COMPETITION & CHANGE, Vol. 13, No. 3, September 2009 267–288
The Emergence of China and India as
New Competitors in MNCs’ Innovation
Networks
GERT BRUCHE
Berlin School of Economics and Law, Berlin
The globalisation of business research and development (R&D) was initially confined to
developed countries, primarily to the triad of North America, Western Europe and Japan.
Around the turn of the millennium, multinational companies (MNCs) increasingly started
to include developing countries in their R&D value chain, with a particular preference for
China and India. Based on the scattered yet growing evidence, this paper argues that the
shift of MNC R&D to China and India is still limited in sectoral and regional scope. The
investment is initially more market-seeking in China and more resource-seeking in India,
with a tendency to evolutionary learning-based upgrading in both countries. Despite the
dynamism in these developments, it seems that knowledge integration and appropriation
remains hierarchical and firmly rooted in the triad-based R&D centres. Although alarmist
and techno-nationalist arguments, predominantly from the US, of an imminent loss of
position in the global innovation contest are exaggerated, these developments may
nevertheless herald a historic shift in the global loci of innovation and power.
KEY WORDS Multinational companies, China, India, Innovation, International research
and development (R&D), Globalisation
Introduction
In recent years, the proposition of a new phase or quality in the globalisation of value chains
has contributed to the debate on the political-economic role and the global strategic
management of multinational companies (MNCs). While globally integrated production
and sales networks had already emerged between the 1960s to the early 1980s, the R&D
function of MNCs remained more home-centric and centralised than the other stages of the
value chain (Patel & Pavitt 1992). From the 1990s, globalisation was said to be transforming
the organisation and geography of MNC innovation processes (the R&D function), penetrating the entire value chain – a trend seen as accelerating around the new millennium. The
‘new phase proposition’ is supported by the observation that the R&D organisation of
larger MNCs is becoming more dispersed across different national geographies, i.e. a growing share of MNC R&D is carried out in subsidiaries outside of the original home base and
may be spread over a larger number of sites in different countries. Furthermore, the R&D
processes of MNCs have become more ‘open’ and ‘collaborative’, with new knowledge and
E-mail address: [email protected]
© 2009 the Editors and W. S. Maney & Son Ltd
DOI: 10.1179/102452909X451378
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complementary capabilities sourced outside of the firm, often in international markets
(Arora et al. 2001; Chesbrough 2003; OECD 2008d; Pittaway et al. 2004). While technology
transfer and product adaptation were always necessary conditions for the worldwide
‘exploitation’ of the core ‘ownership advantages’ of the modern multinational, the increasing dispersion of R&D and the more open approaches have mainly been explained as
‘strategic asset-seeking’ activities (Dunning & Narula 1995), with the growing competitive
pressures forcing MNCs to access the best locations for R&D on a worldwide basis in order
to profit from localised expertise, knowledge and talent resources, as well as from knowledge spillovers in regional clusters (Asheim & Gertler 2005; Doz et al. 2001; Feinberg &
Gupta 2004; Kuemmerle 1999; Porter & Stern 2001). The corresponding changes in the
organisation of multinationals’ R&D activities have been described as a transition to
‘transnational’ R&D organisations with differentiated subsidiaries’ mandates leading to the
emergence of ‘global innovation networks’ of subsidiaries and external partners (Bartlett &
Goshal 1990; Birkinshaw & Hood 1998; Ernst; 2005; Frost et al. 2002; Gassmann & von
Zedtwitz 1998; Nohria & Goshal 1997).
While the increasing globalisation of MNC R&D has been noted for some time, a
second development is more recent. Whereas in the 1980s and 1990s the traditional ‘space’
of cross- border R&D was largely confined to the triad region of North America, Western
Europe and Japan, it now seems to be evolving into a ‘new geography’, increasingly extending MNC innovation processes to newly industrialising and developing economies, and for
the most part to Asian countries. After an initial ‘catch-up’ wave in smaller Asian countries
(Korea, Taiwan, Singapore), the last decade has seen, in particular, China and India
entering the global R&D scene. In their attempt to become ‘knowledge-based economies’,
both countries have instituted ambitious high-tech upgrading agendas and are attracting
significant R&D and higher value offshoring activities of MNCs. Their knowledge workers,
particularly their science and engineering professionals, are said to be rapidly becoming
part of a low-cost global talent pool ‘tapped’ by MNCs (Couto et al. 2006; Levin Institute
2005; OECD 2008c).
The ongoing and emerging changes in the mobility and geography of MNC R&D
processes outlined above raise the question of whether or how we are indeed ‘embarking on
a fundamental paradigm change in which both the nature of the playing field and the rules
of the game are changing on a global scale’ (Denis Fred Simon, in Levin Institute 2005).
Does the increased mobility of ‘R’ and/or ‘D’ functions result in globally dispersed (and
integrated) MNC innovation processes as the prevailing form of major high tech industries?
Will the emergence of developing countries and especially China and India as MNC R&D
locations lead to the ‘destruction’ of, in Chen’s words, the ‘the iron cage of the triad’ (Chen
2007), and possibly mark the beginning of a shift in the global hierarchy of knowledge and
power? What would some of the implications be for developed regions such as the US and
the EU-15, and for MNCs which have a home base in these economies, or for MNCs in
general? To deal with these questions and concerns, the paper first looks into the restrictions
and drivers of MNC R&D globalisation and at the evidence for a ‘new quality’ in the
globalisation of this part of the value chain. This is followed by a short review of the status
and dynamics of China and India’s national innovative capacities. Based on a review of the
scattered evidence in a number of case studies and small sample surveys, we then turn to the
shift of MNC R&D towards China and India before evaluating the major roles in R&D
value chains and their evolution. The paper’s findings are then summarised, and some of the
potential implications discussed.
