Innovation and the Multinational Firm

Perspectives on Foreign Subsidiaries and Host Locations

A. Perri

• Publisher: Palgrave Pivot
• Year: 2015
• Print ISBN: 9781137555434
• eBook ISBN: 9781137555441
• Topic: Negocios y empresa
• Subtopic: Estrategia empresarial

In the changing geography of innovation, multinational corporations play a key role as creators of knowledge. Innovation and the Multinational Firm investigates how innovation is managed within these firms by focusing particularly on subsidiaries and host-locations.

Part I

Managing Innovation across Geographical Space: An Overview

1

Innovation in Multinational Firms and the Role of Geography

Abstract: Chapter 1 discusses the interrelations between innovation and the MNC, reviews selected models of innovation in MNCs and analyzes the role geography plays in shaping the patterns of knowledge diffusion. Building on previous research, it suggests that the development of technological capabilities and the international expansion are mutual-reinforcing strategic paths. Moreover, despite recent views proposing that geography is becoming increasingly irrelevant, it contends that geographical proximity still plays a powerful role in determining economic activities and, more specifically, in influencing MNCs’ management of internal and external innovation networks. Using OECD data, it concludes by offering some insights into recent trends of R&D internationalization.

Keywords: co-location; proximity; R&D internationalization; tacit knowledge

Perri, Alessandra. Innovation and the Multinational Firm: Perspectives on Foreign Subsidiaries and Host Locations. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137555441.0007.

1.1Innovation and the multinational firm

In the current competitive landscape, the ability to innovate constantly despite global economic downturns and changing industry dynamics is a crucial driver of value creation (Scalera et al., 2014). Multinational corporations (MNCs) have been very effective in the development of such capability, as revealed by several insightful facts:

MNCs are the dominant spenders in research and development (R&D) activities; for instance, in 2011, many of the top 20 global R&D spenders, all of which are MNCs, spent in R&D more than the total gross domestic expenditure on R&D (GERD) of countries such as Hungary, Ireland, Portugal, the Czech Republic and Norway,¹

in 2014, the top 20 global R&D spenders, all of which are MNCs, accounted for approximately 25% of the overall R&D spending of the top 1000 corporate R&D spenders, which in turn explains about the 40% of the world’s R&D spending (Jaruzelski et al., 2014);

in 2014, the top 25 US patent assignees were MNCs (IFI Claims, 2015);

from 2005 to 2014, the 13 corporate spenders² that have structurally maintained a position among the top 20 R&D spenders are MNCs (Jaruzelski et al., 2014).

As these data show, MNCs can be considered as the prime developers of technological capacity (Dunning, 1994). Hence, it is important to investigate how R&D and innovation activities are managed within these organizations.

International business (IB) literature has long highlighted the existence of a strong association between innovation processes and the MNC. On one hand, R&D is among the possible sources of ownership advantages that ease firms’ international development (Caves, 1982). On the other hand, a company’s technological capabilities can be intended as being highly firm-specific, thus requiring an internal organization of the underlying international transactions which constitutes a major driver of firms’ foreign expansion (Buckley and Casson, 1976). In addition, through their international presence, MNCs may gain access to foreign knowledge thus strengthening their technological advantages (Dunning, 1993; Kuemmerle, 1997).

Although these arguments should not advice toward the existence of an unambiguous causal link between technological competence and firm internationalization, whose direction would be very difficult to establish, it is undeniable that within the wide-ranging processes of technological accumulation that drive organizations to constantly build and renew their resources and capabilities to face global competitive pressures, the investment in technological competencies and the international expansion are two crucial, and often mutual-reinforcing, strategic paths (Cantwell, 1995a).

In other words, as MNCs develop the capability to accumulate, enrich and exploit technological knowledge, their geographic scope tends to expand. Concurrently, the exposure to foreign knowledge sources enables MNCs to be continuously responsive to state-of-the-art technologies originating anywhere in the world, thereby presiding the innovation frontier.

The MNC technological innovation can be conceptualized as the outcome of a complex process involving technological accumulation and collective learning. Within this process, R&D plays several critical roles, which span from the support to current production needs to the pursuit of long-term objectives of new knowledge creation. In the first case, R&D usually operates in close connection with specific production facilities to the aim of responding to local conditions. Indeed, to convert knowledge into products and services dedicated to foreign markets, MNCs need to carry out processes of adaptation. In the second case, R&D is used to source external knowledge and monitor the emergence of technological opportunities, whose commercial exploitation is only potential.

Traditionally, the need to adapt products and processes to conditions in the foreign markets has represented the spark that ignited R&D internationalization. While the majority of MNCs’ value chain activities have rapidly experienced an increasing geographical dispersal aimed at capturing opportunities arising from foreign countries’ comparative advantages, MNCs have long tried to keep their R&D operations within the home-country boundaries. Yet, in the last decades, it became increasingly evident that proximity to manufacturing plants is essential to effectively target regional markets. The resulting R&D internationalization process has gradually evolved to incorporate other R&D activities beyond adaptation, such as scouting of emerging technologies and foreign knowledge acquisition.

This phenomenon poses several managerial and organizational challenges, but simultaneously encompasses a number of important benefits that have attracted scholars’ attention. The wider picture in which these dynamics occur is one that witnesses the evolution of MNCs into increasingly interactive and internally differentiated networks aimed at the creation of new capabilities, in which specialized activities are performed in particular geographical sites characterized by the endowment with location-specific knowledge (Zanfei, 2000).

