infrastructure in Africa
and enhance the development of science, technology and
innovation policies in the region.

4. Drivers and determinants


The issue of the size of host countries was mentioned
by various experts as a factor in attracting R&D-related FDI.
The situation of the LDCs was singled out since they usually
have a very small R&D base. However, it was indicated, that
there are areas where R&D-related FDI could develop. In Nepal
for example, opportunities exist in the agricultural sector (tea
gardening and herbal medicine). It was recognized that LDCs




Summary of the Expert Meeting




213


deserve special attention and assistance to help them face the
problems they encounter in this area.



A number of drivers of the current internationalization


of R&D were identified. One key driver is the increased
competitive pressure created by liberalization and technological
progress (not least in the area of information and
communication technologies), which forces firms to spend more
on R&D and speed up the innovation process, while seeking to
reduce costs and find the necessary skills. For some developing
countries, this has opened new avenues to link up with global
innovation networks. Various supply and demand factors, along
with policies, were identified as important explanations to why,
and in which locations, the globalization of R&D takes place.
They include the desire to supply large and fast-growing
markets; physical proximity to global manufacturing bases; the
search for lower-cost overseas R&D personnel and, for new
ideas and innovative capabilities. Dramatic changes in design
methodology and organization on the supply side have also
contributed to a greater need to globalize R&D work. In India,
the existence of reputed national research institutes and, the
management style of local companies for example, were also
mentioned as specific factors attracting FDI in R&D. The
presence of Indian nationals in the R&D centres in developed
countries could also influence the choices of TNCs in locating
their overseas laboratories in India.



Experts noted that TNCs from developed countries are


no longer the only source of R&D-related FDI. There is also
growing FDI in R&D (from a low level) by developing country
TNCs, e.g. from the Republic of Korea, China and India.
Overall, motivations for such FDI tend to be similar to those for
R&D-related FDI from developed-country TNCs (for example,
to support local sales abroad, to be near global manufacturing
bases and, to hire foreign experts). However, while in
developing locations the main purpose appears to be to exploit
existing knowledge, which is generally second-generation




Globalization of R&D and Developing Countries




214


technology, in developed locations the main motivation is to
enhance innovative capability by acquiring local knowledge and
technology. Some experts concluded that cost advantages are of
relatively low importance as a driver for developing-country
TNCs’ R&D investments abroad. Experts agreed that more
research is required on R&D-related FDI from developing
countries in order to develop a better understanding of this
relatively recent phenomenon.

5. Development impact


A number of positive and negative potential impacts on
host economies were identified. Key direct positive impacts
mentioned included the creation of well paid employment for
scientists and engineers; better use of locally available
materials; technology transfer (new equipment, laboratories,
etc.); and the design of consumer products better suited to
domestic needs. Indirect positive effects include spillovers to
local firms; the inculcation of an R&D culture in local firms;
the development of new disciplines and specializations at local
universities; the development of R&D clusters; and spin-offs of
by-products that TNCs do not want to develop themselves.



As for negative impacts of FDI inflows in R&D,


experts mentioned the risk of crowding out in the labour
market, making it more difficult for local firms to attract talent;
the risk of crowding out local research units; limited linkages
between foreign affiliates and local firms and institutions and,
the risk of domestic R&D activities being closed down as a
result of foreign entry, notably through acquisition. The net
impact on a host economy depends on the nature of the R&D
undertaken and the specific circumstances of the host economy.
It was noted that the development of domestic skills and
innovation capabilities is essential not only to attract FDI in
R&D but also to benefit from such investment.





Summary of the Expert Meeting




215


The extent to which developing countries could benefit
from knowledge diffusion and innovation also depends on the
extent to which a TNC is embedded in the wider network of
research operations, including domestic firms and the public
sector. The mode of these interactions is also important, e.g.
through non-equity or equity forms; with suppliers, customers,
competitors and universities; through outsourcing and
offshoring and, through the establishment of research consortia.

