Global Companies, Local Innovations

Why the Engineering Aspects of Innovation Making Require Co-location

Yasuyuki Motoyama

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781138271401
• eBook ISBN: 9781317128014
• Topic: Physical Sciences
• Subtopic: Geography
• Index: Geography

Investigating the innovation activities of multinational corporations, this book uncovers and examines why the geography of innovation by multinationals is overwhelmingly local, in spite of their global operations in manufacturing and sales through case studies of produce development by three global players: Toyota, Sony, and Canon. The microdynamic approach of the book allows an in-depth investigation of the engineering and technical aspects of innovation making. The book unfolds the complex and constant process of trial and error in innovation and reveals three fundamental natures of innovation making: complexity, interdisciplinarity, and prototyping and testing. In order to manage these three natures of innovation, firms have to plan, ironically, for unplanned situations and to collocate knowledge, people, and resources.

Chapter 1
Introduction

It is the era of globalization. Multinational corporations (MNCs) conduct production, distribution, and sales of goods and services anywhere in the world. These are not a small portion of economic output; MNCs account for 20–30 per cent of total world output and 66–70 per cent of world trade (UNCTAD 1997, 1998). Scholars argue that global production networks facilitate product design and production technology (Ernst 1994, 5–6; Castells 2000, 207). It is also the age of information technology. People can exchange information instantly anywhere on the planet and collect any kind of data via the Internet.

However, a closer investigation into how Toyota, Sony, and Canon, three successful global players, conduct their R&D activities reveals that the overwhelming proportion of R&D takes place within each firm’s core region. Moreover, the scope of this core region is substantially smaller than national, or all of Japan, but rather matches the metropolitan scale: the Toyota-Nagoya region for Toyota, and the southern Tokyo region for Sony and Canon. All the major technologies and products come from R&D divisions at the core location. This poses a puzzle because R&D activities are a critical aspect for innovation and profit making for firms, yet they do not include knowledge from around the world. Furthermore, it is against the conventional wisdom and the so-called “death of distance” theory, which argues that location is no longer important (O’Brien 1992; Cairncross 1997, 2001).

We have to approach the term globalization carefully and critically. These Japanese companies were global in the sense that they sold products worldwide and operated manufacturing facilities in a number of countries. Yet, they conducted R&D activities in highly concentrated areas. There was a strange mixture of globalization and localization within these global companies.

This odd combination of localization and globalization exhibits two disparities: the theory versus the practice of globalization, as well as that between what companies say and what they do when it comes to global development. First, there is a gap between the academic concept and the companies’ practice in the globalization of R&D. Past research in international business management differentiated between multinational and global operations (Nohria and Goshal 1997). Multinational (or multidomestic) operation of R&D means that a firm has R&D centers in several countries, but they specialize in different technological fields or projects. In contrast, the global operation of R&D means that such R&D centers simultaneously coordinate and conduct the same project or develop the same technology together. While it is easy to theorize about a global R&D operation, I found none in practice. Real companies had only multidomestic R&D operations.

The second gap is present within each firm. These firms try to promote themselves as global companies with global R&D networks. Sony (2004b) explicitly calls for “a global synergy in R&D,” and its former non-Japanese president aims for a “global cross-company team” (Stringer, cited in Sony 2006, 3). Likewise, Canon’s “R&D centers around the world try to develop creative products and solutions for Canon as a whole” (Canon 2006f), and Toyota explicitly promotes technology and product development at the global level in its Global Vision 2010 (2002) and Diversity Management (2003, 19) publications. Yet, again, in their practice, R&D operations are not global, but multidomestic at best.

Why do those so-called “global” firms operate R&D activities locally? Why is that local operation geographically concentrated at each firm’s core location? What is special about the nature of R&D compared to production, distribution, and sales? What exactly are the advantages of proximity for R&D activities? What is the role of information technology in this process of R&D, as it is often claimed that IT connects and disseminates ideas globally? This book explores the answers to these questions.

In Search of Answers

Past studies in business and innovation studies, economic geography, and urban planning have investigated research questions similar to that proposed here about the geographic concentration of industrial activities. Chapter 2 describes three scholarly traditions, how each school of thought answered the question, and their limitations.

