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Insert footer on Slide Master www.henley.reading.ac.uk/dunning Rajneesh Narula Curb your enthusiasm: the limits to offshoring and globalisation.

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Presentation on theme: "Insert footer on Slide Master www.henley.reading.ac.uk/dunning Rajneesh Narula Curb your enthusiasm: the limits to offshoring and globalisation."— Presentation transcript:

1 Insert footer on Slide Master Rajneesh Narula Curb your enthusiasm: the limits to offshoring and globalisation.

2 Insert footer on Slide Master internationalisation of innovative activity is still only a marginal phenomenon relative to nationally bounded innovation processes Internationalisation of innovation the globalisation of innovation has become a large and important activity through global generation of innovations or global collaboration in research. Still confined to innovation networks between actors in the Triad economies Triad-led innovative activities extending to incorporate innovation actors located in non-Triad economies; and Innovation by non-triad actors extending out to incorporate actors located in Triad economies. More non-equity modes; network structures. Innovation systems less ‘national’ 1970s and 1980s 1990s 2020? 2000s

3 Insert footer on Slide Master Déjà vu! No evidence of ‘global’ innovation networks, despite hype –Globalization focus has been on geographical spread, not technological breadth –Outsourcing/collaboration no easier, and not a panacea –Coordination costs have grown Lessons from Japan, Korea, etc, not learned. Take-off requires investment So where to next?

4 Insert footer on Slide Master –why do some countries fail to move from imitation to innovation? The problem of the ‘middle income trap’ The problem of building up an innovation system (including institutions) that works for different sectors The problems of structural adjustment (inertia) The problems of firm-level capabilities (managerial and technical) So where are the non-triad economies?

5 Insert footer on Slide Master Knowledge accumulation in theory. Criscuolo and Narula 2008

6 Insert footer on Slide Master In practice….countries ‘flat line’… A very long catching up phase Building up a threshold level of absorptive capacity Forever emerging

7 Insert footer on Slide Master Multiple sectors that may be linked or disharmoniously work against each other Structural mismatch between what knowledge infrastructure provides and what the economic actors need. Firms (both domestic and MNEs) may not have the technological/absorptive capacity or managerial/organisation skills to do so The role of the state in providing public goods (and appreciating what constitutes a public good in a modern economy) countries are complex ‘systems’

8 Insert footer on Slide Master8 Sectoral distribution of USPTO patent assignees in India ( )

9 Insert footer on Slide Master9 Basic infrastructure indicators for major countries

10 Insert footer on Slide Master10 R&D intensities of various industries in India and worldwide.

11 Insert footer on Slide Master11 Institutional indicators for major countries ( )

12 Insert footer on Slide Master12 Knowledge infrastructure indicators for major countries

13 Insert footer on Slide Master Multiple sectors that may be linked or disharmoniously work against each other Structural mismatch between what knowledge infrastructure provides and what the economic actors need. Firms (both domestic and MNEs) may not have the technological/absorptive capacity or managerial/organisation skills to do so The role of the state in providing public goods (and appreciating what constitutes a public good in a modern economy). What to do with services? But countries are complex ‘systems’

14 Insert footer on Slide Master Firms need to be multiply embedded, in home and host. Greater technological breadth (and depth) Multi-technology competences needs more bandwidth to absorb, and more absorptive capacity Greater coordination capacity needed, even without geographical expansion Favourite new word: ‘Bandwidth’ Question 2: are MNEs really able to leverage such vast innovation networks?

15 Insert footer on Slide Master Foreign subsidiary Universities Public research organisatio ns Suppliers Customers Parent firm in home country Universities Public Research organisations Suppliers Customers For outward MNE activity to influence the home country economy, all three of these sets of linkages must be well-developed Substantial links must exist between subsidiary and host sources of knowledge MNE must have highly integrated structure, and possess O advantages to manage complex cross- border R&D structure Strong links with domestic innovation system in home country need to exist Reverse knowledge transfer requires LARGE coordination resources

16 Insert footer on Slide Master knowledge flows requires greater bandwidth as ‘R’ becomes a significant component And more two-way flows (RKT as well) And even greater bandwidth the greater the cooperative effort Bandwidth becomes expensive as distances (technological, organisational, physical) become greater (both financially, and crucially, in terms of personnel) Firms have more pathways with globalization

17 Insert footer on Slide Master Diversity versus bandwidth As number of competence creating subsidiaries becomes greater, HQ needs larger resources for: – monitoring the assets of subsidiaries, and of their local partners –developing an internal market to move knowledge and assets optimally greater danger of internal market failures Can HQ act as honest broker? must have the wisdom of Gandalf.

18 Insert footer on Slide Master Hierarchies versus networks HQ S2 S1 S4 S3 S2 S1 Coopetition – competition for limited resources, cooperation to share knowledge Greater demand for knowledge flow mechanisms

19 Insert footer on Slide Master Add even more complexity! Larger variety of host countries/innovation systems Multiple headquarters and functional/product groups Power struggles: –Who owns what? –Transfer prices –Acquired subsidiaries Global production networks, flagship firms, non-equity relationships Different intellectual property regimes, institutions, policy regimes Different mandates

20 Insert footer on Slide Master Internally embedded (within MNE) Externally (locally) embedded CELL 3 Competence-creating subsidiary operating autonomously (multi-domestic structure, or free-standing subsidiary) Local-for-local strategy CELL 2 Competence-creating subsidiary, but closely linked to flagship firm as part of a GPN, not with its parent MNE. Primarily engaged in collaborative work with this firm. Operates within enclave/cluster. Possibly focused on adaptive R&D CELL 1 CELL 4 The ‘optimal’ Competence-creating subsidiary Strategically centralised, operationally balanced between central and autonomy Outsider Insider

21 Insert footer on Slide Master With internationalisation of innovation, more pathways and subsidiaries, but smaller bandwidth (on average) Now – factor in that: –Partners will show a high bandwidth preference for homophily (actors that are similar to themselves) –But learning potential greater where other actor is different (heterophily), but paradox is that I will have a smaller bandwidth –So, as dispersion increases (to increase learning), ceteris paribus bandwidth will be distributed to similar partners, and less to new and different firms…. Remember, firms already have organisational inertia – differences persist over a century The result is:

22 Insert footer on Slide Master firms would have the greatest potential outcome by engaging in ‘A’, but because they are afraid to go with high bandwidth they end up in ‘C’ or select a suboptimal outcome ex ante by going to ‘B’. This extends to partnering as well:

23 Insert footer on Slide Master PARTNER SELECTION ‘BEST’ PARTNER known PARTNER TRANSPARENCY DECISION High bandwidth A Learning alliance B Cooperative alliance Low bandwidth C Monitoring alliance D Outsourcing/licensi ng (one way knowledge flows) High bandwidth creates space for two- ways flows, but also creates opportunity for misappropriation

24 Insert footer on Slide Master Internal market imperfections: non-linear relationship between spread and benefits to innovation Decreasing returns to MNE spread. Costs rise, not fall with size. Better to invest in internal knowledge integration (boundary- scanning, etc) than invest in more geographical spread. Meetings are good! Executive fiat does not improve sharing. Somebody has to coordinate in a network structure, but who can act with ‘enlightened self interest’? Consultants versus HQ? Every MNE needs a Gandalf. Lessons (not) learnt

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26 Analysis is mired in Porter’s value chain


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