6. Policies matter


There was general agreement among experts that active
policies by governments could play a leading role in creating
and facilitating the right conditions to attract and benefit from
FDI in R&D. Key instruments mentioned by experts related to
science, innovation and technology policies, as well as FDI
policy. Many experts emphasized that in the light of the shift
towards more knowledge-based activities and increased
internationalization of innovation activities, policy-making
aimed at attracting and benefiting from FDI in R&D needs to
treat the two policy areas in a holistic and coherent way. Several
experts noted that in many countries there is a lack of coherence
between FDI policies and science and technology policies.



Among general policy instruments, some experts


mentioned FDI liberalization and the strengthening of the
national science and technology base, including research
institutions. Specific policy instruments that can be considered
include incentives, performance requirements, investment
targeting, and the provision of public goods (notably low-cost
and high-quality infrastructure). One expert noted that in some
developing countries, high tariffs on imported R&D-related
inputs hamper those countries’ efforts to create or develop R&D
capabilities. The importance of policies in the area of education
and skills development and efforts to strengthen the national
innovation system was stressed by various experts. There is also




Globalization of R&D and Developing Countries




216


a need to secure an appropriate division of responsibility
between central and local governments.



In this context, special attention was paid to the role of


IPAs. In many developing countries, IPAs do not pay adequate
attention to the potential for attracting FDI that could contribute
to knowledge accumulation, but focus rather on capital
accumulation in tangible assets. It was argued that an IPA needs
to be well embedded in the overall system of national
innovation and that promotion activities should be aligned with
a country’s overall development and innovation strategy. In the
case of the Czech Republic, for example, the IPA has a mandate
to promote R&D in both foreign and domestic companies; to
attract FDI, and to advocate improvements in the country’s
technological infrastructure; to work with both existing and new
investors to encourage new R&D-related investment and, to
promote closer linkages between R&D conducted by foreign
affiliates on the one hand, and that conducted by domestic firms
and universities, on the other.



An important function of policies is to promote closer


integration between TNCs and other R&D players, including
domestic firms, universities, and other agencies, in order for
host countries to capture more of the benefits of knowledge
creation and diffusion. Without good linkages between all these
actors, knowledge will not be diffused and innovation
promoted. Some experts were of the opinion that developing
countries in general could benefit from the globalization of
R&D but could not use it directly to upgrade the
competitiveness of their science and technology capabilities. To
do that, they have to complement FDI in R&D with efforts by
local public institutions and the private sector. This point was
raised for instance, in the case of China and some African
countries. A number of experts emphasized the importance of
building a balanced partnership between the public and private
sectors.





Summary of the Expert Meeting




217


Small developing countries may find it more difficult to
successfully engineer strategies to attract FDI in R&D, as they
have weak bargaining power and small markets. In this context,
a key policy challenge is to set priorities and focus on niches
where they could have a comparative or competitive advantage.
The development of local capabilities and skills is also essential
for such countries to take advantage of opportunities that may
be created by the increased mobility of knowledge. Developing
such skills and capabilities (particularly in engineering) and
building a national strategy to take advantage of opportunities is
a long-term process that could take 20 or 30 years, but the
rewards of success could be high. Some experts pointed out that
it has been done before, showing that small size is not an
absolute constraint. Even small developing countries can find a
niche for themselves and target specialized R&D activities to
match their strengths. A number of experts stressed the need for
the prioritization of government goals in related areas. Some
argued that regional cooperation could offer opportunities for
smaller countries to make themselves more attractive. Others
suggested that the building of cooperation and partnership with
other countries could go beyond the borders of given regions.
International cooperation and the sharing of experience with
other countries could also help smaller economies to develop
their ability to design and implement appropriate policies.



Experts discussed the role of performance requirements


in maximizing the benefits of R&D-related FDI in developing
countries. While there was no consensus on the usefulness of
performance requirements, several experts noted the importance
of distinguishing between mandatory and voluntary
performance requirements. The use of mandatory requirements
related to R&D and technology transfer is not prohibited by the
WTO Agreement on Trade-related Investment Measures, but
has become increasingly restricted in various bilateral trade and
investment agreements. However, when linked to the provision
of incentives (or other advantages), such requirements are still
generally permitted. One expert mentioned the importance of




Globalization of R&D and Developing Countries




218


offsetting agreements to encourage R&D-related FDI in large
infrastructure industries.



