Multinational Corporations and European Regional Systems of Innovation

John Cantwell, Simona Iammarino

• Publisher: Routledge
• Year: 2005
• Print ISBN: 9780415501279
• eBook ISBN: 9781134487301
• Topic: Business
• Subtopic: Business General
• Index: Business

In globalising economies, particularly those going through a process of economic integration such as those economies within the EU, regions forge an increasing number of linkages with other locations within and across national borders. This is largely carried out by the technological efforts of Multinational Corporations (MNCs).
This book explores the regional dimension of Europe in terms of localised technological comparative advantages and the location of innovative activities by MNCs. Using an empirical analysis John Cantwell and Simona Iammarino cover such important themes as:
*MNC technological activities and economic wealth
*MNCs and the regional systems of innovation in Italy, UK, Germany and France
*the geographical hierarchy across European national borders.

1   Introduction

According to Paul Krugman ‘the most striking feature of the geography of economic activity is surely concentration . . . production is remarkably concentrated in space’ (Krugman, 1991a: p. 5). However, usually we refer to ‘economic activity’ and ‘production’, having especially in mind the creation of goods and services, and this attitude has tended somehow to obscure another crucial feature of the geography of economic activity: innovation is even more concentrated in space. The evidence suggests that technological and innovative activities not only generate externalities (spillovers), but these are often geographically bounded within the region or local context where the new knowledge was initially created.

Especially over the last decade, a substantial body of research has sought to establish the importance of the spatial dimension in the study of technological innovation, firm competitive advantage and overall economic growth (among others Cantwell and Janne, 1999; Enright, 1998; Martin and Ottaviano, 1998; Porter, 1990, 1994). Although the physical agglomeration of industrial and technological activity is readily visible, the precise origins and dynamics of these agglomerations vary across locations and there is therefore no single explanation for their existence. For instance, as noted by Cooke and Morgan (1994), in some European Union (EU) regions it is clear that localised buyer–supplier networks, together with robust institutional support mechanisms at the local level, have played a major role in promoting localised patterns of innovative activity.

Yet, until recently, comparatively little research has empirically investigated the sub-national concentration of technological activities in Europe, mainly because of the lack of data on innovation at detailed geographical level. Several studies exist for the US (among others, Feldman and Audretsch, 1999; Audretsch and Feldman, 1996; Feldman, 1994; Jaffe et al., 1993), which observe the concentration of innovative and economic variables both across regions and sectors. Using European Patent Office data, Breschi (2000) finds evidence of considerable differences in the spatial concentration of innovation across sectors in Europe; Caniëls (2000) shows that the top 12 EU regions account for 70 per cent of the total number of patents in the period 1986–90; Paci and Usai (2000a, 2001) demonstrate that the degree of geographical concentration of innovative activities in the Union is much higher than that of production.

However, for the most part, both theory and empirical analysis have paid only scant attention to the nationality of ownership of innovative activity, or, in other words, to the particular characteristics of foreign-owned, as opposed to domestically-owned, technological activities. Indeed, while traditional analyses of multinational activity emphasise the centralised nature of research and development efforts of multinational corporations (MNCs), contemporary contributions highlight the potential redundancy of this thesis. The trend toward globalisation of research and innovative activity has resulted in a questioning of the rather narrow role conferred upon the subsidiary by Vernon (1966), and attempts to redefine the role of the subsidiary as a key creator of innovation and technological knowledge – a role originally suggested by Dunning (1958) and later developed by Chesnais (1988), Cantwell (1994) and Fors (1998).

The increasing appreciation of the role of MNCs in the generation of technology (and not just in its international transfer) has been facilitated by the recent trend for MNCs to establish internal and external networks for innovation. Internationally integrated networks within the firm may lead, through a greater focus on the specialisation of technological efforts in affiliates, to an improvement of innovation capacity, both of the MNC and of the host location. Inter-firm networks established between MNC affiliates and local firms may, in addition, amplify the advantages of geographical agglomeration in some particular lines of technological development. In other terms, in order to consolidate existing competencies, it is generally necessary for a firm to extend those capabilities into new related fields of production and technology, and across a variety of locations. The firm is thereby able to benefit from the dynamic economies of scope that derive from the technological complementarities between related paths of innovation or corporate learning in spatially distinct institutional settings or environments. In this perspective, MNCs spread the competence base of the firm and acquire new technological assets, or sources of technological advantage. For their part, indigenous firms benefit from localised knowledge spillovers from MNCs, given the access of the latter to complementary streams of knowledge being developed in other regional locations. The precise form that such knowledge networks take depends upon the nature of the extant agglomeration forces that shape the spatial organisation of activity.

