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8 Outside the Triad: An Examination of International R&D Investments within Peripheral Economies Bjorn Ambos and Tina C. Ambos

1. Introduction

Corporate R&D, traditionally one of the most shielded and most centralized activities in the corporate value chain, has experienced a rapid internationalization over the last decade and a half. The risks of technology leakages, expensive double inventions, difficulties to control and a desire to reap economies of scale have traditionally led firms to concentrate their R&D activities within close proximity to corporate headquarters (see Ambos and Schlegelmilch, 2004; Pearce, 1989). A changing competitive environment, the increasing dispersion of knowledge and the concentration of competencies in so-called 'pockets of knowledge' around the world, has forced firms to absorb the risks of loosening control on their core competencies and to set up R&D units in overseas locations.

The growing body of literature on international R&D has already provided us with valuable insights on the firms' motivations to internationalize R&D activities, on the location of R&D activities and, to a lesser extent, on issues of coordination and control of international R&D networks. A communality of many of these studies is that they look at international R&D as a phenomenon of the triad nations (Archibugi and Iammarino, 2002; Gassmann and Zedtwitz, 1999; Meyer-Krahmer and Reger, 1999; Schmaul, 1995). As Narula and Dunning's (2000) study shows, we do not have much information on those investments that are outside the triad. The absence of research on these laboratories is alarming for at least two reasons. First, with more and more firms deciding to establish R&D laboratories in emerging economies like China, India and Brazil, it becomes important for them to know whether management tools and techniques developed for core countries are also applicable in these new contexts. Second, as R&D arguably is the key to economic

188 G. R. G. Benito et al. (eds.), Multinationals on the Periphery© Palgrave Macmillan, a division of Macmillan Publishers Limited 2007

Bjorn Ambos and Tina C. Ambos 189

development, such research has potential important implications for policy-makers who may want to attract inward FDI in R&D to foster development of these countries.

The aim of this chapter is to shed some light on international R&D activities in non-triad countries. We rely on a large-scale dataset of international R&D investments by German firms, who collectively account for two-thirds of the country's privately funded R&D expenditures. The dataset includes 25 investments in non-triad countries, which will be in the focus of the present investigation. Given the scarcity of prior knowledge in this area our approach here is rather exploratory. In particular we aim to explore the following questions:

• To what extent do MNCs invest in 'peripheral' (non-triad) countries? • How are these foreign R&D units managed?

We will proceed as follows. In the next part, we will discuss the stateof-the-art of internationalization of corporate R&D and try to specify the research questions, which guide our analysis. Subsequently, our sample and the study are described, followed by a comparison of internationalization activities in triad and in non-triad countries. Thereafter, referring to our second research question, we analyze the characteristics of R&D units in non-triad countries and show differences in current management practices as well as performance implications. The chapter ends with a conclusion of our findings and an outlook for future studies.

2. Internationalization of Corporate R&D

There have been several undertakings to investigate the motivations of international R&D (Ambos, 2005; Brockhoff and Schmaul, 1996; Dalton and Serapio, 1995; Hakanson and Nobel, 1993a,b; Pearce, 1989; Pearson et ai. 1993; Zedtwitz and Gassmann, 2002). Their findings emphasize the proximity to research clusters (Kuemmerie, 1999; Pearce and Singh, 1991; Pearson et ai., 1993; Porter and Stern, 2001), the proximity to lead markets (Pearson et ai., 1993; Hakanson and Nobel, 1993a,b), subsidies paid by local governments (Cantwell and Mudambi, 2000; Hakanson and Nobel, 1993a) and the companies' existing stock of knowledge (Gerybadze and Reger, 1999). And while the ultimate reasons for establishing a particular unit at a given location may be numerous and very idiosyncratic, researchers widely agree that R&D laboratories can be broadly classified into a few 'archetypes'. In their seminal study on the internationalization of Swedish R&D units, Hakanson and Nobel, for

190 Examination of R&D within Peripheral Economies

example, identify more than 20 motivations, which, as the authors demonstrate, can be grouped into five distinct laboratory types: market driven, research driven, politically motivated, production support driven or driven by a combination of the above (multi-motive).

Other researchers, who were less concerned with the drivers of the investment decision than with answering the question: 'What does the R&D unit actually do?', could demonstrate that R&D units can be usefully divided into two categories: those seeking to exploit an existing technology or capability of the firm (Le., capability-exploiting laboratories) and those established to create, augment, or explore new knowledge, or to augment the firms' existing capabilities (Le., capability-augmenting laboratories) (Ambos, 200S; Ambos and Schlegelmilch, 2004; Chiesa, 1996; Chung and Alcacer, 2002; Kuemmerle, 1997; 1999; Le Bas and Sierra, 2002; Patel and Pavitt, 1991; Zedtwitz and Gassmann, 2002).