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From Home-based to Global R&D
The Need for Proximity as a Constraint
In innovation theory and economic geography research, learning and innovation are seen
as highly localised interactive processes that can be paraphrased as ‘spatial stickiness’ of
innovation (Ernst 2002, 2006; Gertler 2003; von Hippel 1994; Lundvall 1988). The localised
nature of innovation and knowledge creation has been attributed to the nature of required
interactions in the innovation process and the dependence on certain institutional settings
and milieus. A large part of the required knowledge exchanges in the innovation process
concerns ‘tacit’ knowledge (Polanyi 1967); these may be highly complex and prove more
efficient in face-to-face contact, allowing for a much richer exchange or transfer of knowledge and information. Therefore the creation, development and commercialisation of new
products benefits from proximity, from the geographically close co-location of institutions,
firms and specialists and from ‘knowledge spillovers’ in clusters in the firm’s home country
and its ‘National Innovation System’ (see, for example, Asheim & Gertler 2005; Porter
2000). As a result, the R&D function of firms may be subject to a path-dependent systemic
‘lock-in’ in their national or regional industry-specific innovation system (Narula 2002).
Since innovation processes often consist of interdependent tasks with high transaction costs
where these are executed separately by independent firms, R&D has been originally integrated within the firm, or in the case of the MNC, within its network of subsidiaries (Teece
1988). The need to achieve critical mass or economies of scope in the research organisation
also favoured a concentration in one or few locations, often in the home country. Moreover,
home-based or centralised innovation processes lowered the perceived risks to the firm’s
intellectual property and prevented the ‘leakage’ of important knowledge assets to competitors. Smaller and medium-sized firms may also simply lack the capability or capacity to
manage worldwide dispersed R&D operations. All these factors explain why the ‘upstream’
R&D function had not been ‘globalized’ as early and widely as other more downstream
functions such as production, sales and service.
Drivers and Facilitators of Change
The ‘transactional benefits of spatial proximity’ (Dunning 1998) and the constraints on
running dispersed innovation processes have come to be less important today than they
were two or three decades ago. The fundamental institutional changes in the governance of
the world economic system in the 1980s and 1990s reduced both transaction costs and risks of
doing R&D abroad. The Internet and information and communication technologies have
lowered the cost of communication over distance and facilitated global communication
and knowledge sharing. Vertical industry specialisation and the possibilities of an ever-finer
‘slicing’ or ‘unbundling’ (Baldwin 2006) of value chains have increased the opportunities
for outsourcing and offshoring of services. Modularisation and standardisation (systems
architectures) enabled the integrative management of more distributed value-creating
processes. More often than not, the evolution towards a more globally dispersed configuration of MNC R&D was advanced by cross-border mergers and acquisitions (M&As),
which grew in significance in the mid-1990s (see Figure 1). Some of these M&As were driven
by a growing need to cope with faster innovation cycles by distributing fixed R&D costs
over a larger number of markets or gaining access to new technologies and products. In
other cases, the internationalisation of MNC R&D organisations was a by-product of M&A
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Fig. 1. Cross-border M&As, 1988–2006.
processes undertaken with the aim of market access or for other motives (Cantwell &
Mudambi 2005; Cassiman et al. 2005; Hakanson 1995; Mukherjee et al. 2004).
An underlying driver of greater R&D mobility can be found in the changing nature of
competition. While sustainable competitive advantage was previously thought to be aboveall linked to positional advantages of scale and scope, it is now regarded as being
increasingly based on the ownership of and access to knowledge and the creation and
management of dynamic capabilities (Teece et al. 1997). Moreover, the comparative
advantage of subsidiary locations, including the embedding in regional clusters conducive to
innovation, has become an increasingly important determinant of superior MNC performance (Andersson et al. 2001; Porter & Stern 2001). The need to discover, access,
mobilise and leverage knowledge from many locations around the world has thus increasingly become an imperative for many MNCs (Doz et al. 2001). As the cost of innovation has
continued to rise, access to low-cost talent has become another important driver, especially
for the offshoring of ‘commodity’ services in the R&D value chain to low-cost areas (Couto
et al. 2008; Lewin & Couto 2007; Manning et al. 2008).
Globalisation of the R&D Function in the Triad
During the 1990s, these changes and drivers had an ever-greater impact on the international
configuration and coordination of MNC R&D processes. Although R&D conducted in
foreign subsidiaries is not a new phenomenon, the available R&D foreign direct investment
(FDI) data indicates significant increases in foreign R&D spending of US-based, German,
Swedish and even Japanese MNCs from the mid-1990s on, with a tendency to accelerate
after the turn of the millennium (Belitz et al. 2008; NSB 2008; OECD 2008a, 2008f;
UNCTAD 2005). An OECD study concludes that the internationalisation of industrial
research in the OECD area has accelerated since 1997 and ‘constitutes one of the most
dynamic components of the process of globalization’ (OECD 2008a). According to this
study, foreign-controlled R&D in the OECD area rose (in absolute terms) by 110 per cent
between 1995 and 2003. In all OECD countries except Spain, the R&D expenditure of
foreign-controlled firms increased by between 0.4 and four times as much as firms under
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national control (ibid.: 13–14). The R&D expenditures of affiliates of foreign companies
located in the US increased faster than overall industrial R&D in the US between 1999 and
2004 (2.1 per cent annual average rate after adjusting for inflation, compared with 0.2 per
cent) (NSB 2008).
