1. The Globalization of R&D Sony and Matsushita EMBA BA 804, Fall 2004 Ram Mudambi Temple University

2. © Ram Mudambi, Temple University, 2004 2 Background Historically, most affiliates with R&D were competence-exploiting: they adapted products for local markets, adapted processes to local production conditions, or adapted local resource extraction methods Two complementary theories –The product cycle model (Vernon, 1966) –The stage theory (Johanson and Vahlne, 1977)

3. © Ram Mudambi, Temple University, 2004 3 Subsidiary evolution A shift towards competence creation in the internationally dispersed networks of MNEs, since at least 1980 Alternative taxonomies: –Research-related vs. assembly-type production facilities –Asset-seeking vs. market-servicing FDI –Global, transnational or heterarchical vs. multi- domestic strategy –Home-base exploiting vs. home-base augmenting FDI –Center of excellence subsidiary mandate

4. © Ram Mudambi, Temple University, 2004 4 Drivers of subsidiary evolution Demand –Increased demands for customized products driven by increases in wealth Supply –Increased pace of technological change, reduced cycle times Institutional change –Falling trade barriers, increased competitive pressures

5. © Ram Mudambi, Temple University, 2004 5 Knowledge flows within MNEs: Evidence Firm organization – Gupta and Govindarajan Nature of knowledge – Cantwell and Santangelo Nature of location – Cantwell and Janne Differences across industries and even across firms within industries – I. Zander Political processes within the MNE – Forsgren et al, Forsgren and Pedersen

6. © Ram Mudambi, Temple University, 2004 6 Knowledge flows: 5 inter-related aspects 1.The source-target specification 2.The relative size of flows 3.The market structure within which flows occur 4.The flow and the firm’s business process 5.The applicability of the flow

7. © Ram Mudambi, Temple University, 2004 7 The source-target specification HomeHost Numeraire knowledge flow (from parent to subsidiary) Learning Spillovers Knowledge transfer 1 2 3

8. © Ram Mudambi, Temple University, 2004 8 The relative size of flows Table 2 Case Level of Knowledge Flow 1 Transfer 2 Learning 3 Spillover A HHH B HHL C LHH D LHL E LLH F LLL G HLH I HLL

9. © Ram Mudambi, Temple University, 2004 9 The effect of market structure Perceptions of flow 3 (spillovers) Knowledge as a private good – Intec’l Prpty –spillovers perceived negatively Knowledge as a public good –Virtuous cycle of cluster development – present spillovers enhance future learning Oligopolies are more sensitive to strategic interdependence –Present losses may outweigh possible future gains

10. © Ram Mudambi, Temple University, 2004 10 The firm’s business process Core vs. complementary knowledge flows Oligopolistic market structure  core knowledge creation is unlikely to be co-located However, complementary knowledge creation activities are likely to be co-located with leading firms in that activity

11. © Ram Mudambi, Temple University, 2004 11 Market structure and business process effects Oligopolist HomeHost Competitive firm HomeHost Co-location Complementary location

12. © Ram Mudambi, Temple University, 2004 12 Knowledge applicability Widely applicable knowledge is likely to form complementary knowledge in a wide variety of industries Specialized knowledge is likely to have a narrow applicability Clusters are most likely to coalesce around widely applicable knowledge

13. © Ram Mudambi, Temple University, 2004 13 General purpose technologies Since internationalized innovation is often diversified and supports core technological development at home, the exchange of general purpose technologies is important in international centers of excellence In such centers the industrial profile of foreign-owned and indigenous innovative specialization is generally unrelated

14. © Ram Mudambi, Temple University, 2004 14 Dispersing knowledge creation Some kinds of knowledge creation have remained strongly localized, and MNEs provide the links between localized networks and international interchange Other kinds of knowledge creation are more widely geographically dispersed, typically the non-primary technologies of a firm and less tacit types of technology

15. © Ram Mudambi, Temple University, 2004 15 Location attractiveness For competence-creating subsidiaries (but not competence-exploiting) the presence of local skills, educational resources and research infrastructure is critical A good science base is especially attractive to the location of internationally mobile corporate research facilities Science-technology linkages matter more

16. © Ram Mudambi, Temple University, 2004 16 The role of M&As The role of M&As in the recent restructuring of international networks for innovation is crucial While M&As have a negative effect on R&D in acquired competence-exploiting subsidiaries (the elimination of duplication), they have a positive effect where the purpose of FDI was strategic asset-seeking

17. © Ram Mudambi, Temple University, 2004 17 Matsushita Home Country Operation Country 1 Country 2 Country 3 From late ’70s R&D Center 1988 Local contribution projects Global projects

18. © Ram Mudambi, Temple University, 2004 18 Sony Home Country Operation Country 1 Country 2 Country 3 Through ’88 Focused on local contribution projects 1988 Corporate Research Lab Zone CTO