The ongoing reorganisation of multinational operations further confirms the fact that technological know-how is undoubtedly the key factor of production operating through these dispersed but interdependent global networks. Indeed, as highlighted by Dunning and Wymbs (1999), the decision of firms to extend their innovative activity to a number of foreign locations is closely linked to the perception that such strategies can greatly enhance the firm's international technological advantage by extracting local knowledge for its global network. Knowledge is therefore transferred in a two-way direction – from the parent to the subsidiary (as was traditionally believed to be the case) and also, by tapping into the host's knowledge base, from the subsidiaries to the parent.

Although these trends have long been apparent, their persistence and evolution within the current climate of declining transportation and communication costs (and amongst high-tech firms for whom the ‘friction of distance’ was perceived to be largely irrelevant) seem to warrant investigation. The resolution of the paradox ‘does the local continue to matter in a world increasingly relying upon apparently space-less globalisation and virtual communications and exchanges?’ lies in the crucial distinction between knowledge and information. ‘While the costs of transmitting information may be invariant to distance . . . the cost of transmitting knowledge, especially what von Hippel (1994) refers to as sticky knowledge, rises with distance’ (Feldman and Audretsch, 1999, p. 411). As firms cluster, therefore, knowledge can be more easily transferred between them and the resulting inter-firm interaction (be it coordinated or uncoordinated) serves to consolidate and promote the future attractiveness of the location.

In emphasising the public good characteristics of research output (or potential for technological spillovers), traditional research in this area focused upon the inadequacies of the market if left to provide such goods. The non-rivalrous and non-excludable nature of knowledge renders it very difficult for the producers of that knowledge fully to appropriate social returns on their investments, which means that other actors in the economy can enjoy positive externalities (or research spillovers). As a result of this so-called market failure and implied divergence between private/social costs and benefits, a sub-optimal level of R&D would be undertaken at firm level (Cantwell and Noonan, 2001).

Since knowledge was considered to be the ‘quintessential public good’ (Geroski, 1995, p. 91), one of the central concerns of the literature is how to define the property rights associated with the creation of new knowledge, i.e. how to correct the market failure. Although such contributions have greatly enhanced our understanding of research spillovers, they fail to acknowledge the tacit component implicit in the innovative process. This, in turn, has led to an overestimation of the importance of the appropriability argument – a hypothesis confirmed by recent work in the field (Hall and Ham, 1999; Cohen et al., 2000).

While knowledge is free in principle, the absorptive capacity of the firm determines the degree to which knowledge created outside the firm infiltrates its activities. Building and sustaining this capacity is, in turn, costly and dependent, inter alia, upon the amount of technological innovation undertaken by the receiving firm (Rosenberg, 1976, 1982; Cantwell, 1989a, b), which has become increasingly costly in recent years. Following on from this point, Nelson and Winter (1982) highlight the importance of location for the firm that wishes to take full advantage of inter- and, indeed, intra-industry innovations. Because the innovative process is believed to be path-dependent and firm-specific in nature, the technological advances that result are partially embodied, not just in the final output, but also in the organisational structures of companies engaged in such activities. The costs associated with the articulation of such newly created knowledge thus determine the degree to which this knowledge remains tacit over time. Such costs may be reduced via the physical reduction of distance; that is, the geographical clustering or agglomeration of research activity. Such clustering of firm activity serves to highlight the fact that knowledge spillovers are essentially geographically bounded (Jaffe et al., 1993; Almeida and Kogut, 1997). Dispersion of multinational R&D activity across many locations is therefore believed to facilitate the accumulation of knowledge, which feeds directly into the company's competitive position internationally. While there is evidence that much of the technology developed abroad by large firms lies in their core areas of strength – suggesting that adaptation and technical support to foreign manufacturing plants continues to be major explanatory factors – MNC research in foreign locations is also increasingly associated with a higher probability of entry into new and more distantly related fields of technology. Such knowledge-seeking activity is undertaken to help define the future directions in the evolution of the corporations’ sources of competitiveness (Pearce, 1999). Furthermore, since knowledge creation is a cumulative process, and certain locations boast certain technological expertise, the knowledge-seeking activity of MNCs is believed to be self-reinforcing, leading in turn to further geographical agglomeration over time.