The first school of thought was derived from Marshallian agglomeration theory and identified thick institutional connections within a region (Castells 1989; Lundvall and Johnson 1994; Cooke and Morgan 1998; Porter 2000). The second emphasized the importance of trust in social networks and face-to-face interactions (Sabel 1993; Saxenian 1994; Storper and Venables 2004). The third applied the theory of tacit knowledge (Polanyi 1966; Nonaka and Takeuchi 1995), and argued that some knowledge did not travel over distance and had to be shared by collocated people (Gertler 2003; Zook 2004).

Despite this collection of debates, the major limitation of past studies is that they observed innovation at the aggregated, regional level. Hence, scholars could treat innovation only holistically and discussed it along with macroeconomic proxies, such as the growth of the high-tech sector in Silicon Valley (Saxenian 1994; Kenney 2000), the number of patents produced in a given region (Jaffe and Trajtenberg 2002), or the presence of creative professionals (Florida 2004). All of these phenomena had some correlations with innovations, but they were not innovations per se. As a result, these studies were unable to investigate the inside of innovation and technology, particularly the engineering process of generating each innovation and its connection to a specific location. Innovations have remained a black box, as Nathan Rosenberg (1982; 1994) termed it decades ago.

In contrast, this book attempts to open this black box and argues that the specificity of innovations matters and that it is essential to examine the mechanism that creates each innovation. Contemporary innovations often come from engineering and technical matters. Without understanding the specificity and the technical aspect, we may be missing the fundamental nature of the process of creating innovation and the connection to a particular location. The microdynamic analysis of this book shows why the specificity and complexity among different innovations requires collocated development. Applying the historical corporate case study method pioneered by Hounshell and Smith (1988), we will investigate how each project started, who was involved, where the participants were located, what kinds of technological difficulties they faced, and how they struggled and solved problems. Then we will evaluate why each of those processes required localization or collocation.

Studying Japanese multinational firms can provide an advantage in investigating technology making. Sony, Canon, and Toyota are excellent case companies because each is a major global player in its respective industrial sector: electronics-semiconductors, optics, and automobiles. These are successful firms in a world market, with overseas R&D units. In other words, these firms have strong intentions to develop and sell their products at the global level. Moreover, the business and the core competency of each firm are rooted in the innovation- and engineering-intensive technological fields.

At the same time, it is important to consider whether these Japanese firms present a unique pattern compared to multinationals from other countries. Indeed, some studies in international political economy (Ernst 2000; Katzenstein 2003; Keller and Samuels 2003) and international business (Cantwell 1995; Lam 2003; Urata 1999; Westney 1999) have argued that Japanese firms moved their R&D only selectively and marginally overseas. Chapter 2 additionally introduces these two streams of literature and their reasons for claiming Japanese firms are an anomaly. However, they lack a systematic framework to compare multinationals among different countries of origin. More comparative works (Dunning 1992; Doremus et al. 1998) revealed that both U.S. and Japanese firms conducted the overwhelming proportion of their R&D, approximately 90 per cent, in their home country. Additionally, recent, in-depth industry studies have supported the home-country bias of R&D activities by U.S. firms in various sectors: semiconductors (McKendrick, Doner, and Haggard 2000), automobiles (Studer-Noguez 2002; Sturgeon and Florida 2004), telecommunications (Cohen et al. 2009), and biotechnology and software (Macher and Mowery 2008). Therefore, the pattern of geographic concentration of R&D applies to non-Japanese firms as well, and findings from this book will have important implications not only for Japanese, but also for non-Japanese firms with regard to the global organization of R&D and the engineering aspect of innovation making.

Plan of the Book

Chapters 3–5 describe how the three firms developed their successful products. With a detailed, microlevel analysis, each chapter relates stories of the engineering and technical aspects of product development.

Sony started to develop its Vaio 505 in November 1996. Initially, one designer was located at its headquarters, Shinagawa, in central Tokyo, and five engineers worked at a technical center in Fujisawa, which is 45 km (28 miles) southwest of the headquarters. At this early stage of concept and component development, the designer from the headquarters traveled to Fujisawa for every meeting. One meeting room was dedicated to this project team, and there were almost always some members analyzing the concept and paper models in the meeting room. Gradually, more engineers joined the project in Fujisawa, increasing to eight in February and to 15 in September 1997. Essentially, Sony’s expertise in electronics, mechanical and software engineering, materials science, and design contributed to the miniaturization of a laptop computer. When the process shifted to mass production, most meetings moved to their headquarters. Production took place in Nagano, 250 km (156 miles) northwest of Tokyo, and the product came onto the market in November 1997. R&D labs at San Jose and Brussels participated in this product development, but their roles were restricted to local adaptation of the product, including the translation of the brochure and labels.

