The Role of Multinationals in the Globalisation of Innovations - Research Paper Example

The role of multinationals in the globalisation of innovations Introduction Globalisation of innovation is defined as the spread (transfer) of improved or renewed valuable processes, ideas or products from on one place to the other. It could be from one country to another, one continent to another or another from one region to another. Spread of innovations has improved lives and operations in very many parts of the world. The ten types of innovations include business model innovations; enabling process innovations; core process innovations; product system innovations; service innovations; channel innovations; brand innovations; customer experience innovations ; product performance innovations; and network and alliance innovations. There are theories that explain spread of innovations across several parts of the world. The theory is hinged on dispersion of industry due to centrifugal factors. Centrifugal factor theory acknowledges local knowledge spillovers as well as regional agglomeration. Increase in trade and other international economic activities including foreign direct investment, foreign patenting, and cross border research and development alliances (collaborations) as well as international trade plays key role in globalisation of innovations. Innovations can also be transferred to other parts of the world through cross border transfer of blue prints, employees and various technological manuals. There are various sources of innovations. Some people argue that ‘necessity is a mother of innovation’, others believe that some people are born innovators while others argue that innovation is brought by multinational corporations. When new or improved goods, services, operations or processes are introduced to a different country by virtue of existence of multinationals, then it is correct to say that multinational companies globalised innovation. Toyota Motors was ranked number three innovator in the world in process improvement in 2009 by Bloomberg (2010). Improved ways of making vehicles began in Japan and spread to its other branches situated in Australia, Russia, Philippines, China, Egypt, India, Sri Lanka, Canada, Indonesia, Poland, Turkey, South Africa, United Kingdom, United States, France, Brazil, Mexico, Malaysia, Czech Republic, Argentina, Thailand, Pakistan, Vietnam, Venezuela and Portugal. Another example is Nintendo Co., Limited that was ranked number five in product improvement in 2009 by Bloomberg (2010). The improved products spread from Japan to Canada, Australia, United States and Großostheim. Top forty most innovative multinationals in the world that has helped spread innovation globally is listed in table 1 (refer to appendices). In recent years, multinationals companies have been spreading to developing nations of Asia to tap into its large and expanding markets. For example, America’s Agilent Technologies began experiencing growth of its scientific and test equipment in Asia than other continents. Therefore, they had to shift base to Asia where they developed a full division of fully fledged research and development infrastructure to make it highly competitive and produce products that best suit the Asian market. Innovation centers are set in foreign countries to enable multinationals understand the foreign markets well to facilitate their entry. How multinational globalise innovations There are a number of ways in which multinationals spread innovations to other parts of the world from their country of origin. Practically, innovation spreads across countries or continents inform of foreign direct investments where international companies invest in setting up production facilities in foreign countries, merge or acquire foreign companies, move their expertise to work in international branches, corporate social responsibility or sell technology to other countries or companies. In addition, the mere distribution of improved products or services constitutes transfer of innovations from one place to another. Spread of innovations from one place to another is dictated by economic policies of one or both countries, availability of adequate finances, economic conditions, quality and capability of skilled employees as well as company’s policy on spread of innovation among others. Patents have been identified as the sole driver of globalisation of innovation. Multinational companies that sold their technology abroad were protected by patents. Patents induced them to commit their resources and energy to develop improved products and technologies. This is because patents provided security to them and assure them returns from investments they made as they develop them. In addition, patents are vehicles that compel multinational companies to disclose key breakthrough in technology. As a result, it allows for quick and extensive diffusion of technical information from one region to another. Furthermore, patents lay down procedures for orderly development of improved knowledge or inventions. There are various ways in which multinational companies spread innovations. First, multinationals can spread innovations by establishing innovation or research and development facilities in foreign countries. The international companies set up or merge or acquire innovation centres (research and development facilities) abroad to pursue their own interests and in the process help to transfer technology or new products to countries and neighbours to which it is situated. They set up innovation centres in foreign countries to enable them scale up production of new products as well as improve production process to gain competitive edge in both local and foreign markets. Such innovation centres are set or acquired in foreign lands where there are adequate resources (raw materials and skilled labour) or where the market is near. Multinationals in developed countries such as Japan, United States, Russian and United Kingdom have set innovation centres in developing countries. This is because they want to avoid stringent regulatory conditions in the countries in which they are incorporated. Therefore, setting up of innovation centers in foreign countries indicates that multinationals are happy to do research in the emerging markets. For example, General Electric has spent over fifty million dollars to develop a large research and development centre in Bangalore (India). This is one of the biggest health care innovation centers in