The Key to Being an Innovative Organisation - Example

Innovation and Change Business The Key to Being an Innovative Organisation is R&D Research and development is a meansof increasing innovation know-how. It takes place in company research labs with the aim of coming up with novelties that can be incorporated in production so as to boost company sales. Technological and money-making innovation is essential for the globalized world market. This article will focus on the steps that globalized companies have taken to incorporate R&D and what role this has played in boosting their performance. Cosmopolitan organisations are outsourcing their R&D facilities around the world for various reasons. Carrying out research activities is cheaper in Low-Cost Countries (LCCs) in terms of hiring the scientists and engineers to carry out the research. In home countries, the qualified personnel come at a high cost.1 this move has been adopted by many companies and as a result, has become the global trend. Consequently the LCCs professionals have become costly with the increase in demand. Taking an example of India, the wage rate for the high end workers has risen by 12% from 2005 to 2008 and is projected to have a 25% increase by the year 2020.1 Globalization in R&D is a talent search strategy. With the increase in the number of scientists and engineers around the world, companies are looking for fresh ideas. Different states have different specialities. India for example has focused on automotive engineering and China is known for her electronic novelties. This has made it easier to pinpoint the source of a particular talent.1 Firms position their R&D sectors in regions that are growing as markets. Regions that have a high demand for a particular product are prospective R&D centres. The companies are going to the people and customizing their products as per the customers’ needs using their indigenous expertise. For example, in designing the climate control and stereo systems to be controlled from the back seat in a country like China which largely employs chauffer services. Firms that are aggressive in establishing a firm footing in R&D globalisation are working towards excellent performance. Companies that outsource more than half of their R&D receive huge margin proceeds in the long run. This is because they in turn get to approach the market from a global scale. Such companies tend to lay more focus on their R&D resourcing overseas rather than their overseas market. This works to their advantage because they will grow faster than their competition.1 this growth is however, not guaranteed. It is reliant on the business setting. The environment must agree with the corporate strategy; the success lies in the execution plan. The R&D facilities should have a huge network. Large facilities do not contribute to better results. Smaller facilities effectively make use of the networks and resources. Such facilities should be able to tip the economies of scale to their advantage. Infrastructure to support IT and communication systems should be in place at all sites. Any form of strain would be damaging to efficiency.1 Auto Company Auto companies have a tendency of spending largely on R&D. In the year 2007, on aggregate, the auto industry recorded a 3.7% spending of the total sales on R&D. USA, Germany and Japan had contributed to 83% of the R&D revenue. A larger portion of this was spent in countries abroad (Global Innovation 1000, 2007). Visteon Corporation (USA) has a total of 18 R&D facilities of which only 3 are based in the US. Computing and Electronics Unlike vehicles, electronic products do not have a particular market. These companies therefore lay emphasis on novelty rather than sales. These firms are spreading their R&D facilities across the developed and the developing countries. A company like Hewlett-Packard spends only 20% of its budget in its home country (US) the rest is outsourced. The company targets the areas with the best research personnel and they set up labs in such areas. HP is adopting a portfolio based research system which involves the splitting of the research process into 3 parts: pure research, applied research and product development research. R&D plays a major role in manufacturing industries. Graduates from universities carry out applied research in government laboratories and corporation research laboratories. Innovative firms can therefore be linked to R&D performers which are more branched out and universal in their orientation. R&D is more practical in product rather than process innovation. This is evident in the number of manufacturing companies that have adopted it. The number of firms with patents is almost equal to that of those that are bringing novelties into the market.2 Marginal Impact of R&D Continuous use of R&D depends on whether one is dealing with a low-tech or a high-tech sector because their orientations are different. Factors that come into play are: cost push, demand pull and foreign exposure. For hi-tech industries R&D grows proportionally with diversification while for the low-tech sector it all depends on the market segment. Therefore it is evident that the cost push, demand pull and foreign orientation have no noteworthy role when it comes to the hi-tech sector. Information source is a key factor when it comes to R&D. The information could be from the clientele or from the research institutes. In the hi-tech industries, the information from the research institutes is relied upon and the