1. R&D Offshoring and Outsourcing: Nurturing
Presentation at the
International Symposion on “R&D Outsourcing and Smartsourcing”
Bucharest, Romania
20 February 2008
R&D Offshoring and Outsourcing: Nurturing
Sustainable R&D Capabilities in a Globalized World
Prof. Dr. Alexander Gerybadze
Center for International Management and Innovation
Center for Research on Innovation and Services (FZID)
University of Hohenheim

2. Global Innovation / Trends in R&D Offshoring
R&D Offshoring and R&D Outsourcing: Nurturing Sustainable
R&D Capabilities in a Globalized World
The Agenda / Key Issues
Global Innovation / Trends in
R&D Offshoring
R&D Outsourcing / New Partnership
Models in Innovation
Strategic Implications for R&D and
Innovation Policy

3. R&D and Innovation is Key for International Competitiveness
Major Trends in the Global Innovation Arena
R&D and Innovation is Key for International Competitiveness
Multinational Corporations are the Drivers of Technical Change
Trend to Globalize R&D: Persistent R&D Offshoring
Trend to Externalize R&D: R&D Outsourcing / Open Innovation
Trend to Commercialize R&D
Trend towards Downstream Innovation

4. First of all, Offshoring and Outsourcing need to be differenciated
Do In-house
at the Home-base
of a Multinational
Firm
Do sth. at a
Foreign location
(Foreign direct
Investment)
Contract out
to suppliers and / or
External partners
Type of Value-adding
Activities
OFFSHORING
Increasing trend of globali-
zation of all value-adding acti-
vities including R&D
OUTSOURCING
Increasing tendency to
„harvest-out“ / Focus on few
core activities in-house

5. World R&D Expenditures strongly concentrated on a few Countries
Within the Triad regions / Gross Expenditures for R&D (GERD) 2005
World R&D Expenditures / GERD 2005 Total 845 Billion $ PPP
North America
339 Mrd. $
USA
Canada
Mexico*
Asia
283 Mrd. $
Japan**
China
Korea
Singapore
Taiwan
Western Europe
224 Mrd. $
Rest EU 25 UK
France
Nether-lands**
Switzerland*
Germany
Austria
By Comparison: 27 Billion $ PPP in Eastern Europe (of which 64% in Russia)
Source: OECD, Main Science and Technology Indicators 2006.
* Data for 2003; ** Data for 2004.

6. R&D Offshoring outside of Home Region
Increasing Global Dispersion of Innovation Activities / R&D Globalization and
R&D Offshoring outside of Home Region
Share of R&D
Outside of Home
Region (in %)
40%
Europe
30%
North Amerika
20%
10%
Japan
1992
1995
1998
2001
Source: Gerybadze 2004, p.246; Roberts 2001 / Global Benchmark Survey on the Strategic Management of Technology

7. Business Expenditures on R&D also concentrated on few Industries
which increasingly go Global
Industry
R&D Expen-
ditures 2006
(in Mio €)
R&D In-
tensity
2006 (%)
Intensity of
R&D Offshoring
* * *
* *
1. Pharmaceuticals & Biotech
2. IT-Hardware & Equipment
3. Automobiles & Parts
4. Electronics & Electrical
5. Software & Computer Services
6. Chemicals
7. Aerospace & Defence
8. Consumer / Leisure goods
9. Industrial Engineering
10.General Industrials
70 523
64 532
60 807
27 139
26 523
17 186
15 991
14 209
9 319
8 868
15.9
8.6
4.1
4.4
9.8
3.1
4.8
6.5
2.7
2.1
* * *
Very strong R&D Offshoring
* *
Strong R&D Offshoring
Source: EU Industrial R&D Investment Scoreboard 2007, INTERIS Database University of Hohenheim 2007

8. R&D Outsourcing / New Partnership Models in Innovation
R&D Offshoring and R&D Outsourcing: Nurturing Sustainable
R&D Capabilities in a Globalized World
Presentation Part 2
Increasing Globalization of R&D: What does this
mean for Building R&D Capabilities in Host Countries?
R&D Outsourcing / New Partnership
Models in Innovation
Strategic Implications for R&D and
Innovation Policy

