Presentation to Linkoping.ppt
The Rise of Asian Innovation:
Business and Policy Implications
Professor Mike Hobday*
KITE Open Lecture
October 2010
Linkoping Sweden
*CENTRIM (Centre for Research in Innovation Management)
University of Brighton, Falmer
Brighton, BN1 9RF, UK
e-mail: [email protected]
Tel: 01273 772726
Fax: 01273 685865
CENTRIM Centre for
Research in Innovation
Management
Lecture
1.  Three global ‘leadership’ (e.g. US) innovation
strategies: disruptive, open and solutions
innovation (i.e. selected examples)
2.  The rise of Asian Innovation – ‘latecomer’
innovation strategies – how East and South East
Asian firms catch up with leaders
3.  Implications for business and changing national
advantages? So what for Sweden/European
countries? If time, so what for other developing
nations?
Please comment/ask questions
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Conclusions: Asian Innovation
"   Paths and patterns of catch up highly distinctive – a
new historical approach to economic and
technological development (e.g. sub-contracting/OEM
route to development a new institutional innovation)
"   Great deal of variety in Asia, despite similarities in
export success, and images of similarity/homogeneity
(e.g. Korea/Taiwan vs Malaysia/Singapore)
"   Major differences between currently emerging nations
(e.g. China and Vietnam) and earlier ones (e.g. Korea
and Taiwan); today, markets and technologies more
globalised, business models/ideas travel much faster;
stages of catch compressed into short time periods
(vs 20-30 year ‘hard slog’)
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Conclusions: Asian Innovation
"   In longer run, Asian nations likely to continue to
improve their innovative capability in manufacturing/
hardware
"   Asian exports, drivers of economic growth, – but
highly specialised (especially in electronics)
"   Asia will remain weak in many area of software/
capital goods/services/Internet/knowledge-intensive,
high technology industries
"   Sweden and other leading nations need to maintain/
accelerate their technological/product leads in areas
of local advantage, complementing and benefiting
from Asian growth trajectories
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Part 1: global innovation perspectives
1.Open Innovation
"   Prof Henry Chesbrough - Center for Open
Innovation at Berkley USA
"   Key argument - in a world of distributed
knowledge - mistake for major corporations to
rely on in-house research and innovation
"   Key strategies – access, imitate, purchase,
license IP/R&D etc from external sources –
build up the internal abilities to do this
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Open Innovation: Key principles
"   Work with smart people/companies wherever
they are to create value jointly ‒ use internal
R&D to absorb external R&D
"   If internal innovative resources are not core to
the business model - exploit commercially
outside the firm
"   Reject old model of closed innovation ‒
focusing on internal IP ‒eg. large internal
R&D labs ‒ too insular
"   Instead exploit distributed external knowledge
and technology
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Open Innovation: Research
"   Leading firms which define their business/
innovation models around OI include:
"   Procter & Gamble, IBM, Rolls-Royce, Intel,
Lucent, Eli Lilly, Xerox, Pilkington, Du Pont,
"   Across various products and technologies ‒
pharmaceuticals, software, drugs, polymer
chemicals, float glass, computer services/IT
etc.
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2. Disruptive Innovation: Key Principles
"   Clayton M. Cristensen (Harvard University) - some
technologies are disruptive in character – they can
have a disruptive impact – overturn market
"   A product, process or service underpinned by a
"disruptive" technology (rather than "evolutionary") –
e.g. the rise of the PC (vs mainframe) – or the
Internet - can cause ‘great firms to fail’
"   Christensen and others realised that disruption can
occur even without a radical new technology (e.g. low
cost airlines in Europe) – so ‘disruptive innovation’
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Disruptive Innovation: Impact
"   ‘status quo’ challenged by new players, new market
segments, new consumers, new technological base
"   ‘normal’ strategic focus is on most profitable
customers/products – BUT this can lead firms into a
path of repeated incremental innovation (doing
better) – leaving them open to threat of DI (doing
different!)