the world. Cisco is about to complete one billion innovation centre in Bangalore and Microsoft has developed research and development in Beijing. Knowledge-intensive companies are increasing the number of their employees in developing countries. India is hosting about a quarter of Accenture employees. According to Wooldridge (2010), large multinational companies develop innovation markets in the developing economies because developing economies have huge market potential and high economic growth rate. In addition, they are few costly legacy systems in developing countries and resources are relatively abundant and cheaper. For example, about five million and three million people graduate in China and India annually respectively, consequently most multinational have shifted their companies to Asian countries. Most companies that have developed innovation centres are in the pharmaceuticals and air sectors of the economy. Evidence of setting up or acquiring innovation (research and development) centres abroad is foreign direct investments. Foreign direct investment is money or money worth received by foreign countries as assets from mother companies abroad to start and run their operations abroad. Foreign direct investments were evident in early 1980’s where it grew many times as compared to international trade or domestic investments. Secondly, multinationals speed up innovations by increasing competition in foreign or new locations (Climent et al, 2009). As multinational companies take new and high quality products to new locations, they increase rivalry in foreign markets. In response, native (domestic) companies are compelled to scale up their innovations to be able to compete. Developing countries are going down the road that Japan followed from 1950’s to date. They are now hotbeds of innovations as they constantly produce equipments, vehicles, and computers as well as mobile phones that are better in quality and prices. The developing countries are reinventing production and distribution systems and experiment with new business models as they try hard to counteract increasing rivalry for the market. Each year, emerging companies reengineer (reinvent) supply-chain management, branding as well as recruitment and selection. There is fear engulfing small companies and are forced to dream big to survive the competition rivalry inherent in their countries brought by multinationals and even small companies present in their area of operations. Therefore, they innovate because they also fear cheap competition in their back yard. Some companies have embraced Japan’s quality management and production strategy called ‘just-in-time’. This led to significant cost reduction that resulted in cheaper products. Some business and non-business entities have improved their operations from the lessons learned from international companies include ArcelorMittal, Cemex, Infosys and Wipro. The companies that were once small are emerging companies that developed by learning from multinationals. Therefore, ruthless competition increases the pressure for firms to innovate and promote the introduction and adoption of innovation as a way of survival. International competition contributes the element of turbulent and dynamic organizational environment that makes innovation critical for survival. Thirdly, some multinationals develop improved technologies or processes and sell it to the companies in other countries. Such companies make their monies by selling improved technologies only. Companies that developed innovations for sale issued licenses, copyrights or patents. They also entered into mutual agreements and allowed foreign companies produced products or services on their behalf. This is because they may not have adequate resources and assets or barriers of entry were extremely high to start production abroad. As a result, they found it easier and cheaper to sell the technology they had developed. Furthermore, a firm may decide to offer licences or patents to countries abroad if the technology is rapidly changing. This enabled them focus their energies in developing newer or improved technology thus enabling them respond to opportunities faster and easily. Companies like Applied Chemical technology are multinationals companies specializing in the product and process development of chemicals, fertilizers, food and pharmaceuticals. The company is a consultancy company providing product and technical knowledge and experience to companies with money to invest in manufacturing of chemicals, food, fertilizers and pharmaceuticals. They help manufacturing companies develop and scale up their production plans. These companies can travel from one country to another country when their services are needed. Therefore, they spread innovation to countries considered behind in technology in a short while. Another company involved in innovation commercialization is Green Tech America. Fourth, multinationals spread technologies through their contacts. Mobility of highly skilled labour among the multinationals or even to domestic companies spread innovation. Knowledge spill over dynamics between nations and companies transfer knowledge and processes. This happen involuntarily as they display their classic designs and processes in the market place. As a result, other companies study them and try to come up with similar improved products, services and processes to appeal to their customers. This kind of knowledge transfer can be transferred by employees who quit working for international companies and work for their indigenous companies following expiration of contract of employment in international firm or resignation. Fifth, multinationals spread innovation through their corporate social responsibility. Apart from spreading innovation concerning their own products, services and processes across countries, multinationals are funding technologies that are environment friendly in countries in which they operate. They also sponsor bright and needy students in foreign countries where they get best education and exposure that enable them generate ideas that improve processes and products in their home country. Toyota Motors through its fund awarded pupils from Eltang Centralkole in Denmark the International Environment and Innovation Competition in 2010. The competition spurs innovative bedrock of young minds to develop solution for problems facing humanity in societies they live. Pupils of Eltang Centralkole won the competition because they innovated