A Critical Appraisal of Global Innovation Management Literature:

Is There Really a "Trend Towards a Global Innovation Network"?

Internationales Management, Forschung, Entwicklung

Hauptseminararbeit

by Marcus Matthias Keupp

Paper presented at doctoral seminar 10,134 session
"Innovation Management in Transnational Companies"

Universität St. Gallen

Abstract

Most literature on international R&D has employed a static and MNC-centered view, assuming some kind of evolutionary process by which R&D activities are internationalized, typically with some labs adapting products to local markets first, and whole research facilities being implemented on a world-wide basis last to finally profit from a "global innovation network". This article challenges such a view, asking for a thorough and critical investigation. It will be shown that there are many counter-examples questioning the traditional view of evolutionary development and "optimal" organization that hovers around the "centralisation - decentralisation" dichotomy. Instead, a look on several contingency effects and empirical phenomena is proposed to gain interesting insights as to the limitations of many traditional models. The case of China′s economic emergence provides a final illustration for these arguments. The conclusion shows how theoretical concepts known from other disciplines may serve as an analytical framework that can take into account more aptly the developments alluded.

1. Some Allegations in Literature With Respect to R&D Internationalization

It is purported that there is "a trend towards the international R&D network". According to this view, R&D internationalization started with the search for additional markets, then tapped cheap labor for production, localized existing products and finally ended with a fully deve loped R&D function [1]. This approach is an application of concepts developed before [2,3]. It is claimed that there is a general trend towards more cooperation and more decentralization of R&D. Given this trend, "five types" of R&D organization are claime d to be emerging. The company undergoes a linear development process across these types that ends with the emergence of a global R&D network [4]. This development process has mainly been explained by intra-firm optimization of global cost and transaction cost functions such as to minimize total organizational cost. This can even imply positive external effects by affiliates mutually learning from one another, thus increasing the firm′s competitiveness [5]. This view is consistent with models based on transaction cost arguments [6] and with the process school′s development model towards the "transnational" firm [7].

R&D internationalization motives other than cost were mainly summarized under the headlines demand, supply and external factors [8,9,10,11,12] and the categories local markets, resources and synergy potentials [13]. Indeed there has been evidence that market size [14] is an important location decision factor and that foreign R&D investment is correlated to general host country advantages [15]. In Germany, the share of external R&D expenditures spent offshore almost doubled in favor of expenditures within the industrial sector [16]. This "trend towards R&D internationalization" seems to contradict classical findings [17] that advocate inventors be granted local market monopolies by patents, logically implying R&D to be most centralized to maximally exploit economies of scale and to secure vital knowledge from uncotrolled outflow. Historically, this was indeed the case, the former German chemicals conglomerate IG Farben being an example for a Schumpeterian monopolist. Some have tried to explain this paradox by resorting to a "trend that R&D had to adjust to world-wide dispersion of knowledge and technology creation", with increasing competitive pressure for new and innovative products and the fusion of formerly unrelated technologies reinforcing this trend [18]. Discussion on this paradox has been ample and has often drawn on arguments known from general internationalization theory [19,20,21].

Another reason for this paradox is seen in the fact that increased competition from within and outside their industries has forced companies to globally source technological knowledge and human resources (i.e., researchers that can generate knowledge valuable to the firm). However, there is also a spatial dimension of this problem, because it is purported that the relevant knowledge needed is not available everywhere, but rather globally dispersed in certain regions or clusters ("centres of excellence"), which are characterized by a high rate of new technology output. 

Thus, the "hunt for the best heads" would lead to the establishment of local research and development, mainly in order to absorb critical competencies from centres of excellence and to support organizational learning on a global scale [22,23]. This standpoint basically views R&D internationalization as a sourcing problem, thus returning to competitive advantage theory [24], with technological advantage in the form of superiority of knowledge to form the essential asset basis of MNCs′ competitiveness in world markets [25]. However, the notion of R&D internationalization to be a linear development process or a "goal" in a design process to be reached ultimately is questionable given the latest developments in global economic order. In addition, empirical evidence related to the abovementioned arguments has been debatable . Therefore, the remainder of this paper is organized as follows:

Section 2 will critically review the allegations introduced above, presenting empirical evidence that does not go together with existing R&D internationalization theory. Section 3 will take into account the emergence of China to show further phenomena hardly recognized by existing theory. Section 4 will introduce concepts known from other disciplines that can help to develop new theory that more aptly responds to real-world developments. 2. Critical appraisal: Methodological, Historical, Size and Technology Effects The arguments mentioned above effectively trace back to the "centralisation versus decentralisation" and "local versus global" discussions which assume that a company "chooses" its "optimal" international R&D setup, and "decides" on the degree of (de-)centralization and globalisation. These allegations have been reviewed in the context of international R&D organization [26]. They have been discussed amply and controversially [27,28,29,30,31,32,33,34,35,36,37,38]. The case is not that clear, however, as empirical as well as theoretical phenomena are showing.

Firstly, there is ample evidence available as to the methodological flaws of many studies advocating certain organizational designs. Most of these have dealt with non-randomly selected small samples of first-world MNCs within the Triad only, providing rather subjective case studies and anecdotes, not taking into consideration macroeconomic and international trade relations effects. Some have not provided any data at all. Extensive review and proof for this fact is available [39,40,41,42,43,44,45,46]. In addition, they made little effort as to provide valid inferential conclusions that could be drawn from an adequate sampling design taking into consideration size, industry and technology effects. Studies that did so could show that there are cases where "non-globalisation" is efficient [47,48].

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