"   e.g. internet downloading of music – vs major music
CD producers - ‘stuck’ in old business model – don’t
know how to respond – or EasyJet – budget airlines
began as a small low niche (hard to recognise) – but
grew massively
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Disruptive Innovation: Innovator s Dilemma
"   Often major firms can see the disruption
coming but find themselves paralysed
"   What should an ‘incumbent’ do? Christensen
argues: **recognise/be aware - **invest in
innovative companies – **respond carefully
(e.g. BA low budget flights) – acquire the
capabilities/talent to respond – maybe set up
a new business – IF it goes against the
culture of the firm to react
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3. Innovation in solutions
"   During 1990s large US/European manufacturers (e.g.
IBM, GE, RR, HP) manufacturing hardware profits
declined ‒ more value in follow on services or
solutions ‒ combinations of services with hardware,
consulting, finance, maintenance, distribution
"   shift downstream by manufacturers into large
service markets (e.g. CocaCola gained control of
70% of its U.S. bottling and distribution from making
coke ‒ Ford went into car finance and sales)
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Integrated solutions
"   Research: Davies, Brady and Hobday (2006) Sloan
Management Review - examples, IT/software, trains,
telecom systems, flight simulators and aircraft
engines:
 
 
 
 
 
GE ‒ from train making to maintaining/servicing trains
Thales ‒ from flight simulators to into pilot training
Ericsson ‒ from telecom hardware to installing telecom
systems, consulting and supplying services
Rolls-Royce ‒ from engines ‒ to providing airlines with
power-by-the-hour (maintain, repair and upgrade engines
over many years)
IBM from hardware to e-commerce/IT services/consulting
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e.g. Siemens (Germany) - solutions strategies
across most of their products and systems:
• Power plants
• Baggage handling systems
• Postal automation systems (letter and parcel sorting)
• Power distribution systems
• Steel works
• Intelligent buildings
• Intelligent traffic systems
• Railway automation
• Combined cycle gas turbines
• High speed trains
• Electricity network control systems
• Automated production systems
• Rail signalling/control systems
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Integrated Solutions: Challenges
"   Solutions strategies both ‘open’ (working with users,
partners) and ‘disruptive’ – challenging the business
models of competitors
"   Hard to adjust: new capabilities, cultures and
structures needed to move out of manufacturing
‘mindset’ (supply centred) - to customer-facing
market driven culture/mindset
"   Takes a long time e.g. IBM, started moving
downstream in 1993 under new CEO Louis Gerstner
– today still working on this!
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Part 2: The Rise of East Asian Latecomer
Innovation
 
Context: ‘leadership’ innovation fine but what
about firms in ‘latecomer’ or ‘developing
countries – often have much weaker
technology base and smaller local markets
 
East Asian research - how did ‘latecomer firms’
from Korea, Taiwan, Hong Kong, catch up –
and acquire the latest technology?
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Traditional Asian Debate: ‘State vs Market’
"   View 1: stresses market mechanisms- investment,
interest rates/savings, macro-stability, 'getting prices
right' (e.g. World Bank, Paul Krugman, Alwyn Young)
"   View 2: Government policy all important (Amsden for
Korea; Wade for Taiwan) - state guidance, 'governing
markets' - 'getting prices wrong' - intervention
"   problem: very little (if any) analysis of firms and their
catch up strategies - yet firms responsible for
competitiveness, exports, innovation (not ‘markets’)
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The East Asian ‘latecomer’ firm
"   What is a ‘latecomer firm’? - two sets of typical
developing country disadvantages:
1. Dislocated from key international sources of technology,
science and R&D
2. Cut off from demanding users, leading international markets,
clusters, networks, industrial districts etc.
'Latecomer' firms not only different from Western and
Japanese ‘leaders’ but also 'followers‘ – latecomers
operate from outside of the world innovation centres
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Samsung:
Sales US$160bn
2007
HQ: Seoul
Samsung – entered electronics exports (transistor radios and B&W TVs in
1969 in a JV with Sanyo (from insurance, property and paper) – by 2007
spending US$5.6 billion on R&D - 2725 US Patents (2nd after IBM) –
123,000 employees; 17 R&D Centres around the world – a leader in
semiconductors, mobile phones PCs, TFT-LCDs etc.
