Reflection Paper on National Innovation System
Professor: Rajiv Krishnan Kozhikode
Group 5
Afrakoma Amponsah 301150605
Xiaoyi Zhuang 301114713
Reflection Paper on National Innovation System
Penrose’s article mentions some of the advantages of foreign patenting to
developing countries which included encouraging invention and innovation, protection of
innovations and the transfer of technology.
Penrose expresses her doubt when it comes to patents encouraging innovation in
developed countries, encouraging foreign investment in developing countries and the
extent to which patents can help with the transfer of technology. In this critique, we wish
to assert the extent to which we agree with Penrose and also identify some of the issues
raised which we do not fully agree with.
Penrose mentions in her article that, “patented machinery, is often obtainable
only from firms holding the patents, who may refuse to sell in the absence of patent
protection. Thus, the patent becomes a necessary, though naturally not a sufficient,
condition for the transfer of technology (Penrose, 1973, p.771).” Penrose’s opinion about
patents not being a sufficient condition for the transfer of technology has proven to be
right in this 21st century. This is because there are many MNEs who have established
subsidiaries and Research and Development centres in countries where they are fully
aware that patent laws are not strictly enforced. These MNEs set up the subsidiaries and
R&D centres there because of the benefits that they receive. Some of these benefits
include:
1) The growing number of skilled labour in developing countries - For example, there
were 48000 PhD candidates enrolled in science and technology in Chinese universities
between 1995-2006. Additionally, these skilled labourers usually are way more
affordable than those in the developed countries. This increase in the availability of
cheaper skilled labour in the field of research has drawn MNEs to these less developed
countries (Li & Kozhikode, 2009).
2) Conducive research and investment environments created by the government - Some
emerging economies provide adequate conditions for the establishment and operation of
subsidiaries and R&D centres. These include having tax benefits to for these MNEs. As a
result, these countries have shown growth in their research industry. Their government
also invests financially into research. For example, average annual rate for investment
rose beyond 30% between 1960 and 2005. The Chinese government also encourages
R&D collaboration between their firms and MNEs which has helped to place China as
the leading destination for foreign direct investment (Li & Kozhikode, 2009).
3) Technological competence of the developing countries - The growing interest of
emerging economies wanting to collaborate with MNEs caused them to improve upon
their technology so as to attract MNEs to work with them. Also in order for the MNEs to
stream line their products to suit the taste of the local people, they may need some
technologies of the local people (Li & Kozhikode, 2009).
4) I would like to add that the rising discovery of resources in developing nations has also
caused MNEs to establish subsidiaries and R&D centres in developing nations. Some
MNEs want to build their research centres close to their resources. In order to achieve
that, some of them have to take an integrative technique approach (making promises to
the foreign government and hiring local people). By this approach, MNEs can gain the
favour of local governments and also gain local responsiveness. As a result, these firms
build R&Ds, share knowledge and get involved with the community.
5) Changing MNE requirement - Finally, there has been a need for MNEs to adapt their
products to suit the taste of the locals in whichever country that they’re doing business.
Also the need for open innovation (Chesbrough, 2003 and Chesbrough and Appleyard,
2007) has created the research collaboration between MNEs and local firms. Innovations
arise from “open innovations” as firms are realizing that they cannot just look internally,
but also have to look externally. Companies who only rely on local research only may not
be able to establish product innovation to fulfill the needs of different consumers. Hence
there is a need for partnership with other global firms, local firms in other countries,
independent innovators and academia (Li & Kozhikode, 2009).
The above reasons for the establishment of R&D centres and subsidiaries in emerging
countries despite their knowledge of the weak patent law enforcement goes to show that
there are more factors that MNEs consider before investing in the emerging countries.
Foreign investment may sometimes have nothing to do with the existence of foreign
patent rights in emerging economies.
All these interactions with the local firms especially through joint venture,
establishment of R&D centres and fully owned subsidiaries have caused the transfer of
knowledge from the MNEs to the developing nations. In this day of open innovation,
some MNEs may not be so concerned about knowledge spill overs during joint ventures
because they are also benefiting massively from these collaborations. However there are
some firms who are very much concerned about the fact that knowledge spill over could
make them less competitive. Such MNEs and local firms have adapted other strategies on
how to balance leveraging resources from their home countries through collaborations
and avoiding knowledge spillovers. Again, this goes to show that patent rights are not
what drive MNEs to establish R&Ds or subsidiaries in developing countries. The MNEs
protect their knowledge by:
1) The organizational structure perspective - The structures most often used by MNEs
when investing in emerging markets are joint ventures and wholly owned subsidiaries. In
order to prevent proprietary knowledge leakage, MNEs need to keep R&D activities inhouse. Full ownership of the organization helps MNEs to manage its resources and asset
while developing strategies to create goods and services that the locals want. As a result,
the wholly owned subsidiary choice will better protect a firm's tacit knowledge and
strategic resources than a joint venture. When MNEs want to invest in an emerging
economy market without risking knowledge spillovers, then its better they wholly owned
subsidiaries rather than alliances with local partners to protect their valuable, tacit,
knowledge resources (Li & Kozhikode, 2009).
