CASE 10

Strategic R & D by TNCs in Developing Countries TNCs have had long units in developing host countries for adapting products and processes to the localconditions, and in a few cases, to products for local markets. Since the min-1980s, however, they have also started locating strategic R & D centres in some developing countries, for developing generic technologies and products for regional or global markets. The main incentives for this are : (a) access to highly qualified scientists as shortages of research personnel emerge in certain fields in industrialised countries, (b) Cost differentials in research salaries between developing and industrialised countries, and (c) rationalisation of operations, assigning particular affiliates the responsibility for developing, manufacturing, and marketing particular products worldwide. Th new trends are more visible in industries dealing with new technologies, such as microelectronics, biotechnology, and new materials. In these technologies, the location of R & D can be geographically de-linked more easily from the location of manufacturing. It is also possible to separate R & D in core activities from that in non-core activities. Consequently, countries like India, Israel, Singapore, Malaysia or Brazil serve TNCs as good locations for strategic R & D.
For instance, Sony Corporation of Japan has around nine R & D units in Asian developing countries. It has
three units in Singapore conducting R & D on core components such as optical data shortage devices,
integrated chip design for audio products and CD-ROM drives, and multimedia and microchip software. It has three units in Malaysia working on video design, derivative models and circuit blocks for new TV chases,
radio cassettes, discman and hi-fi receiver designs. It has one unit in Republic of Korea focusing on the design of compact discs, radio cassettes, tape recorders, and car stereos. It has one in Taiwan designing and
developing video tape-recorders, minidisk players, video CDs, and duplicators. Finally, it has one unit in
Indonesia focusing on the design of audio products.
Such units often work in collaboration with science and technology institutes in the host country. For instance, Daimler Benz has established such a unit in Bangalore, India, in collaboration with the Indian Institute of Science to work on projects related to its vehicles and avionics business. Current work includes interface design of avionics landing systems and smart GPS sensors for use by the group’s business worldwide.

Source: World Investment Report 1999.

Questions:

(a) Explain why MNCs have located R & D centres in developing countries?
(b) Mention the areas where R & D activities can easily be decentralised.

Answer

a), Explain why MNCs have located R & D centres in developing countries?

 Theories of the globalisation of innovation assume thatmultinational corporations (MNCs) distribute their innovationactivities hierarchically, with advanced technology beingconfined to the advanced industrialised countries, while moreroutine low-end innovation is decentralised in a few developingcountries. The emergence of about 40 research anddevelopment (R&D) centres in Beijing, China, many of whichengage in basic and advanced applied research, challenges theabove assumption. This article argues that the cheap andabundant highly skilled labour of the latecomer countries is anessential factor in attracting global R&D activities but that thisfactor is far from being a sufficient condition for the presencethere of advanced R&D activities. Through its analysis of thehistorical transformation of local institutions and of their co-development with MNCs, this paper identifies four majorknowledge assets that explains why Beijing could attractadvanced R&D activities. First, Beijing has developed a strongentrepreneurial culture that creates highly motivatedengineers who are eager to learn new knowledge from abroad.Second, the experienced Chinese returnees provide a criticalbridging role between Western R&D management knowledgeand local engineer culture. Third, the lack of inter-firm trustand networks makes the entrance of MNCs into a 'loose' clustermuch easier. Fourth, the large and dynamic Chinese marketthat desires high-tech products with low prices shortens theproduct life cycle, forcing MNCs to upgrade their R&D facilitiesin China. The findings show that the co-development of localinstitutions with the MNC R&D centres can create locationalwindows of opportunity for advanced R&D activities to becarried out in unconventional sites outside the Triad countries. This article concludes with the discussion on how Dunning'sOwnership, Location and Internalisation (OLI) framework andMathew's Linkage, Leverage and Learning (LLL) frameworkmight be useful in explaining this new phenomenon .

(b)Mention the areas where R & D activities can easily be decentralised.

Decentralized R&D in the contemporary MNE The authors distinguish two different environments in which R&D labsare performing. The first context is characterized by the fact that R&D activities workalong with other functions within the subsidiary in order to develop aparticularproduct which would be brought on to the market by the subsidiary. In ordertobetter address local needs, the R&D laboratory uses company-levelknowledgeand develops its own manufactured goods. The second context reflects a more contemporary view, implying thatlaboratories shape the company’s core knowledge. The way foreign R&Dcentersmay achieve such a task is by reaping foreign comparative advantages(technological heritage, scientific competences…) and applying the latterin acompany-wide strategic research. This can be done by developing keycapabilities and specialize in a specific field which will make the lab essentialforthe company’s growth. Decentralized R&D labs will specialize in anarea of competence reflecting the host-country knowledge legacy, andeventuallyenhance the enrichment of group-wide technology. The key challengeinmanaging decentralized R&D centers is to maintain and ensure aglobalcoherence and focus of research.

Purpose

– The purpose of this paper is to open up the research and development (R&D) organisation byseparating product and process innovation and exploring these activities in terms of the structural variableof centralisation versus decentralisation.

Design/methodology/approach

– Case studies of three multinational firms, representing food andbeverage, mining and minerals, and pulp and paper industry.

Findings

– Dual structures may exist within the R&D organisation, one for product innovation and one for process innovation. Consequently, it is suggested that the conventional notion of R&D organisationaldesign, equating R&D more or less with product innovation, does not present a complete picture for manyfirms 

Research limitations/implications

– Opening up the R&D organisation will help further the understandinglink between the organisational structuring of product and process innovation, and the efforts of organisations to develop resources and competitive advantages.

Practical implications

– The findings have implications for managing the strategy-organizational fitconcerning innovation in process industry.

Originality/value

– The conventional view regarding R&D as a single entity – either centralised or decentralised – does not present a complete picture. This paper clarifies the link between strategicinnovation determinants and the organisational configuration of R&D.