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Approximate Phases of Technology Catch
up (Korea and Taiwan) in Electronics
Phase 1 (early 1960s to mid 1970s): assembly stage
"   Firms (such as Samsung, Hyundia, L-G, Tatung) began
assembly of standard, simple goods for US and Japanese TNCs
- often in sub-contracting arrangements (so called ‘OEM’)
"   OEM = TNCs supply designs/technology – buy products and
distribute in the developed country markets (e.g. consumer
electronics, computing, electrical appliances).
Phase 2 (mid 1970s to mid-1990s): manufacturing innovation stage
"   Local firms mastered manufacturing process innovation, learned
product improvement skills – But TNCs buy, brand and
distribute + gain the value added
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Approximate Phases of Technology Catch up
Phase 3 (mid-1990s onwards) - Innovation stage
"   New product design capabilities, lots of in-house R&D, own
distribution networks and brands – caught up with world leaders
in mobile phones, DRAMs, PCs, TFT-LCDs etc.
Key firm level features
"   20-30 years of ‘hard slog’ of technological learning, beginning
with simple mechanical assembly
"   OEM (e.g. 70-80% of total Korean electronics exports in
early-1990s) - a channel for technology transfer - and exports –
and economies of scale - TNC buyers provided advice on
capital equipment, engineering, training, management etc.
"   Despite success, firms still weak in software, basic research,
and capital goods
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Key Features of East Asian Innovation
"   Phases only a rough approximation – not all firms
followed the same stages – many failed
"   innovation incremental (not radical) – improvements
to manufacturing and products - mostly low cost
‘behind the R&D frontier innovation’ (e.g. better
product models)
"   not just imitation – some novel business models
(TSMC in Taiwan a world leader in semiconductor
‘fabrication only’; ANAM Korea, a world leader in chip
assembly/test only)
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Summarising the Transition of Korean/Taiwanese Firms:
from OEM to ODM to OBM
Technological
Transition
1960s/1970s Learns assembly
Market
Transition
OEM
process
for standard,
simple goods
Foreign TNC/buyer
designs, brands and
distributes
(simple goods)
1980s
Learns design
and product
innovation skills
TNC buys, brands
and distributes
TNC gains PPVA*
Designs new
products
& conducts
R&D
Local firm invests in
distribution,
branding
gains PPVA
ODM
1990s
OBM
OEM = original equipment manufacture;
ODM = own-design and manufacture; OBM = own brand manufacture;
PPVA* = Post-production value added
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Profile of ‘Average’ East Asian Latecomer Firm Today
Technological
Transition
1960s/1970s Learns assembly
Market
Transition
OEM
process
for standard,
simple goods
Foreign TNC/buyer
designs, brands and
distributes
(simple goods)
1980s
Learns design
and product
innovation skills
TNC buys, brands
and distributes
TNC gains PPVA*
Designs new
products
& conducts
R&D
Local firm invests in
distribution,
branding
gains PPVA
ODM
1990s
OBM
OEM = original equipment manufacture;
ODM = own-design and manufacture; OBM = own brand manufacture;
PPVA* = Post-production value added
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Direction of Movement of East Asian Latecomer Firms
Technological
Transition
Market
Transition
Learns assembly
process
for standard,
simple goods
Foreign TNC/buyer
designs, brands and
distributes
(simple goods)
Learns design
and product
innovation skills
TNC buys, brands
and distributes
TNC gains PPVA*
Designs new
products
& conducts
R&D
Local firm invests in
distribution,
branding
gains PPVA
OEM = original equipment manufacture;
ODM = own-design and manufacture; OBM = own brand manufacture;
OEM
ODM
OBM
PPVA* = Post-production value added
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Comparing East Asian firms with standard (MIT) Model
High
Product Innovation
Process Innovation
Rate of
Innovation
Technology stimulated
Low
Uncoordinated process
Product performance max
Cost
Stimulated
Systemic Process
Product cost min.
Stage of Development/Time
R&D ‒Intensive/Low volume
Intensive/high volume
Manufacturing
Basic Model: Utterback and Abernathy (1975) - Utterback and Suarez (1993) - Tushman etc
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Comparing East Asian firms with standard (MIT) Model
High
Product Innovation
Process Innovation
Rate of
Innovation
Technology stimulated
Low
2000s/1990s
.