Experts also discussed the role of incentives in


attracting R&D-related FDI. Some found them useful in
attracting investment in R&D in a host country by pioneer
firms, who would later be followed by their competitors. Others
questioned the usefulness of R&D incentives, arguing that
TNCs tend to base their investment decisions in this area more
on other factors, such as access to skills. The point was made
that countries need to weigh carefully the costs and benefits
involved. In this context, some experts noted that benefits to the
company receiving an incentive should be assessed against the
benefits accruing to the host economy, notably through
spillover effects. The R&D work of foreign affiliates has been
found in some countries to catalyse domestic R&D activities,
help universities to identify new areas where skills development
is needed and, attract more interest in technological fields from
prospective students.



Several experts raised the issue of intellectual property


rights (IPRs). It was noted that high levels of intellectual
property protection are often sought by TNCs locating R&D in
developing countries but, that the empirical evidence on the
impact of IPRs on FDI in R&D is mixed. Referring to the
discussion and work undertaken at the WTO in the context of
the TRIPS Agreement, one expert recalled that the protection
and enforcement of IPRs should contribute to the promotion of
technological innovation and to the transfer and dissemination
of technology, as stated in Article 7 of the Agreement.



One expert noted that there is a general lack of


awareness in developing countries that intellectual property
represents assets that can be registered and used to generate
income and, that the utilization of intellectual property as assets
is important for development in an increasingly knowledge-
intensive economy.




Summary of the Expert Meeting




219



Some experts argued that developing countries should


develop better intellectual property strategies covering the
creation, ownership and commercial leveraging of locally
developed research. This would involve, among other things,
helping individual researchers and scientists to better
understand the importance and value of intellectual property, as
well as creating the appropriate incentive structures for them to
protect new innovations. It was argued that, by becoming better
at using their IPR regimes, developing countries would also
become more interesting as partners to TNCs. One expert raised
the issue of applying IPR concepts to indigenous knowledge.



Some experts stressed the need to develop public


research institutions in the early phases of development. Such
initiatives could help to foster the development of skills and
raise a country’s absorptive capacity. For example, it was noted
that Cameroon has established a publicly funded institute for
agricultural research around which the Government hopes to
create public-private partnerships.



The role of home-country policies in encouraging


TNCs to invest in R&D in developing countries and thus
bringing benefits to these countries was also addressed. Some
experts mentioned the potentially positive role of home
countries in promoting FDI in R&D in developing countries, for
instance by reducing the risks faced by TNCs when conducting
R&D activities in foreign developing countries. The European
Union for example, has contributed to the innovation systems of
developing countries by encouraging an exchange of scientists
and closer interaction between universities in developing
countries and EU member countries. On the other hand, an
expert noted the concern of some developing countries that
developed countries are not fully meeting their transfer of
technology obligations in terms of providing incentives to their
enterprises to transfer technology to LDCs, as stipulated in the




Globalization of R&D and Developing Countries




220


TRIPS agreement (Article 66.2), although no specific example
was given in the course of the discussion on this issue.

7. International cooperation


Some experts called for more bilateral cooperation
between relevant institutions in developing and developed
countries with a view to fostering policy formulation and
stronger innovation systems in the concerned countries. An
example of mutually beneficial cooperation between developed
home countries of TNCs and developing host countries exists
between France and universities in China. This cooperation has
resulted in the training of highly qualified researchers who
could find employment both in local institutes and firms and in
affiliates of French TNCs.



In the light of the importance of innovation and R&D


for economic development, and to build on the São Paulo
Consensus highlighting the economic development dimension
of corporate social responsibility, a suggestion was made to
create a list of indicators to assess and measure the
contributions of TNCs to the transfer of technology to
developing countries. Such a list would be a new contribution to
the analysis of the globalization of R&D in the context of
assessing what could now be called the “corporate
developmental responsibility” of firms.