One of the more comprehensive survey studies of MNC R&D strategies covers the
period from 1992/1995 to 2001, and includes results from 209 technology intensive firms.
This survey supports the claim of a significant internationalisation of R&D activities in that
period and shows a major increase in the firms’ reliance on external sources of technology
(Reger 2002; Roberts 2001). The study also finds that the more integrated (‘transnational’)
organisation of international R&D by establishing ‘global centres of excellence’ in foreign
subsidiaries was a breakthrough occurring during those years. Another study has confirmed
the increasing dispersion of MNC innovation processes (Doz et al. 2006). Many other
surveys and studies similarly confirm increasing or even accelerating R&D internationalisation for technology intensive firms and the more collaborative and networked nature of
MNC R&D processes during the 1990s and early 2000s (e.g. Boutellier et al. 2008; EIU
2004, 2007; Jaruzelski & Dehoff 2008). A somewhat different perspective on the process of
R&D internationalisation was introduced in studies of service offshoring (captive offshoring
to subsidiaries or offshore outsourcing) by, among others, the Offshoring Research
Network project of Duke University, and researchers from Copenhagen Business School.
Several studies provide evidence for an evolutionary ‘upgrading’ from ‘offshoring of
commodity services’ towards higher value ‘innovation offshoring’ of selected parts of the
R&D value chain (Couto et al. 2006; Lewin & Couto 2007; Lewin et al. 2008; Manning et al.
2008; Maskell et al. 2006). While in the 1980s and 1990s the internationalisation process was
largely confined to the triad region of developed economies, the turn of the millennium saw
a shift of MNC R&D to developing countries, mainly to China and India. Before we take a
closer look at this geographic shift, we will briefly examine one important determinant for
the inclusion of both countries in MNC innovation strategies: their innovation infrastructure
or national innovation systems that, together with cluster-specific environments, determines
the status and prospects of their ‘innovative capacity’ (Furman et al. 2002).
China’s and India’s Rising Innovative Capacity
The superlatives characterising China as a ‘technological superpower’, ‘innovation juggernaut’ or ‘global magnet for R&D’ (Chen & Dean 2006; Droege & Company 2007; Sigurdson
et al. 2006) and India as an ‘emerging innovation giant’ (Forrester 2008) are partly due to
both governments’ massive efforts to promote their countries’ innovative capacities and
‘leap-frog’ into a knowledge-based society. After continuously emphasising science,
technology and higher education in its five-year plans, China launched an extremely
ambitious 15-year Programme for Science and Technology for 2006–2020 that evokes a
‘Great Leap Forward’: by enhancing its capacity for ‘independent innovation’, China is to
be turned into a world leader in innovation in just 14 years (Schwaag Serger & Breidne
2007). Indian efforts to nurture science and technology capabilities and to establish elite and
then later mass higher education institutions started in the 1950s and continued with
renewed vigour in the 1990s. In comparison to the previous plan, India’s Eleventh Five-year
Plan (2007–2012) foresees a five-fold increase in spending on education, the funding of 30
new central universities and the establishment of five new Indian Institutes of Science, 15
new elite Indian Institutes of Technology (IITs) and of Management (IIMs) and 20 new
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Indian Institutes of Information Technology (for general overviews on India’s innovation
policies, see e.g. Bound 2007; DST 2003; Dutz 2007; Herstatt et al. 2008; Stahlecker et al.
2008).
China’s overall domestic R&D spending already ranks it second in the world for
purchasing power parity (for this and the following, see Table 1), although R&D productivity is still significantly lower than in developed countries (Mu 2008; OECD 2008b). Both
TABLE 1
Selected indicators of the national innovation infrastructure, China and India
Input indicators
R&D spending (billion US$)
R&D spending as % of GDP
R&D spending: world rank (US$, PPP)
R&D spending share in: public
institutions/firms/universities (%)
Number of science and engineering
graduates working in R&D
Number of Chinese-/Indian-born
population with tertiary degrees
in the USAa
Number of enrolled students in regular
universities and colleges, millionb
Output indicators
Number of annual engineering and
technology graduatesc
Estimated share of university graduates,
employable in MNCs after graduation (%)d
Number of science and engineering
articles (global share), Science Citation
Index
Number of invention patents filed locally
in China (SIPO)/India (IPO)
Number (share) of patents filed in the US
(USPTO) by citizens from the countries
Number (global share) of triadic patent
families filed by citizens from the
countries
China
India
1995: 4.2
2006: 44.8
1995: 0.6
2006: 1.4
2006: No. 2
1996: 41/37/13
2005: 22/68/10
1995: 752,000
2006: 930,000
–
2004: 5.9
1995: 0.6
2004: 0.85
2003/04: No. 9
2000: 457,000
2000: 669,600
1997: 3.2
2006: 18.5
1994/95: 6.1
2005/06: 11.4
2005/6: 669,000
2005/06: 281,000
2003: 10
2003: 25
1995: 9,061 (1.6%)
2005: 41,596 (5.9%)
1995: 9,370 (1.7%)
2005: 14,608 (2.1%)
2000: 51,747
2007: 245,161
2007: 772 (0.99%)
2000/01: 10,000
2007/08: 35,000
2007: 546 (0.7%)
1995: 42 (0.05%)
2005: 433 (0.82%)
1995: 12 (0.03%)
2005: 132 (0.25%)
2002/03: 75/20/5
2003: 118,000
a
Arora and Gambardella (2005: 19); bMoE (2008) and Agarwal (2006); cGereffi et al. (2008); dFarrell
et al. (2005).