9. Increasing Trend towards Downstream Innovation in many dynamic
Industries
Many Host Countries build up Universites and Science base …
… but R&D Location not just driven by need to access Research
Changing Pattern of Knowledge Flow in the Innovation Process
Lead Market
Innovation / Advanced
Services
Research-
based Innovation
Engineering-
Innovation / Advanced
Manufacturing
Traditional Interpretation / Linear-sequential Innovation Process
Most important „new drivers“ for R&D Offshoring
- Access to Advanced Market / Lead Market
- Manufacturing Excellence / Engineering Innovation
- Strong Innovative Competitors
- Standard setting / Innovation enhancing Regulation

10. Home-base-Augmenting R&D
Case Example Pharmaceuticals & Biotech: still Research-based,
but strongly dominated by the U.S.
Most European and Asian MNC set-up Lead-R&D in the U.S.
Home-base-Augmenting R&D
Reverse
Knowledge
Transfer
Lead R&D
Center in the
U.S.
Home-base-Exploiting R&D
FOREIGN BASE
(e.g. USA)
Transfer of
Knowledge to Foreign
R&D Labs
Where is the most
critical concen-
tration of talent?
Location with
most advanced
Scientific base?
HOME BASE
(e.g. Germany)
Leading
R&D Center in
Germany
R&D Offshoring of MNC in Europe: few selected research areas
R&D Outsourcing: Mainly clinical studies / but often dominated
by U.S. based CRO´s
Some R&D in Eastern Europe: Labour-intensive screening and
Multi-center Clinical studies

11. Where is the Engine in the Innovation Process? Scientific Excellence
European Countries often with Strong Capabilities in Downstream Innovation
„Rear-Drive“
„Front-Drive“
Where is the Engine in the Innovation Process?
RESEARCH-BASED
INNOVATIONS /
Scientific Excellence
ENGINEERING
INNOVATION /
Advanced Manu-
facturing
LEAD MARKET
INNOVATION /
Close Access to
Lead Customers
Research may generate
New Products and Industries /
Embeddedness in Research
Community critical
Examples:
Genetic engineering
High-energy physics
Superconductivity
Very few successes in Research-based Innovation in Europe
Interaction with Lead Users /
Strong Ties with Demand side
Partners & Regulatory agencies
Examples:
Telecommunication
Automotive electronics
Medical products &
services
Many success stories in Engineering Innovation / Often Medium-tech
Close Interaction between
Product- & Process Development /
Embeddedness advanced
Supplier-Networks critical
Examples:
Automotive engineering
Mechatronics
Chemical processing

12. R&D Outsourcing in Germany / Increasing Global Outsourcing in
a few selected Industries
R&D Outsourcing concentrated on a few Industries with very
specific requirements
Foreign
Outsour-
cing (%)
16.8
48.9
5.6
12.9
18.6
22.6
Outsourcing Partners
Share of Foreign R&D Outsourcing Increasing
Private
Companies
in Germany
70.4
43.7
61.0
66.5
58.1
63.0
Mostly private Companies as Outsourcing Partners
Public
Research &
Universities
12.8
7.4
33.4
20.6
23.3
14.4
Role of Public Research & Universities often overestimated
External R&D
Expenditures
( 2003 in Mio €)
Industry
R&D Out-
sourcing
(% of BERD)
1. Automobiles
2. Chemical Industry
3. Electronics / Data Processing
4. Machinery
5. Metall Processing
Total / Manufacturing Industries
4 767
1 698
886
300
128
7 940
25.0
21.1
10.4
7.3
13.5
18.6

13. Strategic Implications for R&D and Innovation Policy
R&D Offshoring and R&D Outsourcing: Nurturing Sustainable
R&D Capabilities in a Globalized World
Presentation Part 3
Global Innovation / Trends in
R&D Offshoring
R&D Outsourcing growing in Importance / but contracts
go to professional partners / mostly private firms
Strategic Implications for R&D and
Innovation Policy