low-tech sector heavily relies on the feedback from the customers. The member quotient is crucial in the R&D sector although size is not a determinant on the level of success of the research activities. It definitely increases the probability of developing new innovations in the hi-tech sector. In low-tech sectors, this increase would only serve to increase the number of patent applications. Increase of the employee base has no positive effect on the portion of novelty sales.3 Relationship between R&D, Innovation and Exporting Innovation and R&D are similar to a given parameter. The modern technological world demands that firms come up with novelties that will ensure that they remain competitive. Through exposure to the global market and competition, local companies get to see the need of R&D. Through internationalization, firms are able to learn the global trends in the market, they also get exposure to superior competition. The companies therefore learn how to cover the costs of R&D.4 Research and Development is dependent on the novelty. Successful novelty escalates a company’s technological prospects making supplementary innovations more probable.5 Research is a risky undertaking in its financial aspect. It is tasking for organizations to obtain external funding for R&D. Once firms tackle this hurdle and the innovation process is successful, the firm will be able to fund the process continuously. Empirical Evidence At the macro-economic level, there is evidence to support the relationship between exports and novelty in terms of performance. A country’s exports are directly proportional to its innovation undertakings. The entry of an industry into the global market is highly influenced by their level on innovation. This is so because more innovations lead to more exports. Countries that involve themselves in exporting activities are able to gather knowledge that may serve to heighten their innovation potential.6 This is evident in the United Kingdom’s growth from exports. The nation has seized the market from the intellectual angle and acquired information that has served to build her technological sector. Exporting industries that are also engaged in R&D reflect a greater growth percentage than the exporters that do not do so.7 This trend has boosted R&D intensity in manufacturing industries engaged at the international level. Modelling strategy There are three variables which can be used to determine the implement used. These are: whether the establishment introduces a new product in innovation or it exports in good time or it allocates funds for R&D; all these are under a time frame. These factors are co-dependent and they are used to determine whether the implement chosen is suitable. Each variable is implemented and the time frame is the merchandise life cycle in the market. Manufacturing For manufacturing companies, research shows that if they allocated funds for R&D they were more probable to export. The prospect of innovation is 20% higher in firms that undertake R&D.8 soon after companies that entered the exporting market gained the relevant know-how, they revert to local markets. This is because these markets will have become less competitive in the view of these companies. Location of an enterprise also plays a role in mapping the establishment’s R&D prospects. For example: companies in Bristol have a higher likelihood to engage in R&D but have a lower prospect in exporting while manufacturers in London have a 12% higher likelihood to innovate.8 this could be solely because enterprises in Bristol have higher inter-company linkages which allow them to provide each other with supplies. Non-Manufacturing In the non-manufacturing field, novelty does not affect R&D trends. It is the latter that has an effect on the former. Engaging in R&D raises the prospects on novelty by 25%.8 in the manufacturing sector undertaking R&D gives a 48% possibility of the industry branching out to exports but this value is 36% less for the non-manufacturing industry. Exporting also does not play a major part in origination performance. The personnel variable comes into play. Costly human capital downplays the possibility of enacting R&D. Availability of labour does not affect R&D. Unlike in the manufacturing industry, in the non-manufacturing industry a high budget intensity raises the prospects of engaging in R&D. Small establishments in the same market with developed industries are less likely to undertake R&D. In both the manufacturing and non-manufacturing entities, there is a higher probability to export when the establishment is in the proximity of players in the same field. Hypothesis The willingness of a firm to undertake R&D is dependent on the company’s financials. A company’s ability to sustain R&D activities is therefore subject to the size of the firm. This in turn divides the R&D into two modes of approach. There is the internal approach that is applicable for established corporations and the external funding for the growing industries.9 The first hypothesis is that: the larger the corporation the more the research and development is internal. The second hypothesis is: the smaller the company the more likely it is to get funding from an external source. However, the external bit could be used to complement the in-house funding and is dependent on the lifecycle of the product. The external funding could be used to match up the company with modern globalization trends. Thus the larger the corporation the greater the possibility