Other sources: OECD, World Bank, National Science Foundation, USPTO (US), SIPO (PR China),
IPO (India) and author’s calculations.
THE EMERGENCE OF CHINA AND INDIA
273
countries have a significant stock of R&D staff (China’s ranked second in the world after the
US, with 1.3 million) and have expanded their university systems at an unparalleled speed,
albeit with notable quality problems outside the elite sector (Agarwal 2006; FNBE 2007). In
terms of student numbers and science and engineering graduates, China and India have
outpaced all other countries, including the US. Both have extensive ‘diaspora networks’,
with the highly qualified ‘overseas Chinese’ or ‘non-resident Indians’ displaying an increasing inclination to return (‘brain circulation’), providing a link into high-tech clusters in
developed countries and a ‘talent base’ for MNCs, new ventures and the new Chinese and
Indian multinationals (Kuznetsov 2006; Saxenian 2006). Since both countries have a strong
network of public research organisations (e.g. Chinese Academy of Sciences; Council of
Scientific and Industrial Research), the government-backed set-up of R&D displays some
similarities (Conlé et al. 2008; Stahlecker et al. 2008). However, China has transformed its
innovation system into a more business-centric structure, while the Indian system is still
dominated by the activities of government research institutes, many of which focus on
defence-related research. Both countries have actively nurtured the development of attractive regional clusters over long periods (Basant 2006; Chen 2008; Prevezer & Tang 2006;
Saraswati 2008) and created an infrastructure for the protection of intellectual property that
is gradually providing a level playing field for MNCs (Barret & Price 2008; Ordish &
Adcock 2008).
Although the gap in innovative capability and maturity of national innovative systems
to major developed countries such as the US, Japan or Germany is still very large, the
increases in publications and in patenting point toward an exceptionally fast, exponentially
developing capability building process in both countries, with China as the clear frontrunner
(see Table 1 and Altenburg et al. 2007; Frietsch 2007; Meckl et al. 2007; Mitra 2007; NSB
2008; OECD 2008b; Stahlecker et al. 2008). These developments suggest that the overall
infrastructural conditions for conducting MNC R&D activities in China and India have
been upgraded significantly, though with some delay in the latter case, and the ongoing
changes point to further rapid improvements in the future. These changes provide a basic
prerequisite for the shift of MNC R&D, which will be discussed in the next section.
Shifting Directions of R&D foreign direct investment
While the available evidence shows that MNC R&D has become more mobile and more
international, the geography of multinationals’ innovation activities until the late 1990s was
largely confined to the developed countries of the triad regions of North America, Western
Europe and Japan. European MNC R&D investments went primarily to the US and other
European countries, American MNCs invested in Europe and to a smaller extent in Japan,
and Japanese MNCs invested mainly in the US, albeit at a low level. Apart from a few newly
industrialising economies (e.g. South Korea, Taiwan, Israel and Singapore), North
America, Western Europe and Japan were home to virtually all the leading clusters of
high-tech industries. Developing countries were ‘suppliers of brains’ and talent (‘brain
drain’), especially to the US, but were not generally considered suitable locations for
research.
Location decisions on MNC R&D only started to tilt more decisively towards new
territories outside the developed countries and MNC R&D spending in developing countries
only began to increase significantly towards the end of the 1990s and after 2000 (UNCTAD
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TABLE 2
Source and destination of R&D investment by MNCs 2002–2005 (US$ millions)
North America
Asia Pacific
European Union 15
Other*
Total
Source of
investment
%
Destination of
investment
%
Net home
investment
24,781
7011
13,807
3746
49,345
50.2
14.2
28.0
7.6
100.0
7078
28,560
11,001
2705
49,345
14.3
57.9
22.3
5.5
100.0
–17,703
21,549
–2806
–1041
–
*Includes the other European countries, Latin America, the Caribbean, the Middle East and Africa.
Source: Adapted from Huggins et al. (2007: 442).
2005). An analysis of the four-year period 2002–2005, using data from 1906 R&D FDI
projects, indicates a growing shift of R&D investment to the Asia Pacific region (see Table 2).
In that four-year period almost 58 per cent of new R&D FDI went to Asia Pacific, with 78
per cent of the total of 368,000 jobs created by these investments located there (Huggins et
al. 2007: 442. This data only lists the share for single countries in the Asia Pacific region as
the number of R&D projects (not spending). On that basis, the overwhelming share of the
Asia Pacific projects in these four years went to developing Asia. India leads the worldwide
ranking by number of projects (25.6 per cent) followed by China (17.2 per cent). The other
Asian Pacific countries have much lower shares of 3.8 per cent (Singapore), 2.6 per cent
(Taiwan) and 1.7 per cent (Malaysia). Japan (1.8 per cent) and Australia (2.2 per cent) have
comparatively low shares (ibid.: 444).
Survey results also indicate the rise of China and India as new locations for MNC
R&D. Two surveys by the Economist Intelligence Unit in August 2004 (300 senior
executives in 99 MNCs) and November 2006 (300 senior executives in 100 firms) found that,
although the highest proportion of overseas R&D is still spent in the US, respondents put
‘China’ (first) and ‘India’ (third) after the ‘USA’ (second) as their top destinations for future
R&D expansion or as the best locations; in both surveys, the UK and Germany are ranked in
fourth and fifth place (EIU 2004, 2007). The survey by Doz et al. (2006), mentioned above,
considered the ‘dispersion’ of R&D by MNCs and found that, for US companies, the share
of R&D sites based in the US and Western Europe fell from 59 and 24 per cent in 1994 to 52
and 22 per cent in 2004; while the share of R&D sites in China and India grew in the same
period from 4 to 11 per cent and 4 to 7 per cent, respectively (Doz et al. 2006). Similar results
are reported in another study of 250 MNCs (Thursby & Thursby 2006). A recent survey
of the 1000 largest corporate R&D spenders found, for 2004 to 2007, that 83 per cent of
newly-opened R&D sites and 91 per cent of R&D staff increases were located in China
and India (Jaruzelski & Dehoff 2008). Taken together, all these findings point towards a
dramatic ‘shift’ of MNC R&D spending to locations outside of the triad, with China and
India as the new geographic focus.