text messages that gave energy saving advice on everything from toilet use to lamp use as well as from hand washing to car washing using latest smart code technology. The pupils made it possible for everyone receiving the message to measure energy that they consume with the tools they use. Toyota fund was created in 2002 with an aim of promoting innovations linked to Toyota’s core business activities and covered environmental awareness, road safety and technical education. Sixth, multinational companies spread innovation through collaboration with similar or complimentary companies in other parts of the world. Multinational companies enter into agreements with companies in other countries to share knowledge and experience in various issues. A number of companies have formed collaborations and alliances. As such they became agents of spreading innovations. Alliances began to become common in 1980’s and were done through cooperation and technological agreements, joint ventures, consortiums or linkages. Alliances were entered for many reasons. First, it was meant to enable multinationals companies penetrate foreign markets. Secondly, it was also meant to develop barriers of entry to prevent many firms from entering a given market. Third, it was meant to utilise complementary assets and fifth, it was meant to generate new knowledge (technology) that was practically impossible without pulling of resources. Multinationals collaborations were common among aircraft companies as compared to other manufactures. Before 1980’s, United States of America had technological and financial capabilities that was unbeatable. As a result, European countries had to initiate and nurture international relationship through intra-European cooperation and towards the end of 1980’s and early 1990’s, there was significant cooperation between different companies that made aircrafts especially the European and American companies. As a result, cheaper, better and faster aero planes were made. According to Niosi and Zhegu (2005), international partnering index indicated that aerospace industry took the lead between 1990 and 1998 as compared to other sectors. Other countries that partnered in aerospace industry include Brazil, India, China and South Korea. Seventh, multinationals companies have spread innovations through outsourcing. Aircraft companies have outsourced subassemblies to their suppliers situated in different parts of the world. Such suppliers make aero plane engines, structures, landing gear and avionics on their behalf. This is because they wanted to concentrate in designing and assembling the aircrafts. Furthermore, they will be able to concentrate in marketing their new aircrafts. Through outsourcing, companies are able to save on production cost and time, which will enable the company produce aircrafts faster and sell them at much lower price. Therefore, outsourcing help spread innovation to different parts of the world where suppliers are situated. Contradictory arguments Setting up companies abroad enables multinational companies to get cheap labour, government subsidies and tax credits. However, this may occur without significant interaction and learning process in distant places and transfer of innovation may not be achieved. In addition, a research on twenty large corporations in Europe, United States of America and Japan indicated research and development activities, which spread created extremely complex and unmanageable architectures (Gerybadze and Reger). Carlsson (2005) argued that most multinationals expanded research and development activities away from home but the technologies used in foreign countries were less science based and depended less on tacit knowledge as compared to those developed at home. Therefore, it is transfer of non-science innovation with less tacit knowledge does not effectively globalise innovation and indicates that multinationals are not willing to transfer innovations. Finally, most innovations developed because of needs of that particular area and multinationals with foreign ideas may not succeed. To sum it all, multinational companies play critical role in transferring innovation from one place to the other. Bibliography Climent, A, Hoffman, T, Vaidya, M & Yu, T 2009, Asia’s innovation advance: Leadership perspectives on a growing innovation hub, viewed 18 March 2011, < http://content.spencerstuart.com/sswebsite/pdf/lib/asInnAdv_pov09.pdf>. Wooldridge, A 2010, A special report on innovation in emerging markets. ‘The emerging world, long a source of cheap labour, now rivals the rich countries for business innovation’, The Economist, 15 April, viewed 18 March 2011, . Mazzoleni, R & Nelson, RR 1998,’the benefits and costs of strong patent protection: a contribution to the current debate,’ Research Policy 27, 273–284 Niosi, J & Zhegu, M 2005, ‘Aerospace Clusters: Local or Global Knowledge Spillovers?’ Vol. 12, No. 1, 1–25 Gerybadze, A & Reger, G 1999, ‘Globalization of R&D: recent changes in the management of innovation in transnational corporations’, Research Policy 28, 251–274 Carlsson, B 2005, ‘Internationalization of innovation systems: A survey of the literature’, Research Policy 35, 56–67 Bloomberg (2010), The 50 Most Innovative Companies, viewed 18 March 2011, . Appendices Table 1 Top forty most innovative multinationals No. Company Type of innovation No. Company Type of innovation 1 Apple Product 21 Walt Disney Customer experience 2 Google Customer experience 22 Honda Motor Product 3 Toyota Motor Process 23 AT&T product 4 Microsoft Process 24 Coca-Cola Customer experience 5 Nintendo Product 25 Vodafone Product 6 IBM Process 26 Infosys process 7 Hewlett-Packard Process 27 LG Electronics Product 8 Research in motion Product 28 Telefonica Business model 9 Nokia Product 29 Daimler Product 10 Wal-Mart Stores Process 30 Verizon Communication Customer experience 11 Amazon.com Customer Experience 31 Ford motor Product 12 Procter & Gamble Process 32 Cisco Systems Process 13 Tata Group Product 33 Intel Process 14 Sony Product 34 Virgin Group Customer experience 15 Reliance industries Business model 35 ArcelorMittal Business model 16 Samsung Electronics Product 36 HSBC Holdings Process 17 General Electric Process 37 ExxonMobil Process 18 Volkswagen Customer experience 38 Nestle Product 19 McDonalds Customer experience 39 Iberdrola Customer experience 20 BMW Customer experience 40 Facebook Customer experience Source: Bloomberg 2010. 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