The Role of Multinationals in the Globalisation of Innovation - Essay Example

? The role of multinationals in the globalisation of innovation Introduction The main drivers of economic globalisation are technological change and the increasing significance of multinational enterprises (MNEs) in expanding the dependence of locations and economic systems across continents and regions. MNEs employ several strategies in order to develop and diffuse innovation across national borders (Welfens, 1999, P.342). This paper explores the role of MNEs in the globalisation of innovation. First the strategies employed by MNEs are explained, then the concept of clustering is evaluated, and lastly the role of MNEs in the national innovation strategy is discussed. Strategies employed by MNEs in the globalisation of innovation One strategy used by MNEs is foreign direct investment (FDI) where MNEs acquire existing assets abroad or set up new wholly or majority owned investments abroad. Other modalities of spreading innovation by MNEs include trade, licensing, cross-patenting initiatives, and international scientific and technological collaborations. Trade involves the exchange of sophisticated products such as electrical and electronic products, precision instruments, fine chemicals and pharmaceuticals (Narula and Zanfei, 2003, P.7). Exports of such products and especially information and technology products worldwide rose from 8% in 1976 to 23% in 2000. The massive increase in the share of world trade represented by research and development intensive sectors signals an increase in globalisation of innovation (Narula and Guimon, 2009, P.5). There has been a steady growth in international patenting trends characterised by non-resident patenting, which is patent applications of foreign investors in a country, and external patenting, which is patent applications of national investors abroad. MNEs seek protection of innovation in order to commercialise new products in a new market, and extend markets so as to gain access to static and dynamic economies of scale. MNEs have increased use of external options that entail cooperation among suppliers, customers and competitors referred to as strategic technological partnering (STP) (Chesnais, 1992, P.364). In the rapidly evolving global markets, MNEs resort to technological partnerships as a relatively low cost means to access knowledge sources across borders. STPs are more common in the domain of biotechnology, new materials and information technology and oftenly involve Triad nations rather than emerging economies. Developed nations’ firms take up over 90% of STP agreements while the share of STPs involving developing country firms is in the range of 5-6%. 70% of all STPs have had at least one US partner since 1960 (UNCTAD, 2005, P.51). The concentration of STPs in highly industrialised countries together with the involvement of American firms can be attributed to the fact that industrialised countries are the largest investors in R&D (Welfens, 1999, P.342). As a result of government regulation, some MNEs are forced to adopt STPs in place of internal innovation. Such situations include where firms form R&D alliances aiming to enter foreign markets protected by non-tariff barriers such environmental regulation in the chemical industries or safety standards in the automobile industry. STPs are common where partner companies share complementary capabilities and the integration creates a greater degree of interaction between the partner’s respective paths of learning and innovation. Cooperation helps firms keep up with technological advancements and assists firms in exploring and exploiting emerging technological opportunities (Chen, 2003, P.397). MNEs engage in considerable intra-firm and inter-firm trade with industrialised countries, and this contributed almost 90% of all outbound FDI in 2001. Most of the firms engaged in FDI are also key players in the generation and diffusion of innovation. Over 30% of the top 100 MNEs are involved in R&D intensive industries such as electronic and electrical equipment, pharmaceuticals and chemicals (OECD, 2002, P.188). MNEs play a dominant role in the innovative activities, in their home countries, and control or own large parts of the world’s stock of advanced technologies. For instance, three MNEs accounted for over 30% of the overall UK R&D investment in manufacturing (Chesnais, 1992, P.364). A common trend among MNEs is to concentrate their most strategic investments such as R&D in their home countries. This is a result of the complexities of innovation, the connections of the MNEs initiatives in the home environment and the high quality of local infrastructures and systems that R&D activities require. As a consequence of this situation, the international generation of innovation occurs at a slower pace compared to the internationalization of production. It can be argued that the globalisation of innovation is dependent on the sequence of events and decisions taken by firms, governments, and many other stakeholders involved in innovative activities, in different countries (Castellani and Zanfei, 2006). Firms tend to internationalise their R&D activities with an aim of enhancing the efficiency of existing assets. Therefore, firms may internationalise in an attempt to boost the use of their technological assets together with or in response to certain foreign locational conditions. Locational conditions may require some modification to products or processes in order to suit them to local conditions; in this case the technological advantages are modified to suit the conditions of the host country. In this case, host countries and foreign subsidiaries play a unique role in the adoption and diffusion of new technology (Marklund, Vonortas and Wessner, 2009, P.284). The clustering of industries Firms can also improve existing assets or invent new technological assets through R&D facilities located in foreign countries. In this case, foreign locations provide complementary location-specific advantages that are not available in the home base. In some instances, the location advantages are linked to the presence of other industries. Locations with the presence of other competitors attract asset-augmenting investments by firms in similar or in associated industries. The