Based on the scattered evidence from various micro-level surveys, the pattern of MNC
R&D investments in China and India shares at least three dimensions: a fairly similar timing
and dynamic of R&D centre openings; similarities in the sectoral/industry composition, with
a focus on ICT industries; and the preference to locate in very few high-tech clusters. In both
THE EMERGENCE OF CHINA AND INDIA
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countries, R&D centre openings and expansion surged after the turn of the millennium in a
‘gold-rush’ style movement (Schwaag Serger 2007). While China only had some 50 MNC
R&D labs in 2000, various Chinese sources refer to some 1100 at the end of 2007, and even
foreign observers reporting lower numbers nonetheless confirm a dramatic upsurge in MNC
R&D investment (e.g. Boutellier et al. 2008; Droege & Company 2007; OECD 2008b;
Schwaag Serger 2007). In India, there is a similar surge in MNC R&D centres, from around
100 in the early 2000s to almost 600 at the end of 2007 (Mrinalini & Wakdikar 2008; TIFAC
2005; Zinnov 2008). In the same period R&D (offshore) outsourcing to Chinese or Indian
vendors or contract research organisations also increased exponentially (Couto et al. 2008).
The lion’s share of MNC R&D activities in China and India are clustered in the information
and communications technology (ICT) sector (for a definition, see OECD 2008e), with
pharmaceuticals and the automotive sector accounting for much of the rest (Gassmann &
Han 2004; MoC 2008a; MoST 2007; Mrinalini & Wakdikar 2008). Other industries
(chemicals, machinery, aerospace etc.) have a more limited relevance. In both countries,
MNCs chose to locate their centres in very few prominent regional clusters. Beijing and
Shanghai together attracted 60–70 per cent of MNC R&D, whereas Bangalore is home to
more than 50 per cent of the Indian MNC R&D sites, followed by Pune and the National
Capital Region (together 30 per cent) (Sun & Wen 2007; von Zedtwitz 2004, 2006; Zinnov
2008). In the following section, we look at some of the explanations for the ‘suddenness’ of
the shift described above and discuss the possible role of the new R&D locations in MNCs’
global R&D value chains.
China and India in Multinationals’ R&D Value Chains
From a more general perspective, the rather sudden and massive ‘take-off’ of MNC R&D
investment in China and India after the year 2000 can be understood as the result of a
complex interaction of several driving and enabling factors that reached a historic ‘tipping
point’ around the turn of the millennium and shortly afterwards:
•
•
•
The two most fundamental drivers are, on the one hand, the increasing certainty in the
1990s of China’s lasting role as a global lead market and as a world manufacturing centre
in information and communication technologies (ICT), as well as a number of other
high- and medium-tech industries. On the other hand, China and India’s significant
investments into their ‘intellectual infrastructure’ acted as a significant ‘pull’ factor (see
the second section above). Hence, the principal causes of the rapid establishment or
expansion of MNC R&D bases after 2000 relate to the pressure to secure positions in
strategically important growth markets and/or the intention to capitalise on the large
and growing (low-cost) talent bases of both countries (Thursby & Thursby 2006; EIU
2004, 2007).
The pressure to ‘grab a piece of the cake’ early on was increased by several factors:
the fierce competition for positional advantages in a hyper-growth environment; the
growing influence of local subsidiary managements due to the increasing strategic
importance of ‘their’ countries; and the tendency to mimic the behaviour of industry
leaders (‘imitative behaviour’) (Sun & Wen 2007).
Host government policies provided another important ‘pull’ factor. The Chinese
government often proved able to successfully utilise its growing bargaining power to
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Fig. 2. MNC subsidiaries in China and India: evolution of R&D missions.
•
‘trade market access for technology’ (for instance, requesting local R&D to accompany
manufacturing investments in key sectors) (Blanchard 2007; Liu & Dicken 2006;
Oslanda & Björkman 1998). Both China and India also offered various forms of specific
incentives and infrastructure support to attract R&D FDI.
Finally, there were a number of individual events that functioned as additional ‘catalysts’
in the shift; for example, the massive involvement of Indian programmers in solving the
problems in the run up to the Y2K problem, and shortages of computer scientists and
engineers in the US due to changes in visa policy after 9/11 (EIU 2007; Manning et al.
2008).
The missions of the Chinese and Indian sites in MNC R&D value chains show a certain
development and evolutionary upgrading over time (Chen 2007; Medcof 2007). Taking a
broad perspective and summarising observations from various surveys, scattered case
studies and press reports, we can identify four principal findings (see also Figure 2):
1. MNCs rarely shift high end parts of their R&D value chain in the initial stage; instead,
they initially locate R&D activities of lower technological value added in China and
India.
2. The conduct of R&D in China is initially focused on asset exploiting R&D, complementing and supporting the localisation of the company’s existing products and manufacturing processes. In line with China’s growing market scale, importance and increasing
subsidiary capabilities, there is an evolution toward new product development for the
local market. In contrast, entry into India is oriented towards using particular assets (the
Indian talent base) and therefore augmenting the global R&D resources through
offshoring selected ‘slices’ of the global value chain.