Some experts regretted that among the Millennium


Development Goals of the United Nations, there is no specific
goal on science, technology and innovation. The need to
explore the possibilities for the international community to
support the strengthening of developing countries’ national
innovation systems, including enhancing opportunities for
developing countries to benefit from the internationalization of
R&D activities by TNCs, was highlighted. Such support could
include both technical and financial assistance.





Contributors

Thomas Andersson is President, Jönköping University, and
Professor of International Economics and Industrial
Organisation at the Jönköping Business School, Jönköping,
Sweden. He is also Chairman of the Board for the International
Organization for Knowledge Economy and Enterprise
Development (IKED), Malmö, Sweden.


Ionara Costa is Researcher at the United Nations University
Institute for New Technologies (UNU-INTECH), Maastricht,
the Netherlands.


Dieter Ernst is Senior Fellow at the East West Center,
Honolulu, Hawaii, United States.


Efa Fouda is Inspector General, Ministry of Scientific Research
and Innovation, Yaoundé, Cameroon.


Tarmo Kalvet is Director of the Innovation Program, PRAXIS
Center for Policy Studies, Tallinn, Estonia.


Rainer Kattel is Professor and Chair of Public Administration
and European Studies, Tallinn Technical University, Tallinn,
Estonia.


John Mugabe is Advisor to the New Partnership for Africa’s
Development (NEPAD) Science and Technology Forum,
Pretoria, South Africa.


Rajneesh Narula is Professor of International Business
Regulation at The University of Reading, Reading, United
Kingdom.


Robert Pearce is Reader in the Department of Economics at The
University of Reading Reading, United Kingdom.


Prasada Reddy is Senior Research Fellow at the Research
Policy Institute, Lund University, Lund, Sweden.


Dilip S. Samarasinghe is Director (Media & Publicity) at the
Board of Investment of Sri Lanka, Colombo, Sri Lanka.




Globalization of R&D and Developing Countries




222


Marek Tiits is one of the founders of, and Chairman of the
Board, of the Institute of Baltic Studies, Tartu, Estonia.


Maximilian von Zedtwitz is Associate Professor at the Research
Center for Technological Innovation and the Center for Global
R&D Management, School of Economics and Management,
Tsinghua University, Beijing, China.


Zhou Yuan is Research Professor and Deputy Director-General
at the National Research Center for Science and Technology for
Development, Ministry of Science and Technology, Beijing,
China.





Selected recent UNCTAD publications on TNCs and FDI


(For more information, please visit www.unctad.org/en/pub)


A. Serial publications


World Investment Reports
(For more information visit www.unctad.org/wir)



World Investment Report 2005. Transnational Corporations and the
Internationalization of R&D. Sales No. E.05.II.D.10. $75.
http://www.unctad.org/en/docs//wir2005_en.pdf.

World Investment Report 2005. Transnational Corporations and the
Internationalization of R&D. An Overview. 50 p.
http://www.unctad.org/en/docs/wir2005overview_en.pdf.

World Investment Report 2004. The Shift Towards Services. Sales No.
E.04.II.D.36. $75. http://www.unctad.org/en/docs//wir2004_en.pdf.

World Investment Report 2004. The Shift Towards Services. An
Overview. 62 p.
http://www.unctad.org/en/docs/wir2004overview_en.pdf.

World Investment Report 2003. FDI Policies for Development:
National and International Perspectives. Sales No. E.03.II.D.8. $49.
http://www.unctad.org/en/docs//wir2003_en.pdf.

World Investment Report 2003. FDI Polices for Development:
National and International Perspectives. An Overview. 66 p.
http://www.unctad.org/en/docs/wir2003overview_en.pdf.

World Investment Report 2002: Transnational Corporations and
Export Competitiveness. 352 p. Sales No. E.02.II.D.4. $49.
http://www.unctad.org/en/docs//wir2002_en.pdf.