14. Learn from Success Stories / Sustainable Strategies
in other Countries
Coherent Development Strategies that build on Human Capital,
Science and Industrial Innovation
The New „Eastern European Tigers“: Estonia, Slowenia,
Czech Republic, Saxony
The „Baltic Tigers“: Finland,
Sweden, Denmark
The „Celtic Tigers“: Ireland,
Scotland, Wales
The „Alpine Tigers“: Baden-Württemberg, Bavaria, Austria,
Switzerland

15. Case Example of a „Eastern European Tiger“ / Innovation and
Foreign Direct Investment in the Czech Republic
R&D Expenditures 3.5 Billion $ 2005 (up from 1.3 Billion in 1995)
R&D 1.54 % of GDP (up from 0.95% in 1995)
Strong role of R&D of Foreign affiliates (52% in 2005 / up from 27% in 1995)
R&D units typically linked to Manufacturing plants
Foreign affiliates still play limited role in stand-alone R&D labs
(only 6% of R%D employmant)
R&D services industry received only 0.1% of FDI inflow
(80% of this investment from Germany)
Encouraging and fostering an Innovation and Technology culture
has moved to center stage of Economic development strategy
CzechInvest actively targets companies with R&D and technologi-
cally advanced projects

16. What can a Country do to build and Leverage
Sustainable R&D Capabilities?
Active, long-term and stable investment in Education at all levels
Focus on Academic Excellence in Targeted fields
Increase of R&D as % of GDP (to levels of >2%)
Build / Nurture Local Firms / Spin-offs
Build Technology Centers
Build Business Support Services
Participate in European R&D Support Programmes
Attract Foreign Firms in areas where the Country offers
appropriate Capabilities

17. Develop Strategic Partnerships with Corporations and
Government Agencies in Continental Europe
Even in a Globalized World, Proximity and Cultural Heritage
still matters
Build alliances with Firms and Research centers especially
in „Alpine Tiger“ states
Baden-Württemberg
- Machinery / Manufuture BW
- Mechatronics
- Automobiles / Automobile components
- Materials
Bavaria
- Specialty Electronics
- Food / Beverages
- Data processing / Software
Austria
Switzerland

18. Setting the Agenda for a dedicated Programme aimed
at Fostering Innovation and Economic Growth
Don´t just follow the „High-tech Bandwagon“ / Every government
in the World targets IT and Biotech!
Emphasize Country-specific Capabilities / Country-USP
Build on Industries with Downstream Potential / High Value-added
in Country plus Innovation
- Specialty Machinery
- Food Chain / Wine
- Supplier Industries
Build Strong Innovation Clusters for particular Industries
Develop growing Business Services / Knowledge-intensive
Business Services (KIBS)
Design and Administer EU Structural Fund projects aimed
at enhancing Innovation
Strong Investment Promotion Agency as Promoter and
Implementor of National Development Programme

19. Differenzierte Formen
Offshoring and Outsourcing Strategien for different elements of the Value Chain in Multinational Corporations
Differenzierte Formen
der Wertschöpfung
Etwas In-house
durchführen und
am Stammsitz des
Unternehmens
Etwas im Ausland
durchführen, aber
innerhalb eines
MNU
Etwas durch ein
anderes Unterneh-
men durchführen
lassen
OFFSHORING
OUTSOURCING
Manufacturing
„Made in Germany"
„Made by BMW"
Marketing
Sales
R&D
Administration

20. The Innovation Performance of Research-based Innovation and
High-tech Industries is rather limited in Germany
German Innovation Performance is much higher in areas where the core of value added is in Engineering Innovation / which build on a strong Home-base of Manufacturing and Engineering excellence
Research-based
Innovation
Engineering
Innovation
Lead Market
Innovation
FOREIGN BASE
Home-base
Exploiting R&D
Foreign Direct In-
vestment in Manufacturing
& Advanced Foreign Plants
of German Firms
Export
Strategies
Strong Home-base
in World-class Manufacturing
and Engineering / Functioning
Supplier and Engineering
Infrastructure
HOME BASE
Advanced R&D
In Germany
First Commercial
use often in
Germany
Examples: Automobiles, Process engineering, Special purpose machinery

21. Increasing Trend towards Downstream Innovation
Innovation Strategies within Multinational Corporations addressing
two Key Issues
Key Issue 1: Where is the Geographical Center / Locus of Innovation
Where can we best learn about the Winning Combination?
Research-
based Innovation
Engineering-
Innovation / Advanced
Manufacturing
Lead Market
Innovation / Advanced
Services
Traditional Interpretation / Linear-sequential Innovation Process
Changing Pattern of Knowledge Flow in the Innovation Process
Key Issue 2: Where is the Core of Value Added in the Innovation Process / The Functional Source of most advanced Knowledge?
Where is the Engine in the Innovation Process?