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3. On the basis of learning and local competence building processes in subsidiaries (as
well as contract research organisations), some local MNC R&D organisations have
broadened their missions to simultaneously include asset exploiting and augmenting
activities, and have also assumed activities of higher technological value added, such as
completely localised product development. In a growing number of cases, global or
regional technology acquisition or product development mandates have been given to the
R&D subsidiaries (see for China, e.g., Chen 2007, 2008; Medcof 2007; Schwaag Serger
2007; Sun et al. 2006).
4. MNCs seem to be very conscious about the risks to their intellectual property, are
providing safeguards against IP loss and applying suitable means to ensure the
appropriation and protection of their innovations (e.g. Holstein 2007; Thursby & Thursby
2006).
Since three major industries (ICT, pharmaceuticals, automotive) comprise the overwhelming share of MNC R&D globally, and in China and India in particular, the principal
findings above need to be elaborated for these specific areas. The ICT sector accounts for
the largest part of the geographic shift of MNC R&D to China and India, a finding which
reflects the sector’s size and a more global R&D footprint than the two other industries
(Jaruzelski& Dehoff 2008). Although the sector embraces a diverse set of manufacturing
and service industries, the R&D processes share some common characteristics, i.e. fast
product development cycles, vertical specialisation and ‘modularisation’ of the R&D value
chain, and open and collaborative innovation processes. Successful innovations in these
industries are often simultaneously dependent on the integration of higher value-added
R&D into regional high-tech clusters and the proximity of development activities to lead
customers. The differences in the initial inclusion of China and India into R&D value chains
(asset exploiting motives for China versus an asset-augmenting rationale for investments in
India) and the evolutionary paths of R&D subsidiaries generally correspond to the principal
description given above. The evolution towards global (or regional) mandates is the most
advanced in this sector (see, e.g., Arora & Gambardella 2005; Brown & Linden 2008; MoC
2008b; Popkin et al. 2007). R&D investment is dominated by leading US, Japanese and
Korean MNCs (and few major MNCs from Europe). The US-linked ‘diaspora networks’ of
overseas Chinese and Indians are a particular feature that supports an especially closely
knit-form of collaborative and networked innovation processes in ‘transnational knowledge
communities’ across the Pacific (Kuznetsov 2006; Saxenian 2005).
Despite the strong shift of R&D activities to China and India, the MNCs have several
levers to keep control of their IP. As most ICT industries are ‘fast cycle industries’, the
permanent need to create innovations or keep up with new technological requirements
provides some protection against imitation since imitators would have to build ‘dynamic
innovation capabilities’ rather than imitate quickly outdated products. Recent case
studies of ITC MNCs’ R&D activities in China have also shown how the ‘hierarchical
segmentation’ and ‘modularity’ of the R&D value chain and the concentration of
‘architectural integration capabilities’ in the home bases are deliberately applied to minimise
potential knowledge spillovers to domestic and international competitors in developing
countries with weak IP regimes (Quan 2008). Other studies based on patent analysis
have shown that the core IP in two ICT industries (semiconductors and wireless telecom)
generated in R&D centres all over the world is first appropriated and patented in the home
countries of the leading MNCs (Macher et al. 2007; Di Minin & Palmberg 2006).
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The pharmaceutical industry including biotechnology is the second most important
sector in shifting R&D activities to China and India. Pharmaceuticals is a science and
innovation driven industry, with long development cycles of more than ten years from the
initial identification of a new drug candidate in early research (drug discovery) through
preclinical development (mainly animal testing) and clinical development (several stages of
clinical trials with humans) (for an overview, see Gassmann & Reepmeyer 2005). Even if
MNCs wanted to introduce fully-developed and registered drugs in triad markets, they
would have to conduct local ‘registration trials’ to obtain a drug licence for the Chinese or
Indian pharmaceutical market. Hence, establishing a local trial management capability in
China and India has been a condition of market entry. The significantly larger and
much more rewarding Chinese pharmaceutical market has resulted in this type of ‘assetexploiting’ R&D function being far more advanced in China, while the low-price and
heavily regulated Indian pharmaceuticals market was considered less attractive. In addition
to the more adaptive R&D activities, both countries have meanwhile emerged as important
offshoring centres for (inhouse or outsourced) preclinical R&D, large clinical trials, and
contract manufacturing (Bhalla et al. 2006; PwC 2008; Wadhwa et al. 2008). This ongoing
move of certain ‘slices’ of the R&D value chain to both countries is mainly driven by the
desire to lower R&D costs and speed up the development process. As in the ICT industries,
‘hierarchical segmentation’ and the modular nature of these activities limits the risks of
knowledge spillovers and IP loss, as does the concentration of integration capabilities in the
triad.
While these activities tend to be of ‘lower technological value added’, through the
selective inclusion of China and India in their global drug discovery and development
networks, a number of pharma majors have recently moved into innovative R&D activities
(PwC 2008). Companies such as GlaxoSmithKline or Bayer HealthCare in China or
AstraZeneca in India are committing significant research funds to selected disease areas.
With these initiatives, the firms are not only trying to tap important emerging knowledge
bases in specialised areas, but also demonstrating that they are ‘good corporate citizens’ to
the respective national health authorities – a move that may support their positions in the
local market. Although knowledge spillovers to potential domestic and international competitors cannot be avoided, the risk of imitation is not only limited by the improving patent
protection in both countries. There is a period of ten to 15 years of development from the
identification of drug candidates in early drug discovery research to the eventual launch of a
new drug. Only MNCs with significant financial resources and global development and
registration capabilities are in a position to eventually bring the drug candidate to the global
market.