World Investment Report 2002: Transnational Corporations and
Export Competitiveness. An Overview. 66 p.
http://www.unctad.org/en/docs/wir2002overview_en.pdf.

World Investment Report 2001: Promoting Linkages. 356 p. Sales No.
E.01.II.D.12 $49.
http://www.unctad.org/wir/contents/wir01content.en.htm.




Globalization of R&D and Developing Countries




224


World Investment Report 2001: Promoting Linkages. An Overview.
67 p. http://www.unctad.org/wir/contents/wir01content.en.htm.

Ten Years of World Investment Reports: The Challenges Ahead.
Proceedings of an UNCTAD special event on future challenges in the
area of FDI. UNCTAD/ITE/Misc.45. http://www.unctad.org/wir.

World Investment Report 2000: Cross-border Mergers and
Acquisitions and Development.
368 p. Sales No. E.99.II.D.20. $49.
http://www.unctad.org/wir/contents/wir00content.en.htm.

World Investment Report 2000: Cross-border Mergers and
Acquisitions and Development. An Overview. 75 p.
http://www.unctad.org/wir/contents/wir00content.en.htm.



World Investment Directories
(For more information visit


http://r0.unctad.org/en/subsites/dite/fdistats_files/WID2.htm)

World Investment Directory 2004: Latin America and the Caribbean.
Volume IX. 599 p. Sales No. E.03.II.D.12. $25.

World Investment Directory 2003: Central and Eastern Europe. Vol.
VIII. 397 p. Sales No. E.03.II.D.24. $80.



Investment Policy Reviews
(For more information visit


http://www.unctad.org/Templates/Startpage.asp?intItemID=2554)

Investment Policy Review – Algeria. 110 p.
UNCTAD/ITE/IPC/2003/9.

Investment Policy Review – Kenya. 126 p. Sales No. E.05.II.D.21. $25.

Investment Policy Review – Benin. 147 p. Sales No. F.04.II.D.43. $25.

Investment Policy Review – Sri Lanka. 89 p.
UNCTAD/ITE/IPC/2003/8.




Selected UNCTAD Publications on TNCs and FDI




225



Investment Policy Review – Nepal. 89 p. Sales No. E.03.II.D.17. $20.

Investment Policy Review – Lesotho. 105 p. Sales No. E.03.II.D.18.
$15/18.

Investment Policy Review – Ghana. 103 p. Sales No. E.02.II.D.20.
$20.

Investment Policy Review – Tanzania. 109 p. Sales No. E.02.II.D.6
$20.

Investment Policy Review – Botswana. 107 p. Sales No. E.01.II.D.I.
$22.

Investment Policy Review – Ecuador. 136 p. Sales No. E.01.II D.31.
$25.

Investment and Innovation Policy Review – Ethiopia. 130 p.
UNCTAD/ITE/IPC/Misc.4.

Investment Policy Review – Mauritius. 92 p. Sales No. E.01.II.D.11.
$22.

Investment Policy Review – Peru. 109 p. Sales No. E.00.II.D.7. $22.



International Investment Instruments
(Fore more information visit http://www.unctad.org/iia)



International Investment Instruments: A Compendium. Vol. XIV.
Sales No. E.05.II.D.8. 326 p. $60.

International Investment Instruments: A Compendium. Vol. XIII.
Sales No. E.05.II.D.7. 358 p. $60.

International Investment Instruments: A Compendium. Vol. XII.
Sales No. E.04.II.D.10. 364 p. $60.




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226


International Investment Instruments: A Compendium. Vol. XI. 345
p. Sales No. E.04.II.D.9. $60.
http://www.unctad.org/en/docs//dite4volxi_en.pdf.

International Investment Instruments: A Compendium. Vol. X. 353 p.
Sales No. E.02.II.D.21. $60.
http://www.unctad.org/en/docs/psdited3v9.en.pdf.

International Investment Instruments: A Compendium. Vol. IX. 353
p. Sales No. E.02.II.D.16. $60.
http://www.unctad.org/en/docs/psdited3v9.en.pdf.

