Critically discuss the role of multinational companies in the globalisation of innovation
The globalization of economies has led to a massive scale geographical dispersion of the economic as well as the innovative activities. Multinational play a key role in globalization of innovation and this article accordingly tries to critically evaluate MNCs role in globalization of innovation.
The phenomenon of globalization of innovation is not something new. Organizations have since long took advantage of the economies of scale through international commercialization of new services & products. Chaminade and Vang (2008); Schmitz (2007) contend that while the literature on international business has focused on the organization’s internal characteristics, explaining their inclination of accessing foreign markets, innovation researchers stressed the role and importance of regions, nations or industries that support the competency accumulation which enables local companies in starting to upgrade and access international markets.
The continuous economic globalization process (Daly, 1999) has led to the opening of a new avenue of opportunities as well as challenges for the global businesses (Economist, 2007). The imperative of innovation, mostly fuelled by international opportunities, extreme competition and revolutionary technological advances (Marklund et al., 2009), has led to the globalization of innovation process as companies, increasingly, tend to tap worldwide knowledge resources for shortening development cycles, reducing the costs of development or simply for developing products for some specific local market having varied customer tastes, regulatory requirements or geographic conditions (UNCTAD, 2005; OECD, 2008). A qualitative shift has been observed along value chains from globalization of innovation to internationalization of R&D with more market access focus (Buse et al., 2010; Beise, 2004; von Zedtwitz, 2002). Research and development constitutes a main though it is not an exclusive portion of innovation process (Buse et al., 2010).
Phenomenon of Internationalization of R&D had been long considered to be effectively seen in North America, Japan and Europe called the Triad (Archibui & Iammarino, 2002; Carlsson, 2006). Nevertheless, there has been witnessed in recent years a remarkable & palpable trend of multinational companies selecting emerging markets, like India and Chin for performing innovation activities besides the R&D work process (Aswaka & Som, 2008; Bruche, 2009; UNCTAD, 2005; Economist, 2010). Boehe (2008) with respect to the above has differentiated between globalization of R&D driven mostly by the desire of tapping a leading market among other things and offshoring of R&D majorly driven by the cost considerations. Patents though are not sufficient an indicator pertaining to innovation activity (Brouwer & Kleinknecht, 1999), the OECD (Organisation for Economic Co-Operation and Development) released statistics relating to international cooperation of patents however reveal a considerable increased research and development activity by global companies in BRIC countries (that is, Brazil, Russia, India, and China) over the past 20 years.
Dunning (1997) contends the effect of globalisation on the geographic dispersion of innovation and knowledge and, and whether it constrains or fosters local technological capabilities, plays a significant role in the theoretical debates regarding role of multinational firms and FDI (foreign direct investments). According to Chandler et al. (1998) the above thinking has been deliberated upon in firm theory, innovation theory and the economic geography. Cantwell (1995) observes that while traditional multinational activity analysis focused on the centralised nature of MNC’s R&D efforts, modern contributions argue the relevance of this theory. The trend towards the globalisation of innovative activity and technology has led to the questioning of the MNC subsidiary’s rather limited role advised by Vernon (1966), as well as the attempts of redefining multinational units as the primary creators of technological knowledge and innovation, a role first proposed by Dunning (1958) which was later further developed by Cantwell (1994), and Fors (1998) to name a few.
The MNCs role as new technology creators (and not merely global transfer vehicles) has been driven by the multinational company’s trends for establishing external & internal innovation networks. Globally Integrated networks within a company might lead, by increased focus in affiliate’s technological efforts specialization, to innovation capacity improvement of the company and as well as the host country location. Inter-firm networks built between affiliates of multinationals and local companies might, in addition, augment the geographical agglomeration advantages in a few specific technological development lines. Cantwell and Iammarino (2003) agree stating that for renovating current competencies generally it is important for a company to extend such capabilities into newer related fields of technology and production, and across numerous locations. The organization can thus take advantage from the economies of scope which are derived from technological complementarities concerning related innovation paths in spatially distinctive institutional settings. Thus, multinationals spread the firm’s competency base and obtain new technological advantage sources or technological assets. Resources & capabilities which are central to the competitive success of a company, according to Enright (1998), often are found within a region and not in an individual firm. The indigenous firms due to their role might in principle profit from the multinational’s localised knowledge spillovers as MNCs have access to many complementary knowledge streams being developed across the globe.
Archibugi & Michie (1995) in their pivotal work highlight the innovation activities’ global nature. They contend that not only technological development affects globalization, but also globalization itself affects the method in the acquiring, development and commercialization of these technological innovations. Archibugi & Michie (1995) have distinguished three “globalization of innovation” forms which include the global innovation exploitation, the global innovation generation and finally the global collaboration of technology. The worldwide exploitation of innovations signifies the global commercialization of the new services or products, and has an economic equivalent in new services or product export and in global patent licensing. The international technological collaboration suggests joint innovation or know-how development with the involvement of partners from many countries. This collaboration can take numerous forms, such as contractual R&D, R&D alliances, R&D joint-ventures etc. and might involve numerous actors, which include firms, universities, government, research centers, etc. Finally, the worldwide generation of innovation mainly refers to the R&D activity locations in a various nations, and is related to R&D linked FDI.