22. Business Expenditures on R&D also concentrated on few Industries
which increasingly go Global
R&D Ex-
penditures
2006
(Mio €)
R&D In-
tensity
2006
(%)
Competitive
Position
Germany
Weak
Leading
Strong
Extent of
R&D Globa-
lization
Competitive
Position
Japan
Industrie
1. Pharmaceuticals & Biotech
2. IT-Hardware & Equipment
3. Automobiles & Parts
4. Electronics & Electrical
5. Software & Computer Services
6. Chemicals
7. Aerospace & Defence
8. Consumer / Leisure goods
9. Industrial Engineering
10. General Industrials
70 523
64 532
60 807
27 139
26 523
17 186
15 991
14 209
9 319
8 868
15.9
8.6
4.1
4.4
9.8
3.1
4.8
6.5
2.7
2.1
* * *
* *
Weak
Strong
Leading
Average
* * *
Very strong R&D Offshoring
* *
Strong R&D Offshoring
Source: EU Industrial R&D Investment Scoreboard 2007, INTERIS Database University of Hohenheim 2007

23. Global Innovation: New Modes of Knowledge Production
International R&D and Innovation Study (INTERIS) - Sample Firms
Europa
ABB
Bosch
Siemens
Philips
Alcatel
Ericsson
Nokia
Akzo
Bayer
BASF
Aventis
Glaxo Wellcome
Merck KGaA
Novartis
Roche
St.Gobain
ThyssenKrupp
Sulzer
DaimlerChrysler
Renault
Volkswagen/Audi
EADS
USA
General Electric
Honeywell
Agilent Technologies
Hewlett-Packard
IBM
Lucent Technologies
Motorola
Dow Chemical
DuPont
Ely Lilly
Pfizer
Johnson&Johnson
Merck Co.
Alcoa
United Technologies
Ford
General Motors
TRW
Boeing
Japan
Hitachi
Mitsubishi Electric
Toshiba
Matsushita
Sharp
Sony
NEC
Kao
Toray
Eisaj
Kyocera
Toyota
Electronics / Electrical
Engineering
Consumer Electronics
IT / Telekommunication
Chemical Industry
Pharmaceuticals
Materials / Engineering &
Maschinery
Automotive & Automotive
Suppliers
Aerospace & Defense

24. Academic Excellence can be key for attracting foreign R&D, but …
Does Excellence in Academic Research attract foreign R&D Units?
Academic Excellence can be key for attracting foreign R&D, but …
… often a necessary / not a sufficient condition
Many countries / regions build up strong research base, but
do not attract foreign MNCs
Hypothesis: Foreign MNCs locate where strong local presence
of Benchmark Co´s signals academic excellence
Academic Excellence
in Host country
Home-based MNCs
in related technical
area
Foreign MNCs
with R&D unit
in Host country

25. Globalization of R&D / R&D Offshoring
Global Innovation / R&D Offshoring
Major Trends of Innovation: Increasing Global Disperion of Innovation Activities and New Forms of Open Innovation
Globalization of R&D / R&D Offshoring
Increasing Complexity of Innovation processes
Open Innovation / Partnering and Networking
Innovation moving Downstream / Strong role of Lead customers
New types of Standard-setting Competition
New transnational projects combining joint R&D and
joint standard-setting
Success in Innovation increasingly dependent on Global Presence and on strong Participation in most advanced innovation networks abroad