Although the automobile industry is not as R&D intensive as the pharmaceutical
industry or the ITC sector, it is, primarily due to its size, the third largest industrial R&D
spender on a global scale. Automotive development cycles generally last between three and
four years, requiring a complex ‘bundle of interdependent problem solving’ (Fujimoto &
Thomke 2000) across a large range of components and technologies. Despite the global
reach of most major car manufacturers and suppliers, the complex development process of
automobiles is still very much ‘nested’ in the triad countries’ geographic clusters around one
or several leading car manufacturers (OEMs) with design centres, specialised suppliers,
engineering service firms, research institutes and various other complementary institutions
(e.g. Schamp et al. 2004; Sturgeon et al. 2008). China is the second-largest automobile
market in the world after the US, and the leading recipient of FDI from the OEMs as well as
THE EMERGENCE OF CHINA AND INDIA
279
automotive suppliers, far ahead of India’s car market which is at a much earlier stage of
development. Leading suppliers and OEMs have established local R&D centres to help
adapt models to the Chinese market (Noble 2006). The government’s ‘market access for
technology’ trading has been particularly strong and active in this sector (on this policy of
‘obligated embeddedness’, see Liu & Dicken 2006) and some of the R&D centres of OEMs
have been dubbed ‘PR&D’ (Noble 2006: 18). Increasing cost pressures and faster
innovation cycles have also led to a significant increase in the offshoring of software and
engineering activities to both China and India. Although the core of new product
development, as well as the bulk of activities, is still firmly anchored in triad regions
(Jaruzelski & Dehoff 2008), these developments may be the early signs of a more substantial
move of R&D processes in the automotive industry. As new innovation triggers such as the
development of new power train technologies, auto electronics or radically re-engineered
low-cost models combine with the offshoring of routine R&D and increasing market
demand, the gravity centre of automotive innovation may gradually migrate to China and
India, though certainly only over a longer drawn out period (A. T. Kearney 2008).
Concluding Thoughts: a New Geography of Innovation?
Early signals of change to come
While MNCs’ R&D value chains were originally home-centred and immobile, they have
become far more internationally dispersed over the last two decades. For a considerable
time, this process was confined to the triad world region of North America, Western Europe
and Japan. In the later 1990s and especially after 2000, we can identify a new phase of
R&D internationalisation, with the extension and migration of MNC R&D to developing
countries, primarily China and India (and some other developing countries in Asia).
Although this shift justifies the ‘new phase’ label, terms such as a ‘gathering storm’ (NAE
2006), a ‘fundamental paradigm change’ (Levin Institute 2005), a ‘break in the iron cage of
the triad’ (Chen 2007) or ‘next generation offshoring’ (Lewin & Couto 2007) somewhat
exaggerate the actual status and changes in the ‘geography of innovation’:
•
•
Although there is no doubt about the shift in additional annual cross-border flows of
MNC R&D to China and India (R&D FDI), the dominant share of R&D resources and
of total annual industrial R&D investment still remains in the triad region, which suggests
that we are still far away from a major relocation. The new R&D activities of MNCs in
China and India are concentrated in the ICT sector and it is only in this single (though
important) sector that China and India have achieved a significant global share of MNC
R&D activities (Jaruzelski & Dehoff 2008: 59). From a global perspective, MNC R&D
spending of other industries in these two countries (e.g. pharmaceuticals, biotechnology,
automotive, chemicals etc.) is still rather small – though increasing rapidly.
The overwhelming share of R&D activities of MNCs in China and India is of lower
technological value added and still not aimed at the core of innovative technology creation
in MNCs. However, a growing number of MNC R&D centres in China and India
are moving up the R&D value chain and becoming involved in activities of higher
technological value added, often assuming global or regional technology or product
mandates in addition to their roles as local market supporter and contract research
centre. The extent, depth and speed of this process are still an open issue and a significant
area for future research.
280
•
•
•
GERT BRUCHE
There is a major difference in the role of China and India in MNC value chains, since
R&D investments in China more often than not support the local market position and
local manufacturing, whereas in India MNCs seek access to talent and efficiencies to
support globally integrated R&D processes. Although the latter is also found in R&D
activities in China, it is less prominent than in India.
It is also important to note that multinationals’ R&D activities are extremely
concentrated in few outstanding regional clusters, which ‘customise’ local institutions and
business practices to MNC needs (Manning 2008). The other cities and urban areas lag
far behind these locations in terms of technological infrastructure and sophistication.
For several reasons, the widely publicised risk of ‘IP loss’ has not so far been a major
barrier to the MNC R&D shift to China and India. A large share of the activities can
be classified as ‘offshoring’ lower value-added activities for which the ‘higher-order’
integration capability remains in the home base of the MNC. In the case of innovative
activities, the results are often channelled through the home-based patent offices,
managing the worldwide (triadic) patenting process. The results of more basic or early
research may need to undergo an extended development process with global capabilities
which would-be imitators rarely posses. Finally, complex R&D processes with the
requirement of many complementary resources and competences are still dependent on
regional clusters in the developed countries.
On the basis of these insights, it can be concluded that the shift of MNC R&D to China and
India is still in an early stage. Although a ‘new geography’ of the MNC innovation value
chain seems to be emerging, it is still largely characterised by a hierarchical organisation of
the R&D value chain. At the spatial level, this corresponds to a hierarchy of regional centres
(Cantwell 2000; Sturgeon 2003), with leading clusters of the triad region at the apex and a
very limited set of Chinese and Indian ‘innovation nodes’ at lower levels. In this sense, the
‘iron cage of the triad’ is not yet broken and the ‘gathering storm’ is still rather distant.