According to Castellani and Zanfei (2006); Dunning and Lundan (2009) different globalization of innovation forms are the result of two diverse strategies which are asset seeking and asset exploiting. Asset exploitation is commonly referred to as the new market development for existing services or products, but according to Chen et al. (2009) it often refers to export of innovations in the innovation literature. Dunning and Lundan (2009) believe that asset-exploiting strategies may entail a technology transfer from the base (home) of the company to the overseas market. Conversely, asset seeking refers to the aim to acquire science-based capabilities & technologies which are not accessible in the current environment. The international technological collaboration or global innovation generation might be treated as the asset-seeking strategy. The point to not is that asset-exploiting strategies might also entail innovation to a little extent, as often the products require adaptation according to local markets. In the developing nations one could expect the globalization of innovation framework to change in at least one aspect. Schmitz (2007) state that though the local generation of innovations has its importance in both developing as well as developed nations, companies in the developing nations depend largely on foreign knowledge and capital sources (i.e., linkages with multinationals or FDI) for their innovation and production processes. Global technology sourcing becomes globalization of innovation type which chiefly is vital for developing the nations. In MNCs the knowledge contained in a single innovation project includes global expertise while aiming at the global market. According to Kuemmerle (1997) this fact appears to lead straight to globalisation and hence to the innovation activities’ dispersion. Alternatively, advantages driving from the local concentration include higher proximity degree and homogeneity and hence the establishing powers relations that are more balanced, rust and the likelihood of efficient communication.
MNCs undoubtedly are the key actors in global technology & innovation generation. The innovative activity locations of MNC’s in host nation is generally associated with the productive activity location, but the correspondence strength in between R&D activities and productive activities in whatever capacity would not suffice. There are various advantages as well as disadvantages of technological activities centralisation & decentralisation. The chief centralisation advantages include scope in R&D and economies of scale, while key benefits of decentralisation include associations with national business as well as non-business sectors and control on innovation. Taking investor’s perspective, decentralisation has been summed up by Miller (1994) as linkages between local production & innovatory activity, suppliers & clients, markets and the technological excellence exploitation in host nations. All factors acquire lesser or greater importance subject to the country, firm type, products and involved technologies. The possible worldwide ‘generation of innovation’ effects according to Dunning (1993) on economies are direct as well as indirect. Multinational firm’s technological globalisation might enhance a countries innovative capacity, but also has the possibility of weakening it. This mainly depends on the strength & weakness of the sectors in both home as well as the host nation.
It has also been observed by researchers like Cantwell and Iammarino (1998) that the growing network number established by multinational companies while enhancing decentralisation via inter-border corporate incorporation of the technological activities in a multinational firm could further promote advantages to accumulation by means of inter-firm integration of sectors within the national boundaries. The ‘competitive bidding’ for attracting higher value added foreign direct investment and multinational firm’s research activity would possibly become more difficult, between the ‘higher order’ locations throughout the developed nations, as well as between the ‘lower order’ centers, the latter more and more threatened by emerging competition from lesser advanced countries. The regional inequalities risk might therefore also increase within economies, as the excellence centres would further be encouraged, whereas backward regions will further be undermined due to the policies and the strategies of multinational enterprises. Fagerberg and Verspagen (1996) says that by considering innovative capability differences across the regions of European Union it was observed that they accounted for a great deal for explaining the trend of divergence in the economic growth seen since late 1980s. As a result of the technological globalisation of MNCs on the native innovative capacity could thus further aggravate the disparities amid the Southern & the Northern EU regions.
To conclude, the continuous economic globalization process has led to the opening of a new avenue of opportunities as well as challenges for the global businesses. The MNCs role as new technology creators (and not merely global transfer vehicles) has been driven by the multinational company’s trends for establishing external & internal innovation networks. Multinationals spread the firm’s competency base and obtain new technological advantage sources or technological assets. The indigenous firms due to their role might in principle profit from the multinational’s localised knowledge spillovers as MNCs have access to many complementary knowledge streams being developed across the globe. Different globalizations of innovation forms are the result of two diverse strategies which are asset seeking and asset exploiting. Multinational firm’s technological globalisation might enhance a countries innovative capacity, but also has the possibility of weakening it. This mainly depends on the strength & weakness of the sectors in both home as well as the host nation.
REFERENCES
Archibugi, D. and S. Iammarino (2002) “The globalization of technological innovation: definition and evidence”, Review of International Political Economy, 9(1), pp. 98-122.
Archibugi, D., Michie, J., (1995) “The globalisation of technology: a new taxonomy”, Cambridge Journal of Economics, 19(1), pp. 121-140.
Asakawa, K. and A. Som, (2008) “Internationalization of R&D in China and India: Conventional wisdom versus reality”, Asia Pacific Journal of Management, 25(3), pp. 375-394.
Beise, M. (2004) “Lead Markets: Country-Specific Success Factors of the Global Diffusion of Innovations”, Research Policy, 33, pp. 997-1018.