2) Another solution is establishing less vulnerable R&Ds in these countries at first to
know how the political system works and culture differences. As they gain more
experience with and confidence with these societies, they will feel more comfortable
establishing complex R&Ds in the countries (Li & Kozhikode, 2009).
3) Additional solution is a method of co-opetition. An MNE may be worried about a
knowledge spill over, so it corporates with another MNE in an area where it does not
compete with it. For example two firms could be competing in the product market but be
cooperating in the factor market. This method helps MNEs better leverage their resources
and at the same time helps protect their intellectual property from leakage (Brandenburg
and Nalebuff, 1996)
Despite all these strategies to avoid knowledge spillovers, they still do occur, either
against the will of MNEs or by their will (which is through open innovation)
Intellectual property (IP) rights are often either under-developed or under-enforced
(Rawski, 1994). The culture of the people from emerging economies may encourage
knowledge spill overs. If they are from a collectivist background they may encourage
sharing and so IP laws may not be so strictly enforced. Moreover, access to the right
technology was considered a key input to encourage entrepreneurial activity for most of
the emerging countries during the initial stages of economy development. Local
government wanted the domestic companies to have the opportunity to learn these
technologies and ideas from MNEs. However, strong intellectual property protection
would have inhibited the locals from learning and copying these technologies. So IP
protection was not the top priority of the government during the initial stages of
development. Hence, creating a society where IP laws were underdeveloped.
This goes to support the assertion that the existence of patent rights may
encourage MNEs to do establish R&D centres in emerging economies. However, MNEs
recognize the possibility of knowledge spillovers because of the weak patent right laws.
Therefore, the existence of patent right laws does not exactly encourage MNEs to
establish R&D centres in emerging economies.
However, Penrose’s findings that patent rights will cause MNEs to establish
themselves in emerging economies and facilitate the transfer of technology have proven
to be right to some extent. Patent rights might not have encouraged the establishment of
MNEs in emerging economies. However, the establishment of MNEs in developing
nations has caused the transfer of technology to the developing nations. As a result of the
cheap labour in emerging economies such as China, MNEs were outsourcing their lowend value chain activities from emerging economies. This has caused the emerging
economies to be equipped with “process innovation” which is a form of transfer of
technology. Process innovation is more of a core technology which is borrowed from
MNEs (Li and Kozhikode, 2008). However, in order for the LDCs to gain legitimacy
they will have to move from “process innovation” to ‘product innovation” (Tellis and
Golder, 1996). Companies need to combine the learning of new technologies with the
company’s capacity and resources to develop their own products that satisfy the needs of
their consumers. They must be able to offer new yet affordable products rather than
cheap and unimproved products which they imitated from others. Their products might
even tend to become obsolete if they don’t innovate. Some firms that caught up through
imitation of the products of others have moved on through innovations and then patented
their innovations. Many of such firms are in developing nations and that explains the
growing number of patents owned by developing countries these days. Companies, who
seek to improve, invest in research for long term innovation will always gain a
competitive advantage in the market. MNEs can move from the “process innovation” to
the “product innovation” through research and development either alone or through
collaborations and acquisition of resources.
Through the innovations and eventually patents by the emerging economies,
MNEs no longer own 90% of the patents in the developing nations (Penrose, 1973).
Figure 1 below confirms this fact. This goes to show the process and product innovation
and hence patent registration that are taking place in developing nations.
Fig. 1
Source: WIPO, 2007. Patent Report: Statistics on Worldwide Patent Activity (2007 edition). Geneva: World
Intellectual Property Organization. As cited in Jiatao Li and Rajiv Krishnan Kozhikode’s article “Developing new
innovation models: Shifts in the innovation landscapes in emerging economies and implications for global R&D
management”
Although patent rights are not a major reason for which a country may establish a
subsidiary or R&D centre in an emerging economy, it could be said that it might
encourage a firm to establish a subsidiary or R&D centre in an emerging economy.
There are many other major factors that could cause an MNE to establish R&D
centres and subsidiaries in an emerging economy.
Additionally, there are a lot of advantages that an emerging economy can gain if
an MNE establishes R&D centres and subsidiaries in their country. Research and other
collaborations will lead to the transfer of technology, imitation and hopefully innovation
of the products.
References
Penrose, E. (1973). International patenting and the less-developed countries. The
Economic Journal,83(331), 768-786.
Li, J., & Kozhikode, R. K. (2009). Developing new innovation models: Shifts in the
innovation landscapes in emerging economies and implications for global r&d
management developing new innovation models. Journal of International Management,
(15), 328-339.
Brandenburg, A.M., Nalebuff, B.J. (1996). Co-opetition. New York, Doubleday.
Li, J.T., Kozhikode, R.K., 2008. Knowledge management and innovation strategy: the
challenge for latecomers in emerging economies. Asia Pacific Journal of Management,
(25), 429–450.
Tellis, G., Golder, P. (1996). First to market, first to fail? Real causes of enduring market
leadership. Sloan Management Review, 37 (2), 65–77.
UNCTAD. (2003). FDI policies for development: National and international perspectives.
World Investment Report.