26. * * * * * Top 10 Leading Industries / World Industrial R&D Spending
Managing Global Innovation
Top 10 Leading Industries / World Industrial R&D Spending
R&D Ex-
penditures
2006
(Mio €)
R&D In-
tensity
2006
(%)
Competitive
Position
Germany
Weak
Leading
Strong
Extent of
R&D Globa-
lization
Competitive
Position
Japan
Industrie
1. Pharmaceuticals & Biotech
2. IT-Hardware & Equipment
3. Automobiles & Parts
4. Electronics & Electrical
5. Software & Computer Services
6. Chemicals
7. Aerospace & Defence
8. Consumer / Leisure goods
9. Industrial Engineering
10. General Industrials
70 523
64 532
60 807
27 139
26 523
17 186
15 991
14 209
9 319
8 868
15.9
8.6
4.1
4.4
9.8
3.1
4.8
6.5
2.7
2.1
* * *
* *
Weak
Strong
Leading
Average
* * *
Very strong R&D Offshoring
* *
Strong R&D Offshoring
Source: EU Industrial R&D Investment Scoreboard 2007, INTERIS Database University of Hohenheim 2007

27. New Forms of Managing Innovation and the Role of
Managing Global Innovation
New Forms of Managing Innovation and the Role of
Network Embeddedness in Foreign Countries
Research based
Innovation
Corporate / Home-based
R&D Capabilities
Multipolar / Globally-
Distributed R&D
Key issue:
Embeddedness in
Research System / Talent
base abroad
Engineering-
Innovation / Integrated
Process Development
& Manufacturing
Advanced Manufacturing
concentrated in Home-base
Multipolar / Globally distributed
Manufacturing & Engineering
Key issue:
Embeddedness in most
Advanced Engineering
locations abroad
Home-based
Lead Markets
Multipolar / Foreign
Lead Market
Innovation / Customer
and Service Inte-
gration
Key issue
Strong network relation-
ships with Lead customers
in „Avantgarde markets“
Japanese Firms
German Firms

28. Managing Global Innovation
Managing Global Innovation Networks: The Case of Automotive
Electronics
Presentation Part 2
Managing Global Innovation
Innovation Networks and Standard-setting
in Automobile Electronics
Managerial Issues for three selected Projects:
Jaspar, Autosar and FlexRay

29. Managing Global Innovation
Managing Global Innovation Networks: The Case of Automotive
Electronics
Presentation Part 3
Managing Global Innovation
Innovation Networks and Standard-setting
in Automobile Electronics
Managerial Issues for three selected Projects:
Jaspar, Autosar and FlexRay

30. Corporate R&D / Product Devt. at German HQ Corporate R&D / Product
Managerial issues
Organizational Issues in Managing Transnational Innovation Networks
Corporate R&D / Product
Devt. at German HQ
Corporate R&D / Product
Devt. at Japanese HQ
Coordination
Problems between
HQ and Japanese
Subsidiary
Coordination
Problems between
HQ and European
Subsidiary
Project team in Japanese
R&D subsidiary
Project team in European
R&D subsidiary
Weak represen-
tation of HQ
agenda in German
nese coopera-
tion projects
Weak represen-
tation of HQ
agenda in Japa-
nese coopera-
tion projects
Cooperative R&D
Project in Japan
Cooperative R&D
Project in Germany

32. Sucessful Global Innovation requires to manage the Full Range
The Global Innovation Value Chain and the Battle for Standards
Sucessful Global Innovation requires to manage the Full Range
of the Innovation Value Chain
The Global Value Chain
University
Education
Basic
Research
Industrial
R&D
New Pro-
duct Per-
formance
Intellectual
Property
Position
Standard
setting
Strength
Manufactu-
ring Ex-
cellence
Lead
Market
Capability
World
Market
Rollout
High Performance Innovating Country
Downstream Innovation increasingly important
Standard-setting and IP-Position most critical !
World Class
(Top 3 Countries)
Competitive
(Keeping pace with
Top 10 Countries)
Developing
(Catching-up
Countries)

33. The Global Innovation Chain and the Battle for Standards
Who defines the Standard in Automobile Electronics: the European OEM or U.S.based High-tech Firms?
Software
(15% R&D
intensity)
High-tech
8-10% R&D
intensity
Semiconductors
(12% R&D intensity)
Automobile
Electronics &
Vehicle IT
5-7% R&D
intensity
Automobile
Suppliers
(Sub-systems &
Components)
3-4% R&D
intensity
Low-tech
Automobile-OEM
(Final assembly &
System integration)
European strengths
U.S. dominated