of it introducing both the domestic and external research. The independence of the research is reliant on the size of the industry. Therefore the smaller the company the greater the possibility of it going for the external research option.9 Business R&D Performance in the USA (2011)10 The Business R&D and Innovation Survey (BRDIS) reports that in 2010, firms spent $279 billion on research and development and $294 billion the following year. In 2010 $222 billion was from the company’s basic budgets and in 2011 that figure rose to $279 billion. This shows that the research proved to be a good investment and more funds were allocated to this cause over a year’s period with an even larger portion coming from internal budgets. The manufacturing industry performed 68% of domestic research and development with 81% of the total funding coming from the companies. The non-manufacturing sector performed 32% of the total with 81% of the backing coming from the syndicates. The external finances came from the federal government and foreign corporations. The industries that undertook research and development recorded net sales of $9 trillion in the year 2011. The R&D intensity was as follows: 3.2%- manufacturers and 2.3%- nonmanufacturing. Of these percentages, in the manufacturing segment it was the pharmaceutical and medicine industries had the largest investments in R&D. In the manufacturing field, it was the software developers and computer systems corporations. These figures reflected substantially in the employment curve. A total of 19.3 million personnel were recruited by enterprises that undertook R&D. 7.6% of this numeral was in the R&D field. The computer and electronic industries and the pharmaceutical and medicine firms employed most people with regard to R&D. The software publishers were top in the non-manufacturing segment. In terms of company size, the small firms took a share of 19% of the overall business. In terms of hiring, these companies hired 19% of those who took jobs at R&D. their research and development power was at 5%. An Empirical Analysis on China’s Innofund Program The Chinese government has undertaken measures to promote innovation in the country. One significant operation is the Innofund Program which is the prevalent program aimed at promoting R&D. This program has boosted innovation with the supported firms recording a greater growth margin than their counterparts. This program was initiated in 1999 with the purpose of funding small and medium enterprises in the technological field.11 The output from these fund allocations is measured in terms of the innovation change. They look at the product trades, the allowed patents and the aggregate exports at a yearly basis. 81% of the industries backed by the fund are hi-tech firms. These companies are also large and they record substantial sales. Their liability is lower than that of non-Innofund-supported corporations. The Innofund-backed companies got 1.66 more novelty patents per year.11 The companies that are to receive the moneys are those that show prospects of novelty outputs. The annual innovation output should match up to the corporation’s size. Federal Research and Development in Pharmaceuticals With the private sector taking little interest in pharmaceutical R&D, the federal government has taken upon itself to take charge of this matter. This lack of interest could be because the benefits that spring up from the development of pharmaceuticals do not go to the firm that made the innovation but to the public and other stakeholders. Scientific advance has a major role to play in this type of R&D. It is the scientific discoveries that bring about R&D. The funding by the federal government is detrimental to the contribution of the private sector in R&D for pharmaceuticals. In this type of research, time is of essence and therefore competition between the government and the private sector is a normal occurrence. In this haste, the government may have ended up funding research that the private sector could have sponsored. This has been the eventuality in research undertakings that were bound to bring abundant outputs.12 The spending on R&D in pharmaceuticals is increasing with the expansion of this type of research and the multiple funding has risen the labour costs as demand for scientists matures. Pharmaceutical innovation has degenerated in terms of performance. This is in light of the decrease in the number of drugs that have been innovated for various ailments and the recent merging trends among the pharmaceutical companies. There are positive prospects with the focus on molecular and cellular biology in R&D. Coupling this with the heavy investment in the industry will lead to an improvement. This industry has therefore been left to rely on financial factors to define the success level of the output.12 Profits In the USA, the drug industry records the highest proceeds\s. However, this profit margin could have been over estimated on technicalities. The funds that the industry receives to back its R&D is recorded as expenditure rather than investment and this serves to exaggerate the profits. The drug industry is still the most profitable entity but at a lower value. The larger portion of the expenditure goes into the R&D because production of the drug is actually cheaper. Taking into consideration that the cost of production must be compensated in the sales, the final product ends up costing more. And that is why the industry continuously registers a