There is a strong interdependence between geographical, technological and sectoral ‘systems of innovation’, particularly when looking at sectoral boundaries as multidimensional, integrated and dynamic, rather than static and delimited in terms of technological opportunities. As argued by Malerba (2002), the notion of a sectoral system of innovation (and production) actually complements both that of a geographical system of innovation and that of a technological system, where the latter focuses mainly on the networks for the generation, diffusion and use of new technologies (Carlsson and Stankiewitz, 1991). Following Malerba's definition of sectoral systems – in which the agents are individuals and organisations with different degrees of aggregation and specific learning processes, competencies, institutional and organisational structures and objectives – it may be maintained that, as a sectoral system undergoes the processes of change through the coevolution of its various elements, so does a local or regional system, underlying the transformation of certain socio-economic environments and the factors at the base of the different performances of firms across locations. In fact, according to the evolutionary theory, environments and contextual conditions in which firms and agents operate may substantially differ. Firms embedded in the same institutional context are likely to share some common behavioural and organisational traits and develop some common learning and absorptive modes. Exactly as interdependence and complementarily mark the real boundaries of a sectoral system, they define the actual borders of a regional system, rendering boundaries and borders quite dynamic and subject to evolutionary change.

On the other hand, cumulativeness is indeed observed at various levels – technological, sectoral and local. Technological change is a path-dependent process in the sense that the probabilities of adopting a certain kind of technology are influenced by past decisions, which in turn constrain the range of existing choices. Therefore, the industrial composition of innovative activities in a given location reflects past technological accumulation (Cantwell, 1991). From the systemic view of technological change, it turns out that a system is a collective emergent outcome of the interaction and coevolution of its various constituting elements, and the appropriate level of analysis depends on the specific research goals.

The aim of this book is to examine one crucial aspect of the nexus between global and local processes: that is, how the particular corporate technological trajectories of multinational corporations have interacted with spatially-specific resources for the creation of new competencies in some of the leading (sub-national) regions in the European Union. Particularly within the latter, the reorganisation of operations of MNC affiliates has been spurred to a much greater extent than in the case of affiliates based outside the area (Cantwell, 1987, 1992b; Dicken, 1994), as a consequence of the completion of the Single European Market and the pursuit of economic and monetary union.

The theoretical and analytical approach from which this work draws comes from the evolutionary theory and the system approach. It is within such a framework that key concepts such as knowledge, learning, competence, interdependence and dynamics, have particularly been developed. And, as a consequence, that relationships and networks have become the main elements of innovative and production processes.

The focus on ‘systems of innovation’ has led to a different contribution of the geographical dimension to the study of innovative phenomena. Yet, along with the importance of context-specific factors, the presence of systemic interactions in the process of generation and diffusion of innovation has also been recognised as a key determinant of the technological and economic performance of countries and regions. However, proper regional systems of innovation are found only in a few well-defined areas: in most regions, systemic interactions and knowledge flows between the relevant actors are simply too sparse and too weak to reveal the presence of systems of innovation at work. By contrast, regions that have developed high endogenous scientific and technical capabilities over time are likely to be net providers of technological knowledge to the rest of the country, as well as to appear very ‘attractive’ for the localisation of innovation activities and facilities by global actors. Indeed, the development of cross-border corporate integration and intra-border inter-company sectoral integration, as new forms of governance, makes it increasingly important to examine where and how innovative activity by MNCs is internationally dispersed and regionally concentrated.

This book addresses some of the most relevant questions in this field of research, such as: what are the main features of the nature of interactions between local and corporate knowledge? Is there a positive correlation between MNC technological profiles and regional technological specialisation? Can a hierarchy of regional centres of technological excellence be established within and across national boundaries? What are the dynamics of regional patterns of technological specialisation? Which implications can be drawn from the evidence on the EU regions?