While much more research remains to be done, these studies already provide important insights on where to locate and how to manage these two types of R&D. Kuemmerle (1999), for example found that capabilityexploiting laboratories are primarily located within important-led markets, whereas a firm's propensity to invest in capability-augmenting laboratories has been linked to the quality of the human resource pool, the level of scientific achievement in the target community as well as the host countries' own commitment to R&D. Ambos and Chini (2004) Chiesa (1996), Hakanson and Nobel (1993a;b) and Pearson et al. (1993) largely support these findings. Yet, as Ambos and Chini (ibid.) demonstrate, there are other important factors in this decision than host country characteristics. In their analysis, psychic distance and R&D intensity of the firm turned out to be more important than the local science base, for example.

Following these studies, most non-triad nations shouldn't attract much inward R&D investments at all, as they usually neither have an important market nor a sophisticated technological science base. Indeed, as Narula and Dunning (2000) point out, the FDI potential of stage 1 and 2 countries (Le., those which are in very early stages of economic development) to attract R&D is limited to adaptive R&D. To understand (general) FDI in non-triad countries, many researchers relied on a stage model of economic development (see Rostow, 1960). However, we have to bear in mind that most of this literature originates from an economic development or foreign aid perspective. While this stream has brought important insights on investment patterns according to stages of development, these findings might not be applicable to the research question at hand. First, most research has taken an aggregate economic or institutional lens on FDI patterns and mostly ignored the motivations of


multinational firms. Second, the specific requirements and drivers of investment in R&D might significantly differ from other kinds of FDI. Third, many studies seem to ignore the fact that competitive - or at least comparative - advantages do not necessarily develop on the country, but rather on the industry level (see e.g., Porter, 1990). As MNCs aim to tap into so called pockets of knowledge, it is evident that industry advantages provide an important basis for R&D investments.

Thus, to explain R&D investments in non-triad countries, two lines of argumentation seem to prevail. The category of arguments, already put forward in some of the previously mentioned studies, is essentially Ricardian: countries will specialize in those activities in which they possess a comparative advantage. Economies in their early stages of development do not possess specialized factor endowments (Le., highly skilled labour needed to conduct R&D), consequently the level of R&D within the country and the attractiveness to FDI will be low. According to this view the most likely candidates of inward FDI in R&D appear to be those countries that do possess a high-skilled and abundant pool of workers capable to engage into R&D. In particular this holds true for ex-communist countries like Romania, Poland or Russia, with a large labour pool of highly skilled physical engineers, or countries like India and China, who traditionally have a very good science base (Zedtwitz, 2004). Whether MNCs really base their R&D location decision on cost differentials remains controversial. Speaking to many R&D professionals we got a sense that access to cheap labour was not a prime criterion. As one R&D manager put it: 'The times where you would go abroad to source cheap labour are over: a top-skilled R&D engineer in India almost costs as much as in the US, or Germany.'

Informed by the product-life-cycle theory of MNC internationalization and the prospects to exploit gained advantages (e.g., Vernon, 1966), the second stream of arguments indicates that FDI might be motivated by size and importance of a market. According to this school, the potential for R&D in non-triad countries would be limited to a small number of countries that do have a large enough size to attract capability-exploiting R&D, such as Brazil, India, China. Alternatively, countries that serve as hubs for a whole region might become the focal point of interest. For example, Evobus, a subsidiary of DaimlerChrysler, use their R&D lab in Istanbul to adapt and modify their coach buses to the Middle East. Among others, their activities include changing the suspension in order to make the buses more suitable for bad road conditions.

The above arguments show some rationales of MNCs to establish R&D locations in non-triad countries. However, it is not clear how prevalent


this phenomenon is and how it compares to investments in triad countries. This leads us to our first research question: 'To what extent do firms invest in non-triad nations?'

Exploring the motivations behind MNC internationalization and the mandates they assign to their overseas R&D laboratories is the easier task; the management of dispersed innovation networks is arguably much more difficult (Ambos and Schlegelmilch, 2004; Cheng and Bolon, 1993). Literature has produced several attempts to link management and control processes to key organizational and laboratory characteristics (Ambos, 2002; Birkinshaw, 2002; Brockhoff and Schmaul, 1996; Nobel and Birkinshaw, 1998; Schmaul, 1995). Only few studies today have made a stab at examining the impact of the environment on subsidiary roles (Benito et ai., 2003) or the management processes used (Ambos, 2005). Despite the recent progress in uncovering managerial issues in international R&D the field is still fragmented (Ambos and Schlegelmilch, 2004). Thus, rather than testing any explicit hypotheses, we will focus on some of the most salient attributes of R&D laboratories and investigate whether differences exist, and how they might manifest.

Our investigation is guided by the question 'How are these foreign R&D units managed?', which affects several areas of research. First of all, it is important to investigate what kind of foreign R&D unit is established in non-triad nations. Then, questions concerning the integration of non-triad laboratories (NTLs) into the global organization arise. Other decisive factors are the embeddedness in the host country environment and, as mentioned above, the use of coordination and control mechanisms. Last but not least, we will explore the performance of NTLs compared to triad laboratories (TLs).