profit annually.12 The direction that the researchers will take in the development of a particular drug is dependent on its demand. If the production is costly then the drugs end up being expensive but luckily for the consumers, the health insurance plans safeguard them from bearing the full brunt of the cost. Pharmaceutical R&D is a lucrative investment because the patented drugs are sold at a high price and the consumers are not in a position to complain because their insurance handles part of the cost. The value that a new drug has to the consumer the more the investment in R&D for the pharmaceuticals.12 R&D Intensity In comparison to the sales made by drug companies, they base the larger portion of their investment budgets on R&D. The increased spending on sponsoring the research and demand processes has been complemented by the increase in sales revenue. The R&D intensity of the US has doubled since the 1980s. This is solely because the sales bring in enough money to fund more R&D and the bond and stock markets provide an alternative income source. As much as these two sources provide an alternative, the flipside is that the investors necessitate compensation. The reason for this is that they undertake a major risk in backing a research they have no control over.12 The continued investment of sales revenue into more research is evidence of how companies prefer to invest in their own research activities. Price levels change from time to time and this occurrence distorts the envisioned profits. The tall drug prices generate proceeds to back the research. R&D Activity and Risk Capital Investments in R&D by small-scale companies are funded externally. This external source could be a loan or an equity investment. Risk venture markets deliver this funding in the private segment. When applied successfully, these procedures generate the risk revenue for R&D. For the private sector, the shares are not traded in a public equity. R&D intensive industries are bound to bring back high returns as they develop rapidly. The risk or venture money is used to sponsor R&D. Once the research has been funded, the firm is expected to grow and bring in revenue that can be re-invested in more R&D undertakings.13 Prominence of Risk Capital for Private Division and R&D Expenditure Small enterprises with intensive R&D attribute their success to risk capital be it in the healthcare or the technological sector. These entities which have the potential to branch out but are faced with financial constraints. When the firms overcome the initial start-up hurdles they are able to generate money for further investment in R&D.13 Large globalized corporations which have access to the public equity market have no need for private risk capital. It is such establishments that provide the private risk revenue to the small-scale entities. These venture funds are the ones that initiate the research and development process.13 University graduates and researchers fresh off from research institutes who are starting off companies use the venture finance to set off their intensive R&D.13 Conclusion Multinational establishments undertake Research and Development at a globalised level. This move is aimed at improving the corporations’ intellectual wealth that will play a role in improving their sales. R&D is influenced by different factors in the manufacturing and the non-manufacturing industries and can therefore not be implemented using the same strategy. The size of the entity is of importance in choosing the implement method. R&D is applicable in auto, electronic and pharmaceutical companies. The pharmaceutical industry has however, recorded the largest profit margins which is attributed to the heavy investment in R&D from external sponsoring by the federal government and the private sector. The introduction of R&D is not an assurance for a boost in sales. It all depends on the mode of implementation and the business environment. Hi-tech businesses may have it easier than the low-tech enterprises. In the case of acquiring funds to start off R&D, the hi-tech companies have it easier because they have access to the public financial market. The low-tech companies have to rely on risk/venture capital to initiate the research and development. References 1. Jaruzelski B. et al. 2008. Beyond Borders: The Global Innovation 1000. 2. Mairesse J. et al. 2004. The Importance of R&D for Innovation 3. Crépon B. et al. 1998. Research and Development, Innovation and Productivity: An Econometric Analysis at the Firm Level. 4. Bernard A. et al. 2004. Exporting and Productivity in the USA. Oxford Review of Economic Policy, 20, 343-57. 5. Mansfield E. 1969. Industrial Research and Technological Innovation. Harlow. 6. Cassiman B. et al. 2007. Product Innovation and Exports 7. Criscuolo C. et al. 2010. Global Engagement and the Innovation Activities of Firms. International Journal of Industrial Organization. 28, 191-202. 8. Harris R. et al. R&D, Innovation & Exporting in Britain: An Empirical Analysis. University of Glasgow, UK 9. Saito H. 2010. Choice of Independent R&D and Open Innovation.670-671 10. Raymond M. Sept.2013. Business R&D Performance in the USA Increased in 2011. 11. Guo D. et al. Feb. 2014. Government Subsidized R&D and Innovation Outputs. Stanford University. 12. Donald B. Oct. 2006. Research and Development in the Pharmaceutical Industry. 13. Raising EU and R&D Intensity. European Commission Research. Retrieved from, http://europa.eu.int/comm/research/era/3pct. Read More