1980s
Cost
Stimulated
1970s
1960s
Asian Stages of Development: Reversing the Cycle
R&D ‒Intensive/Low volume
Intensive/high volume
Manufacturing
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South East Asia: TNC Model
"   A different latecomer model - Singapore, Malaysia,
Thailand, Indonesia, Philippines, Vietnam
"   Rapid growth/also successful – but few local exporting
firms – mostly subsidiaries of Transnational Corporations
(TNCs)
"   E.g. Seagate Technology Thailand – began hard disk
drive (HDD) assembly with 50 employees in 1982 - first
foreign HDD producer in Thailand – today employs 35,000
staff, biggest HDD producer world wide – advanced
process innovation capability
"   Various appx ‘stages of development’ with Singapore in
the lead, followed by Malaysia and Thailand, others
lagging behind (e.g. mostly basic assembly in Vietnam
and Philippines)
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TNC subsidiaries – another model of technology catch up
Global Corporation
Future (5-10 years)
• Blue sky research
• R&D for new products and processes
• New product development
• New process development
• Minor product improvements
Latest vintage
• Improvements to current equipment/processes
• Ongoing production (training, engineering)
Changes to existing TNC
or old stock
Subsidiary
(eg Malaysia)
Malaysia
1975
2005
2020
Thailand
Singapore
1975
2005
2020
1975
2005
28 2020
East vs South East Asia – Common Patterns
"   BOTH East and South East Asia (local firms and
TNCs), technology activities shifted from cheap
labour, simple goods to high-tech products - disk
drives, PCs, semiconductors – driven by exports
"   innovation occurring - but mostly ‘behind the R&D
frontier’ - initially manufacturing driven – then minor
product design - firms still weak in R&D, capital
goods etc.
"   Formidable manufacturing-centred capacity: the
‘factory of the world’ – very difficult to compete
directly (e.g. in electronics manufacturing)
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China
"   China following a similar path with BOTH local firm
and FDI/TNC-led growth (60-70% of exports), but
with added advantage of (A) very large local market
(not present in other Asian countries) (B) massive
cheap labour/technical labour supply
"   Circumstances today very different: more
globalisation, faster transfers of capital and business
models – both threatening and complementing other
Asian economies
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Part 3: Implications for other developing nations
"   For other developing nations, no direct model to
follow/copy – each country needs to exploit its own
distinctive advantages (as did Asia)
"   Guiding principle: Latin America and poorer nations
need to complement/not copy Asian (and other
growth) poles
"   Need to identify areas of distinctive advantage with
large market potential (e.g. could be supplying high
technology, resource-based products to China etc,
like Brazil)
"   Always need to move up the value and technology
chain via innovation - not rely on cheap labour (cost
only ever an ‘entry ticket’)
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Business and Policy Implications
"   Western leaders: today’s conditions of market
uncertainty - strength of recovery still in question etc.
"   Innovation needed in policy and business strategy essential to react and respond, create new
opportunities, survive the market downturn (e.g.
leading Asian businesses re-focusing on ‘middle of
the pyramid’ markets: India, Turkey, Brazil, Middle
East etc).
"   Lower cost/more robust mobile phones/TVs etc.
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Conclusion: Innovation in Corporate Strategies
"   Three examples (and others in literature) are simply
ones popularised by academics – many other
strategic innovations ‘out there’ (e.g. knowledge
integration as a focus of strategy) but no empirical
research on prevalence, extent/diffusion or variety
"   Leading firms should understand the principles of
different types of innovation BUT should never copy/
imitate – no best ‘model’ for others to follow
"   Instead, need to identify own areas of distinctive
capability and advantage and build on these – can be
an innovation ‘fast follower’ (with modifications) or an
innovation leader – but direct imitation a recipe for
failure/indicator of lack of corporate creativeness
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Implications for Businesses in DCs
"   Asia’s ever growing strength in manufacturing,
hardware (e.g electronics) very hard to challenge
"   But relative weakness in software/capital goods/
resource based industries
"   other developing nations need to develop their own
distinctive technological/product leads in areas of
local advantage
"   cost competition alone is unlikely to produce
sustainable success – innovation in products, service,
technology and strategy remains a key factor in
survival and success
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THANK YOU!
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