The gradual establishment of this geographically dispersed system for corporate development underscores the importance of exploring not only the role of foreign locations, but also the actors that are required to manage MNCs’ innovative activities outside the home-country, that is, foreign subsidiaries.

1.2Models and processes of innovation in multinational firms

To understand the contemporary organizational and strategic issues that characterize the management of innovation in MNCs, it is important to recall the origins and the evolution of this phenomenon, as well as the most important theoretical approaches that have been developed for its interpretation.

To this aim, it is useful to start from the contribution of Vernon who, in 1966, proposed a theory of the product cycle model, thereby offering an interpretation of international technology flows. According to the author, firms in advanced, industrialized countries are likely to be more sensitive to the detection of opportunities for novel products. Therefore, advanced countries not only spur the innovation process but also represent the preferred setting for the actual development of innovation, because they offer extensive pools of skilled human resources, interaction opportunities with prospective customers and smooth communication among innovative actors and among these and production facilities. As a demand for products embodying the new technology emerges in foreign countries, the innovation may be transferred into other locations through export modes, technology-based market transactions such as licensing and, ultimately, through the establishment of overseas subsidiaries.

It is worth mentioning here that the original product cycle model is based on the idea that innovation is a demand-driven, linear process. Indeed, the underlying assumption of this approach is that innovations are stimulated by particular conditions emerging from the marketplace (Vernon, 1979). This is the reason why Vernon considered the US market as the most convenient innovation source for indigenous MNCs, which could leverage the sophisticated needs of a high-income market and the critical expertise of advanced downstream manufacturing facilities. From an economic geography (EG) perspective, Vernon’s model has the merit of highlighting the spatial consequences, in terms of shifts in firms’ operations, arising from an industry’s development cycle, thereby denoting the existence of a sort of hierarchical structure in the geographical location dynamics of international production (Iammarino and McCann, 2013).

Despite his pioneering focus on MNCs’ activities spatial movements, which inspired scholars in both regional and urban economics, subsequent IB studies building on Vernon’s model did not explore the space-related insights envisaged by his works (Iammarino and McCann, 2013). For instance, Kindleberger (1969) and Stopford and Wells (1972) developed theories that are close to the product cycle model but mainly focus on organizational issues; in their view, subsidiaries are mere implementers of the headquarters’ strategic choices, including those involving the firm technological activities.

While the explanatory power of these models was initially quite strong, several conditions have gradually changed, driving to reconsider the validity of the underlying approach. Specifically, it became manifest that innovation processes are not confined to firms’ home-countries anymore, as MNCs knowledge-based activities increasingly draw upon globally distributed networks of subsidiaries (Vernon, 1979).

Several empirical studies confirmed the national boundary spanning process that firm innovation activities were undergoing. In 1990, Ghoshal and Bartlett propose a classification of the different innovation tasks performed by MNCs’ subsidiaries in three main categories: creation, adoption and diffusion. The “creation” task refers to the autonomous development of new products and processes to respond to local contingencies, and hints at the organization’s responsiveness, intended as the ability to use the available resources to exploit opportunities arising from diverse locations. The “adoption” task covers the range of activities that subsidiaries are required to execute to embrace and implement innovations generated by the headquarters or by other sister units, thus being closely related to the pursuit of an integrated global strategy at the firm level. Finally, the “diffusion” task relates to those situations in which subsidiaries are requested to share their locally created innovations with the parent-company or with other subsidiaries, thus allowing for the exploitation of the individual subsidiary’s knowledge in a wider range of geographically distributed MNC nodes.

Clearly, the introduction of “creation” tasks significantly expands the functions that were traditionally ascribed to foreign subsidiaries in their roles of replicators of the parent-company’s activities abroad. In particular, the recognition of the variety of innovative activities that subsidiaries may be requested to undertake hints at the diversity of the routes that innovation may follow within MNCs’ boundaries. In this regard, Bartlett and Ghoshal (1990) propose four different processes of MNC innovation that, however, should not be considered as mutually exclusive, as MNCs should be able to implement them simultaneously to pursue different projects. All four processes encompass both advantages and drawbacks, which need to be evaluated in combination with the specificities of the firm and of the innovation project itself.

The two most traditional processes have been labeled as “center-for-global” and “local-for-local”. The “center-for-global” process identifies in the corporate headquarters the most critical actor of innovative activities. According to this view, it is the MNC central R&D laboratory to be provided with the critical resources and capabilities to develop innovation that will be subsequently leveraged worldwide through a network of geographically distributed subsidiaries. Despite the advantages of centralization, such process and the resulting innovation structure entail the risk of disregarding local market needs and encountering resistance on the part of subsidiaries, which may be reluctant to act as passive implementers of centrally imposed technologies.

In the “local-for-local” process, each subsidiary engages in the development of its own technological know-how, which enables them to create tailored innovations that fit with the needs and conditions in the host market. A potential drawback of this model lies in the inefficient use of MNC innovation resources, as different subsidiaries could develop their own answer to the same problem, or bear unnecessary differentiation costs across countries.

Along with these established innovation paths, empirical evidence has contributed to emphasize the existence of a “local-for-global” process, in which R&D and technological capabilities in specific subsidiary locations may lead to innovations endowed with worldwide competitive potential, which could therefore be used in the global market. Admittedly, the transfer and the adoption of local innovations by other local units could be very complex tasks, due to the well-known “not invented here” syndrome.

Finally, “g...

Table of contents

• Cover
• Title
• Introduction
• Part I  Managing Innovation across Geographical Space: An Overview
• Part II  A Multilevel Approach to the Study of Geographically Dispersed Innovation in Multinational Firms
• Bibliography
• Index