34. Case Studies of the Battle for Standards are well documented
The Global Innovation Value Chain and the Battle for Standards
Case Studies of the Battle for Standards are well documented
in the Literature
IBM 360
IBM Personal Computer
VHS vs. Betamax
Microsoft Windows
ETHERNET
Mobile Telephony
Internet standards & protocol
In many cases, innovators with the best technology lost out because they were incapable of influencing the standard and / or unable to secure
a strong IP-Position

35. More recently, European firms have taken a more active role in
The Global Innovation Value Chain and the Battle for Standards
More recently, European firms have taken a more active role in
Standard-setting Competition
CAN
MOST
FlexRay
PROFIBUS
PROFINET
Industrial Ethernet
AUTOSAR
. . .
In most of these Cases, European firms have become quite successful in
pushing the frontier and in coordinating the Innovation race and the
Standard-setting race

36. Core members of a Standard-setting Cluster pursue a
The Global Innovation Value Chain and the Battle for Standards
Success in the Standard-setting race requires to follow a stringent
Procedure
Core members of a Standard-setting Cluster pursue a
consistent strategy emphasizing the following elements:
A. Explore basic concepts that are likely to result in an accepted
standard
B. Convince customers and downstream complementors to invest in
widespread application thereby strengthening the standard
C. Enable suppliers and upstream complementors to invest in necessary
equipment, tools and supplies
D. Manage intellectual property (patents, brands, trademarks) for the
major knowledge domains
E. Organize a Club that clearly defines the roles, responsibilities and
access rules for its members

37. . . . as long as the Standard-setting process and IP-Management is
The Global Innovation Value Chain and the Battle for Standards
Specialization along the Global Innovation Value Chain is feasible . . .
University
Education
Basic
Research
Industrial
R&D
New Pro-
duct Per-
formance
Intellectual
Property
Position
Standard
setting
Strength
Manufactu-
ring Ex-
cellence
Lead
Market
Capability
World
Market
Rollout
Science-driven Upstream Innovator Strategy / Downstream Activities Abroad
Downstream Innovator Strategy / Exploiting Foreign R&D Capabilities
. . . as long as the Standard-setting process and IP-Management is
well under Control

38. Innovation strategies of should focus on areas for which Full
The Global Innovation Value Chain and the Battle for Standards
Strategic Implications
Innovation strategies of should focus on areas for which Full
Range of Global Innovation Value Chain can be controlled
Downstream Innovation Competence and Standard-setting
Competence as Important as Research Competence
Innovation Policy should be concentrated on areas for which stan-
dard-setting competence and downstream elements of the value
chain can be secured
Less emphasis on high-tech programs for which global standards
and Business models are determined in other Countries
The New Geography of Innovation: Clusters of Leading Firms,
Suppliers, Standard-setting Clubs and Research Centers
Better linkage between Research community and Innovation-
oriented Business community within a region (country)

39. Ranking der technologieintensiven Sektoren und die Bedeutung
der F&E-Internationalisierung in den Sektoren
R&D-Expen-
ditures in
million $ 2005
R&D as %-
of Revenues
2005
Extent of
R&D Globa-
lization
Industry / Sector
Information-Technology / IT-Hardware
Pharmaceutical, Biotechnology
Automobiles & Parts
Electronics & Electrical
Software & IT-Services
Chemicals
Leisure Goods / Electr. Consumer Goods
Aerospace & Defense
Industrial Engineering
General Industrials
Telecommunication Services
Health Care Equipment & Services
Packaged Consumer Goods
Other Industries (Sum of 23 Sectors)
All Companies / Total of Z Co.
82,368
80,382
75,479
31,551
28,158
19,597
18,356
17,424
10,457
10,693
8,605
7,754
6,825
24,219
421,868
8.2
14.9
4,2
4.8
10.4
3.2
7.0
4.6
2.7
2.4
N.A.
6.4
ca. 2.0
3.8
*** *** **
***
*** High Degree of R&D Globalization
** Medium Degree of R&D Globalization
* Low Degree of R&D Globalization
Sources: INTERIS-Database / University of Hohenheim; The 2006 R&D Scoreboard