Canon started to explore alternative inkjet printing technology as early as 1977. This required basic research, and the 20 members of the project initially used the lab facilities of Tokyo Metropolitan University at Meguro, in central Tokyo. Over time, this team moved through three locations: the company’s central research lab at Atsugi (1979-81), the technical center at Hiratsuka (1981-89), and eventually to the headquarters in Shimomaruko (1989-present). All these places were located within 50 km (31 miles) of the company headquarters. The project members increased to over 200 by 1987 and 300 by 1989, when in fact all these members were located at the same place. Canon had to mobilize all the knowledge it possessed in electrical and precision machinery, physics, and simulation engineering. Only after production began did the locations used spread to non-Tokyo metropolitan areas. There was no involvement of overseas R&D labs in the U.S., Europe, or Australia.

Concern expressed by Toyota’s Chairman led to the formation of a research group to explore concepts for cars of the 21st century in September 1993. Interestingly, the concept drawn up by this group in December had nothing to do with the hybrid engine, but focused on three broad themes: small size, high fuel efficiency, yet spaciousness. Toyota worked further on specifying the concept, but it was not until November 1994 that three executive figures decided to apply hybrid technology to the car for the next century. Then, Toyota quickly scaled up product development teams, almost all at its development center in Toyota City, including power-train, chassis, body engineering, interior engineering, and vehicle evaluation groups. Only the group developing the engine system integration was located outside the city in Higashi Fuji, 240 km (150 miles) east of Toyota City. However, the development group realized that the two-hour journey was a physical burden and moved the engine system integration team to Toyota City by January 1996. Additionally, together with its coinvestor and long-time ally, Matsushita Electronics, Toyota established a new firm to create a new type of battery in Kosai, 75 km (47 miles) southeast of Toyota, in December 1996. The Prius was indeed a hybrid product of Toyota U.S.A. and Japan. A team at Calty Design Research in Los Angeles modeled the exterior design throughout 1996. However, this design was almost independently conducted. For automobiles, the exterior design must appeal to consumers, but that does not affect the development of other components once the basic body size is fixed. Production took place in four factories within Toyota City. The executives pushed the introduction of this car before the new century, finally bringing the hybrid car to market in December 1997.

In the last chapter, “Innovation and Geography,” I will draw conclusions for the management of innovation at the global and local levels. Based on the findings from the case chapters, I will demonstrate that three engineering and organizational aspects of innovation making necessitated the collocation of each firm’s development resources and personnel. The three aspects are: the complexity of modern consumer products, the interdisciplinary dimension of technological advancement, and the need for prototyping and testing. These microdynamic aspects were the hidden dimension of innovation making that previous theories of agglomeration, social networks, and tacit knowledge have overlooked. At the same time, this microdynamic theory will not seek to refute other theories, but to complement them. This analysis can deepen the understanding of why social networks and tacit knowledge stick to places. There will be further discussion in relation to the theory of innovation, agglomeration, and firms.

This book will challenge the conventional understanding of globalization, whether R&D has been globalized, and provide a nuanced conclusion. Multinationals do have overseas R&D centers. However, the overwhelming preponderance of R&D was conducted at the core location of each multinational, and overseas R&D centers played only a peripheral role. Limited and peripheral inputs came from overseas R&D centers in Sony’s and Toyota’s cases which is a substantially different picture from the conventional understanding of the globalization of R&D and the claims by multinationals. Multinationals may have R&D centers with a global stretch when simply looking at location, but organize them in a hierarchical and multi-layered structure.

The implications from these findings are substantial. While access to world-class talent and emerging technology clusters led to a rush to build R&D centers by multinationals in China and India (for example, Reddy 2000; Friedman 2005; Boutellier 2008), and these countries indeed achieved remarkable growth of high-tech industries in the last decade, this book will suggest that the operation of global R&D and the synergistic integration of knowledge, innovations, and technologies is not a simple task. Outsourcing of R&D may take place, but only if a component or functionality is specifically defined and separated.