The conceptual framework on MNC strategies for innovation and the crucial link between the global and the local dimensions of technology creation is summarised in Chapter 2. Actually, each chapter contains some background that clarifies the most crucial themes related to the subsequent discussion. This is also because the literature has been particularly prolific in the last few years and, without claiming to be exhaustive, we have tried to take into account at least the main lines of evolution of the current debate. Chapter 3 provides an overview of the spatial distribution of technological operations of MNCs across European regions, illustrating some basic links between technological growth and systemic characters and giving account of the data used in this book as a proxy for both MNC and regional technological profiles. Chapter 4 introduces, in comparative terms, the national case-studies reported in the following four chapters, which address, respectively, Italy (Chapter 5), the UK (Chapter 6), Germany (Chapter 7) and France (Chapter 8). Our hypothesis that MNC networks for technological innovation conform to a hierarchy of regional centres within national systems is tested for each of the four major EU economies. Chapter 9 explores the dynamics of both technological capacity and specialisation of the leading European regional cores for innovation, supporting our second hypothesis that a geographical hierarchy can also be established across European national boundaries. Finally, Chapter 10 concludes, by drawing some implications of our work and highlighting the main directions of our future research efforts.

2 Regional systems of innovation in Europe and the globalisation of technology

Introduction

In this chapter, we will summarise the conceptual framework and the current debate on the evolution of regional systems of innovation in the European Union, adopting a globalisation–localisation perspective. Spillovers, particularly those associated with new technological knowledge, tend to be highly concentrated at the geographical level. The convergence/divergence tendencies of regional development in the EU seem to depend increasingly on regional innovative capabilities and on localised learning, which in turn shape the attractiveness of the region towards outside resources. The regional dimension of the cumulative nature of the innovation process, which also includes social, cultural and institutional factors, is thus becoming central in explaining the locational choices of multinational corporations, especially with regard to their innovative activity.

We argue that these choices depend upon the number and the characteristics of regional centres and their relative position in a geographical hierarchy, and upon the different strategies for technological upgrading and diversification developed by MNCs. The ultimate implication is that public policies on a far wider range than those currently practiced are required in order to reap the benefits associated with the globalisation of innovation and to offset the risk of increasing regional inequalities.

The ‘local’ dimension of innovation phenomena is the subject of the following section, in which we give an overview of the increasing function of regional innovation systems. The ‘global’ dimension of technological innovation is discussed in the third section of this chapter. In it we explore the change of MNC innovatory strategies, according to the recent trend for large industrial firms to establish internal and external networks for innovation. The ‘local’ versus the ‘global’ is considered in the fourth section, addressing the cumulative causation mechanisms that may arise from the interaction between the two dimensions of innovative processes.

The location of innovative activities and regional systems of innovation

There are two clear observations pointing towards the link between geographical location and industrial performance. The first is that economic and technological activities show a strong tendency to agglomerate in certain locations, giving rise to patterns of national and regional specialisation. The second is that the performance and the growth of firms depend, to a large extent, on the conditions of the environment in which they operate, and particularly on those in the immediate proximity (Malmberg et al., 1996).

The phenomenon of the c...

Table of contents

• Front Cover
• Half Title
• Studies in Global Competition
• Title Page
• Copyright
• Contents
• List of Figures
• List of Tables
• Acknowledgements
• List of abbreviations and acronyms
• 1 Introduction
• 2 Regional systems of innovation in Europe and the globalisation of technology
• 3 MNC technological activities and economic wealth: an analysis of spatial distribution in the European Union
• 4 Geographical hierarchies of research locations in the European Union
• 5 Multinational corporations and the Italian regional systems of innovation
• 6 Multinational corporations and the UK regional systems of innovation
• 7 Multinational corporations and the German regional systems of innovation
• 8 Multinational corporations and the French regional systems of innovation
• 9 The geographical hierarchy across European national borders
• 10 Conclusions: the global–local nexus in technological innovation: what implications are there for the future?
• Appendices
• Notes
• Bibliography
• Index