International Investment Instruments: A Compendium. Vol. VIII.
335 p. Sales No. E.02.II.D.15. $60.
http://www.unctad.org/en/docs/psdited3v8.en.pdf.

International Investment Instruments: A Compendium. Vol. VII. 339
p. Sales No. E.02.II.D.14. $60.
http://www.unctad.org/en/docs/psdited3v7.en.pdf.

International Investment Instruments: A Compendium. Vol. VI. 568
p. Sales No. E.01.II.D.34. $60.
http://www.unctad.org/en/docs/ps1dited2v6_p1.en.pdf (part one).

International Investment Instruments: A Compendium. Vol. V. 505
p. Sales No. E.00.II.D.14. $55.

International Investment Instruments: A Compendium. Vol. IV. 319
p. Sales No. E.00.II.D.13. $55.



LDC Investment Guides
(For more information visit


http://www.unctad.org/Templates/Page.asp?intItemID=2705&lang=14)

An Investment Guide to Kenya: Opportunities and Conditions. 92 p.
UNCTAD/ITE/IIA/2005/2.

An Investment Guide to Tanzania: Opportunities and Conditions. 82
p. UNCTAD/ITE/IIA/2005/3.




Selected UNCTAD Publications on TNCs and FDI




227



An Investment Guide to the East African Community: Opportunities
and Conditions. 109 p. UNCTAD/ITE/IIA2005/4.

An Investment Guide to Mauritania: Opportunities and Conditions.
80 p. UNCTAD/ITE/IIA/2004/4.

Guide de l’investissement au Mali: Opportunités et Conditions. 76 p.
UNCTAD/ITE/IIA/2004/1.

An Investment Guide to Cambodia: Opportunities and Conditions. 89
p. UNCTAD/ITE/IIA/2003/6.
http://www.unctad.org/en/docs//iteiia20036_en.pdf.

An Investment Guide to Nepal: Opportunities and Conditions. 97 p.
UNCTAD/ITE/IIA/2003/2.
http://www.unctad.org/en/docs/iteiia20032_en.pdf.

An Investment Guide to Mozambique: Opportunities and Conditions.
109 p. UNCTAD/ITE/IIA/4.
http://www.unctad.org/en/docs/poiteiiad4.en.pdf.

An Investment Guide to Uganda: Opportunities and Conditions. 89
p. UNCTAD/ITE/IIA/2004/3.

An Investment Guide to Bangladesh: Opportunities and Conditions.
66 p. UNCTAD/ITE/IIT/Misc.29.
http://www.unctad.org/en/docs/poiteiitm29.en.pdf.

An Investment Guide to Ethiopia: Opportunities and Conditions. 90
p. UNCTAD/ITE/IIA/2004/2.



Issues in International Investment Agreements
(Fore more information visit http://www.unctad.org/iia)



South-South Cooperation in Investment Arrangements. 108 p. Sales
No. E.05.II.D.26 $15.




Globalization of R&D and Developing Countries




228


The REIO Exception in MFN Treatment Clauses. 92 p. Sales No.
E.05.II.D.1. $15.

International Investment Agreements in Services. 119 p. Sales No.
E.05.II.D.15. $15.

State Contracts. 84 p. Sales No. E.05.II.D.5. $15.

Competition. 112 p. E.04.II.D.44. $ 15.

Key Terms and Concepts in IIAs: a Glossary. 232 p. Sales No.
E.04.II.D.31. $15.

Incentives. 108 p. Sales No. E.04.II.D.6. $15.

Transparency. 118 p. Sales No. E.04.II.D.7. $15.

Dispute Settlement: State-State. 101 p. Sales No. E.03.II.D.6. $15.

Dispute Settlement: Investor-State. 125 p. Sales No. E.03.II.D.5. $15.

Transfer of Technology. 138 p. Sales No. E.01.II.D.33. $18.

Illicit Payments. 108 p. Sales No. E.01.II.D.20. $13.

Home Country Measures. 96 p. Sales No.E.01.II.D.19. $12.

Host Country Operational Measures. 109 p. Sales No E.01.II.D.18.
$15.