Information technology facilitated the product development process, but did not substitute for collocation. Firms applied information technology to complement the advantages of proximity, in other words, to make the innovation process more efficient and effective, but hardly had any interest in replacing the advantages of collocation.

This book concludes that innovation is not only a product, but also a process of trial and error with numerous open-ended possibilities. Therefore, firms have to plan, ironically, for the unplanned consequences of product development. Because of this uncertain nature and the need to change and adjust constantly, R&D activities are fundamentally different from other corporate functions, such as production, distribution, and sales, which the multinational firms can locate overseas and coordinate from afar. We will see how each case unwraps this microdynamic process of innovation making.

Chapter 2
In Search of Answers to Being Global and Local

This chapter has four objectives. First, to examine the concept of globalization which is a term that has been used and defined in so many ways that it can mean almost anything. Since the primary focus of this book is on globalization and its contrasting phenomenon, localization, we have to be careful when discussing the concept, or we will not reach any agreement. By assessing several definitions, the first section will clarify this book’s scope of globalization and explain why that focus matters when analyzing innovation and geography.

The second objective is to investigate potential answers to the question: why do global firms operate R&D locally? There are three schools of thought that could provide potential answers: agglomeration, social networks, and tacit knowledge. Each school’s potential for explanation will be assessed, followed by consideration of what is missing in their approaches, and how this book will complete the analysis.

Third, we will assess the advantages and disadvantages of studying Japanese firms, as well as the implications for U.S.-based multinationals. Fourth, the methodology of this study will be briefly explained.

2.1 Which Aspect of Globalization Are We Talking About? What is Globalization?

Globalization emerged as a buzz word in the 1990s (Cooper 2004, 152; Evans 2002, 1; Keohane and Nye 2000, 104) and is a concept frequently used by so many: politicians, media reporters, social workers, street gangs, and others. Among academics, the concept has a whole range of connotations, from an integration of commodity, labor, and capital markets in economics (Bhagwati 2004; Bordo, Taylor, and Williamson 2003), the diminishing role of the nation-state in political science (Cable 1995; Ohmae 1995; Schmidt 1995; Strange 1995), the expansion of capitalist ideology in sociology (Ferguson 1992; Bourdieu and Wacquant 1999), or the compression of time and space (Cairncross 1997, 2001; Harvey 1989; O’Brien 1992). Anthony Giddens (2000) and Mauro Guillen (2001) attempted to integrate various theories from the social sciences and defined globalization as the convergence of cultural, political, and economic aspects of life.

This chapter does not discuss each of these concepts or aim to come up with a single grand theory of globalization. Simply put, no such thing exists because globalization has so many faces. However, it does not mean that we can talk about globalization however we want. It is more important to clarify which dimension of globalization we will discuss. As Bauman remarked, “vogue words share a similar fate: the more experiences they pretend to make transparent, the more they themselves become opaque” (1998, 1). It is important to agree on which aspect of globalization we will discuss, otherwise, we can have neither a single destination nor even a common map to explore with.

This is a book about companies and their innovations. Hence, we will focus on the economic aspect of globalization. But, even within the economic aspect, the concept of globalization varies substantially. This section introduces several concepts concerning economic globalization. The bottom line that I would like to reach is the following: When we talk about globalization, we are not concerned about the quantitative increase in international economic activity. In other words, we are not interested in how many factories and R&D centers Toyota or other companies established in foreign countries, since this hardly captures the dynamics of contemporary economic globalization. Instead, what we will focus on is the qualitative linkage within each multinational corporation: how and how well the R&D centers in multiple countries are coordinated.

2.1.1 Trade

The globalization of economic activity is often thought to have appeared after World War II (Hirst and Thompson 2003, 335), and its pace has increasingly accelerated since the 1980s. In fact, before the 1990s, the term globalization “was hardly used, either in the academic literature or in everyday language” (Gidd...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• List of Abbreviations
• Acknowledgments
• Preface
• 1 Introduction
• 2 In Search of Answers to Being Global and Local
• 3 Sony’s Vaio 505: A Portable and Good-Looking Market Niche
• 4 Toyota’s Prius: Call for Next Century Induced Hybrid Technology
• 5 Canon’s Bubble Jet Printer BJ-10v: The 13-Year Journey from Basic Research to Product
• 6 Innovation and Geography
• List of Interviewees
• References
• Index