Historic Shift in the Longer Term
Despite this rather sober assessment, the question still arises as to whether such a
‘geographic shift’ heralds a fundamental change in the global hierarchy of knowledge and
power. Will we see a much more significant shift of higher value, ‘mission critical’ MNC
R&D moving to China and India, including a much broader involvement of industries
beyond the ICT sector? Or will this be a long-term drawn out evolutionary process
stretching over decades? There is, as yet, no final answer, although there are various
contrary forces to be considered. The continuing shift of future market growth to both
countries and Asia as a whole will tend to increase rather than decrease the need for
MNCs to develop products and production processes suited to these markets. Their R&D
subsidiaries will continue their learning and competence-building processes, facilitating the
assumption of more demanding R&D mandates. The oft-cited skill shortages (e.g. The
Economist 2007; Farrell & Grant 2005) and rising cost of R&D personnel may be a
decelerating factor, but at least in the case of China it is likely that the ongoing quality
initiatives in the education system will soon bear fruit. The vibrant scene of bi-cultural
entrepreneurs and the inflow of foreign venture capital will provide further stimuli and
interesting collaborative opportunities for MNCs. Although the national innovation
systems of both countries are still immature (OECD 2008b; Stahlecker et al. 2008), both
governments’ strong commitment to and belief in science and technology act as strong
driving forces.
THE EMERGENCE OF CHINA AND INDIA
281
While all these factors would act as ‘accelerators’, there are also significant uncertainties. The development process in the automobile industry is deeply intertwined with the
evolution of complementary local clusters and so any changes in the innovation system’s
geography will need time. The increasing complexity of managing ever-more dispersed
R&D value chains presents a more general challenge (Criscuolo & Narula 2007). Problems
of increasing communication and transport costs, important information ‘lost in translation’, staff turnover and a general loss of control might well trigger a backlash leading to a
return to more centralised processes – and such a scenario would not necessarily favour
either China or India. Finally, apart from the potentially disruptive effects of the global
financial crisis on the economies of both countries, a shift of mission critical R&D to China
and India is sensitive to political risks and policy changes due to geopolitical conflicts or
internal strife.
Another more general question relates to the impact of the ‘new geography of innovation’ on the position of China and India as competitors in the global market for goods
and services. Here, different interpretations are possible, depending on the concrete
circumstances in which the ‘shift’ takes place. From a more ‘techno-nationalist’ perspective,
it has been argued by Chinese and Indian officials and observers that MNCs’ R&D
investments weaken or at least do not support the ‘catch-up’ process of domestic industries
since valuable local knowledge is appropriated by MNCs and transferred out of the country
(e.g. Shi 2007). Moreover, MNCs absorb the local R&D talent into their organisations,
leading to a kind of ‘in-situ brain drain’, depriving local companies of badly needed staff.
Alarmist arguments, especially in the US, paint a picture of the imminent loss of the
country’s technological leadership, eroding comparative advantage and ushering in an
end to the traditional north–south pattern of trade, where advanced countries dominate
high-tech while developing countries specialise in less-skilled manufacturing (Freeman
2005; Prestowitz 2006). The ‘globalisation of the talent pool’ concept proposes a global
labour market for the highly skilled, where Chinese and Indian science and engineering
graduates compete against their counterparts in the US and Western Europe in much the
same way as the low-wage workforces of China and other developing countries compete
against unskilled labour in the West.
Is this world view of a zero-sum game a reasonable framework for understanding the
implications of the geographic shift? There is no clear cut answer to this question, since it
depends on the specific circumstances and locations by which innovations progress from
early knowledge and idea generation to application in usable products and processes. A
further factor here is where the new products are used in creating ‘consumer surplus’ or
productivity enhancements. In his recent book, Bhidé (2008) points out that the answer to
the question of whether breakthrough R&D results abroad (e.g. in China or India) help or
hurt consumers and employees at home (in his case, the US) depends on whether the knowhow is internationally ‘tradable’ (or, one might add, whether it can be ‘appropriated’ by an
organisational unit in the home base(s) in the triad). If this is the case, then it does not matter
so much where the cutting-edge research is undertaken. The commercialisation of this
knowledge in the form of products or productivity-enhancing process improvements may
take place far away from the locus of its generation. If, on the other hand, the high level
know-how developed in China and India is embodied in exported final goods and services
(and the knowledge itself does not travel), then the country of origin secures the profits from
the invention and the wage income associated with the production of related goods and
services.
282
GERT BRUCHE
Apart from the question of comparative advantage and accrual of benefits, one should
not lose sight – at least for the (important) ICT – sector of another implication of the
changes observed. To a large extent the wave in ICT R&D offshoring has been driven by
US-based MNCs that also form closely-knit collaborative R&D networks with the Chinese
and Indian ‘disapora’ community. The huge ‘talent reserve’ to which these US firms have
access is the result of two decades of the US government’s high level immigration policies.
The recent upsurge of MNC R&D offshoring to China and India can therefore also be seen
as supporting the ongoing shift towards a new economic ‘centre of gravity’, including the
Pacific Rim and India. Due to their privileged access to these resources and their nodal
position in these networks, US MNCs may gain an important ‘collaborative advantage’
(Lynn & Salzman 2007) over their European and Japanese competitors. In this sense,
the implications of the new geography of innovation may be the harbinger of a new
technological world order.
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