Social Responsibility. 91 p. Sales No. E.01.II.D.4. $15.

Environment. 105 p. Sales No. E.01.II.D.3. $15.

Transfer of Funds. 68 p. Sales No. E.00.II.D.27. $12.

Employment. 69 p. Sales No. E.00.II.D.15. $12.




Selected UNCTAD Publications on TNCs and FDI




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Taxation. 111 p. Sales No. E.00.II.D.5. $12.

International Investment Agreements: Flexibility for Development.
185 p. Sales No. E.00.II.D.6. $12.

Taking of Property. 83 p. Sales No. E.00.II.D.4. $12.



ASIT Advisory Studies (Formerly Current Studies, Series B)

No. 17. The World of Investment Promotion at a Glance: A survey of
investment promotion practices. UNCTAD/ITE/IPC/3.

No. 16. Tax Incentives and Foreign Direct Investment: A Global
Survey. 180 p. Sales No. E.01.II.D.5. $23. Summary available from
http://www.unctad.org/asit/resumé.htm.



C. Individual Studies

Prospects for Foreign Direct Investment and the Strategies of
Transnational Corporations, 2005-2008. 74 p. Sales No. E.05.II.D.32.
$18.

World Economic Situation and Prospects 2005. 136 p. Sales No. E.
05.II.C.2. $15. (Joint publication with the United Nations Department
of Economic and Social Affairs.)

Foreign Direct Investment and Performance Requirements: New
Evidence from Selected Countries. 318 p. Sales No. E.03.II.D.32.
$35.http://www.unctad.org/en/docs//iteiia20037_en.pdf

FDI in Land-Locked Developing Countries at a Glance. 112 p.
UNCTAD/ITE/IIA/2003/5.




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230


FDI in Least Developed Countries at a Glance: 2002. 136 p.
UNCTAD/ITE/IIA/6. http://www.unctad.org/en/docs//iteiia6_en.pdf.

The Tradability of Consulting Services. 189 p.
UNCTAD/ITE/IPC/Misc.8.
http://www.unctad.org/en/docs/poiteipcm8.en.pdf.

Foreign Direct Investment in Africa: Performance and Potential. 89 p.
UNCTAD/ITE/IIT/Misc.15. Free of charge. Also available from
http://www.unctad.org/en/docs/poiteiitm15.pdf.

TNC-SME Linkages for Development: Issues–Experiences–Best
Practices. Proceedings of the Special Round Table on TNCs, SMEs and
Development, UNCTAD X, 15 February 2000, Bangkok, Thailand.113
p. UNCTAD/ITE/TEB1. Free of charge.

Measures of the Transnationalization of Economic Activity. 93 p.
Sales No. E.01.II.D.2. $20.

The Competitiveness Challenge: Transnational Corporations and
Industrial Restructuring in Developing Countries. 283p. Sales No.
E.00.II.D.35. $42.

FDI Determinants and TNC Strategies: The Case of Brazil. 195 p.
Sales No. E.00.II.D.2. $35. Summary available from
http://www.unctad.org/en/pub/psiteiitd14.en.htm.



D. Journals

Transnational Corporations Journal (formerly The CTC Reporter).
Published three times a year. Annual subscription price: $45; individual
issues $20. http://www.unctad.org/en/subsites/dite/1_itncs/1_tncs.htm.




Selected UNCTAD Publications on TNCs and FDI




231




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QUESTIONNAIRE


Globalization of R&D and Developing Countries
Sales No.



In order to improve the quality and relevance of the work of
the UNCTAD Division on Investment, Technology and Enterprise
Development, it would be useful to receive the views of readers on
this publication. It would therefore be greatly appreciated if you could
complete the following questionnaire and return it to:


Readership Survey
UNCTAD Division on Investment, Technology and Enterprise Development


United Nations Office in Geneva
Palais des Nations, Room E-9123
CH-1211 Geneva 10, Switzerland


Fax: 41-22-917-0194

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234


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8. If you have read other publications of the UNCTD Division on
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