investing firm seeks to acquire access to the technological assets of other firms through spillovers associated with agglomeration, direct acquisition, R&D alliances or by arms-length acquisition (Archibugi, Howells and Michie, 1999). The basic principle behind the adopting of innovation strategy to local contexts in foreign countries is that new ideas and products emerge in different countries and can be exploited on a global scale. In essence, the variance in country environments can be harnessed to profit the firm through the systematic management of this variance (Kenney and Florida, 2004, p.321). The tacit nature of the knowledge required for innovation in different sectors implies that physical or geographical proximity is important in transmitting it. While the costs associated with transmitting codified knowledge across geographical space is independent of distance, the marginal costs of transmitting tacit knowledge increases with distance. As a result, there is a clustering of innovation activities especially at the early stages of industry life cycle where tacit knowledge is critical (Goldberg, 2008, P.386). A review of literature on asset augmenting internationalisation in R&D over the past few decades has attributed this trend to several factors. The increased cost and complexity of technological advancement has led to a growing need to expand technological sourcing and interaction with different regionally dispersed players endowed with certain niches (CERI, 2009, P. 92; (Pitelis, Sugden and Wilson, 2006, P.327); (Doz, Santos and Williamson, 2001, P.168)). The increased pace of innovative initiatives has spurred firms to search for application solutions that are location specific (Vogel and Kagan, 2004, P.341; (Fawzy, 2002, P.78)). Finally, growing pressure from host governments on MNEs has caused them to increase access and use of local resources as a requirement for accessing foreign markets (Mothe and Paquet, 1998, P.257). Large firms have money and resources to invest in overseas activity and, as a result, they have higher R&D budgets and capacity to set up linkages with both foreign and local science bases. They also have a sophisticated network of supplier firms at home. The internationalisation of supplier firms occurs simultaneously with that of the primary consumer. This is especially common with large and dorminant firms. For example, the Japanese auto- mobile industry and the associated supplier firms relocated their plants to the US and Europe concurrently in 1990s (Kuhlmann, Mendenhall and Stahl, 2001, P.137). For some industries, especially rapidly evolving technology industries, there is a need for closer interaction between production and R&D. Therefore, a closer link between the users and producers of technology is required. In some cases, new technologies and the application environments require extensive trial and error practices. This is the case with most foreign telecommunication markets where both manufacturing and R&D plants are located close to each other (OECD, 2008, P.32). Effects of multinationals on the national innovation system Apart from FDI and knowledge flow associated with MNEs, MNEs also develop a variety of other informal and non-equity agreements that promote knowledge exchange such as trade in products and services, technology licensing and technological collaboration. As a result of links with local actors, local industries learn through interaction with MNEs subsidiaries (Narula and Guimon, 2009, P.5). Therefore, the benefits of attracting R&D of MNEs comprises of both direct effects associated with increased R&D and employment, and indirect effects that result from linkages and knowledge spillovers. Among the indirect effects is the opportunity afforded by subsidiaries to locally produced units to be utilised in designing new products. Other indirect benefits are competition effects, which induce home grown industries to adopt new technologies, and improve their management systems (Narula and Guimon, 2009, P.5). The presence of MNEs subsidiaries in local R&D activities provides better access to foreign knowledge and allows host locations to integrate more easily into the global innovation network. In this case subsidiaries act as catalysts for technological upgrading. For example, the most successful technology clusters in Europe are associated with the contribution of foreign subsidiaries (Narula and Guimon, 2009, P.5). The potential benefits of R&D activities undertaken by MNEs’ subsidiaries are dependent on the existing structure, and developmental aspirations of the host country's innovation systems. Benefits are higher when MNEs engage in projects that enhance domestic technological strength and location specific assets. However, MNE intiatives and the national trategy can complement each other. For instance, if the national innovation strategy is designed to carry out basic research, the entry of MNEs that specialise in applied research helps activate the local system’s latent capabilities and boost the commercial orientation of innovative activities (Narula and Guimon, 2009, P.5). Conclusion Several factors promote MNEs to expand the scope of their innovative activities beyond home countries. The reasons include the need find new markets and take advantage of unique opportunities offered by different locations. Clustering is a common strategy employed by both MNEs and local firms to take advantages of technology spill overs and access tacit knowledge. The benefits of MNEs to the national innovation strategy include knowledge flow and technology collaborations. This is in addition to other indirect benefits, like the adoption of new technologies by local firms. Bibliography: Narula, R., and Zanfei, A. (2003). Globalisation of Innovation: The Role of Multinational Enterprises. http://www3.druid.dk/wp/20030015.pdf Narula, R. and Guimon, J. (2009). The Contribution of Multinational Enterprises to the Upgrading Of National Innovation Systems in the Eu New Member States: Policy Implications. http://www.oecd.org/investment/globalforum/44246353.pdf Welfens, P. (1999). Globalization, economic growth and innovation dynamics: with 15 tables. London: Springer OECD, (2002). Organisation for Economic Co-operation and Development. 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