Boehe, D.M. (2008) “In-house Off-shoring of Product Development by MNCs”, Brazilian Administration Review, 5(1) pp. 1-18.
Brouwer, E. and A. Kleinknecht (1999) “Innovative output, and a firm’s propensity to patent: An exploration of CIS micro data”, Research Policy, 28, pp. 615-624.
Bruche, G., (2009) “The emergence of China and India as new competitors in MNC’s innovation networks”, Competition & Change, 13(3), pp. 267-288.
Buse, S., R. Tiwari, and C. Herstatt (2010) “Global Innovation: An Answer to Mitigate Barriers to Innovation in Small and Medium-sized Enterprises”, International Journal of Innovation and Technology Management, 7(3), pp. 215-227.
Cantwell, J.A. (1995) ‘The Globalisation of Technology: What Remains of the Product Cycle Model?’, Cambridge Journal of Economics, 19(1), pp. 155-174.
Cantwell, J.A. (ed.) (1994) Transnational Corporations and Innovatory Activities, Routledge, London.
Cantwell, J.A., Iammarino, S., (1998) “MNCs, Technological Innovation and Regional Systems in the EU: Some Evidence in the Italian Case”, Discussion Papers in International Investments and Management, 247, University of Reading.
Cantwell, J.A., Iammarino, S., (2003) Multinational Corporations and European Regional Systems of Innovation, Routledge, London and New York.
Carlsson, B. (2006) “Internationalization of innovation systems: A survey of the literature”, Research Policy, 35(1), pp. 56-67.
Castellani, D., Zanfei A., (2006), Multinational firms, innovation and productivity, Edward Elgar Publishing.
Chaminade, C., Vang, J., (2008) “Globalisation of knowledge production and regional innovation policy: Supporting specialized hubs in the Bangalore software industry”, Research Policy, 37(10), pp. 1684-1696.
Chandler, A.D., Hagström, P. and Sölvell, O. (eds) (1998) The Dynamic Firm. The role of Technology, Strategy, Organisation and Regions, Oxford University Press, Oxford.
Chen, S. H., Chen Y. C., Wen, P.C., (2009) “MNCs’ Offshore R & D Mandates and Host Countries’ Locational Advantages: A Comparsion Between Taiwan and China”, China Information 23(1), pp. 159 – 187.
Daly, H.E. (1999) “Globalization versus Internationalization – Some Implications”, Ecological Economics, 31(1), pp. 31-37.
Dunning, J. H., Lundan, S. M., (2009) “The internationalization of corporate R&D: A review of the evidence and some policy implications for home countries”, Review of Policy Research, 26(1-2), pp. 13-33.
Dunning, J.H. and Robson, P. (eds) (1987) Multinational and the European Community, Basil Blackwell, Oxford.
Economist (2010) “The world turned upside down: A special report on innovation in emerging markets”, The Economist, London.
Economist, (2007) “Revving up: How globalisation and information technology are spurring faster innovation”, in The Economist, London.
Enright, M. (1998) Regional Clusters and Firm Strategy, in A.D. Chandler, P. Hagström and O. Sölvell (eds).
Fagerberg, J., Verspagen, B., (1996) “Heading for divergence? Regional growth in Europe reconsidered” Journal of Common Market Studies 34, pp. 431–448.
Fors, G. (1998) Locating R&D abroad: the role of adaptation and knowledge-seeking, in P. Braunerhjelm and K. Ekholm (eds).
Kuemmerle, W. (1997) “Building effective R&D capabilities abroad”, Harvard Business Review, March/April, Pp. 61-70.
Marklund, G., N.S. Vonortas, and C.W. Wessner, (2009) The Innovation Imperative: National Innovation Strategies in the Global Economy, Edgar Elgar, Cheltenham.
Miller, R., (1994) “Global R&D networks and large-scale innovations: the case of the automobile industry”, Research Policy, 23, pp. 27–46.
OECD (2008) “Internationalisation of Business R&D: Evidence, Impacts and Implications”, Organisation for Economic Co-Operation and Development, Paris.
Schmitz, H., (2007) Regional systems and global chains, In: Scott, A. J., Garofoli, G. (Eds.), Development on the ground: clusters, networks and regions in emerging economies, Routledge, London.
Schmitz, H., (2007) Regional systems and global chains, In: Scott, A. J., Garofoli, G. (Eds.), Development on the ground: clusters, networks and regions in emerging economies, Routledge, London.
UNCTAD (2005) “Globalization of R&D and Developing Countries: Proceedings of the Expert Meeting”, United Nations Conference on Trade and Development, New York.
UNCTAD (2005) “UNCTAD survey on the internationalization of R&D: Current patterns and prospects on the internationalization of R&D”, United Nations Conference on Trade and Development, New York.
Vernon, R. (1966) ‘International investment and international trade in the product cycle’, Quarterly Journal of Economics, 80(2), pp. 190-207.
von Zedtwitz, M. and O. Gassmann (2002) “Market versus technology drive in R&D internationalization: four different patterns of managing research and development”, Research Policy, 31(4), pp. 569-588.