3. The Study

Data for this study was collected via a survey conducted in 2000 on the internationalization and management of overseas R&D in German MNCs. The dataset used in this study contains detailed information on 134 overseas R&D investments by 49 German MNCs. With an average turnover of 5.5 billion euros, and an average workforce of 34,000 employees, sampled firms are among the largest corporations within our set target population (all industrial firms with overseas R&D activities listed within the German Top 500). Collectively, the surveyed firms account for about two-thirds of Germany's privately funded R&D in 1999, indicating that international R&D is merely a large firm phenomenon. Quite typical for Germany's industrial activities, our sample spans a wide


range of industries, with machinery, automotive, chemical and pharmaceutical industries jointly accounting for more than half of the sample (see Ambos, 2005, for a more detailed description of the data).

Motivations, pace and extent of German overseas R&D investments largely mirrors that of other nations. Similar to results in other surveys, we find most (82 per cent) of the laboratories within the triad. However, despite this concentration of R&D within only a small number of countries we also find a significant number of laboratories (25) located in peripheral (i.e., non-triad) markets. Generally, there are no apparent differences in terms of size and industry among the firms investing in triad and those investing in non-triad nations. An exception seems to be pharmaceutical companies, which do not invest in non-triad markets at all.

4. The Patterns of R&D Internationalization

We start our discussion by looking at our first research question: to what extent do firms establish R&D laboratories in non-triad as opposed to triad nations? To investigate this question we first looked at the pace as well as the aggregated stock of R&D laboratories in both triad and nontriad nations (Figure 8.1). The solid line signifies the cumulative number of R&D sites established by our sampled firms within the triad; the broken line reports the same information for non-triad laboratories for the period of 1940-2000. We conducted the survey in 2000. The positive slope of both lines confirms a trend that has been observed in many recent publications, as it shows that firms are increasingly establishing R&D laboratories in offshore locations. This finding holds true for triad as well as non-triad investments. Yet, while investment in triad nations more or less exploded in the early 1990, no such acceleration can be observed for non-triad investment. Thus, despite the modest increase of inward R&D investments, non-triad nations are increasingly lagging behind, when contrasted with triad nations. To further investigate why our data reveals such an apparent divergence among investments in both sets of countries, we decided to plot the graphs differently according to type of investment (Figure 8.2). Looking at capabilityaugmenting (knowledge-seeking) and capability-exploiting investments separately clarifies a lot. Indeed, much of the accelerated trend in overseas R&D within the triad can be explained by a rapid internationalization of capability-augmenting investments throughout the 1990s.

Why are non-triad nations increasingly lagging behind in attracting R&D? In the theoretical part of the paper we specified three reasons to build up R&D laboratories in non-triad nations: to appropriate factor cost


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Figure 8.1 Internationalization of R&D over time

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Figure 8.2 Internationalization of R&D over time: the role of capabilityaugmenting investments.

differentials; to follow and to adapt products to large or important markets; and to tap locally confined and highly specialized pools of knowledge. Our findings do not reject the first two motivations. As the following section and Table 8.1 will reveal, firms do invest in non-triad nations to leverage costs etc (Poland, Romania) and do establish centres in large (or key) markets (e.g. Brazil, China, Mexico). However, as Figure 8.2 illustrates quite clearly, the overwhelming acceleration in international

Tabl

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R&D stems from an increase in knowledge-seeking (capability-augmenting) R&D investment. And the majority of these units is located in 'pockets of knowledge', which are, in turn, predominantly found within the triad nations. Only very few of our sampled firms located their capabilityaugmenting activities in one of the rare knowledge clusters outside the triad.

Probably even more informative in that respect is the data that we lack: not a single R&D laboratory among the surveyed units was established in Africa, and, with the exception of Brazil, not one in South America. If knowledge seeking becomes the driving force and motive in overseas R&D investments, the prospects of non-triad nations to participate in the quest for inward R&D will be relatively low.

5. Characteristics and Management of Laboratories in Non-triad Nations

In this section we turn our attention more explicitly towards the characteristics and management issues related to NTLs. We start with a descriptive account of the 25 R&D units located in non-triad countries, analyze several characteristics and implications for management and, later on, contrast them to management practices targeted at triad country units. Table 8.1 shows the major characteristics of the focal units.

The firms in our sample reported on a total of 25 overseas units in nontriad markets. The focal units operate in diverse industries. Firms went to these countries for a variety of reasons, partly reflected in their research mandate. India and Brazil, both large markets, are the most popular locations, with six and five R&D investments respectively in the country. Similarly preferred locations of our firms are Singapore and Taiwan, which are less important in terms of market size but count among the emerging South-east Asian tiger states with important, and highly specialized, technical capabilities. Other units are found in the Czech Republic, Poland, Hungary, Romania - all Eastern European markets that might be relatively easily accessible to German firms - as well as Mexico, Turkey and China.

Compared to the overall sample, R&D units in non-triad markets are rather small, employing less than 20 people. (Only 34.5 per cent of the overall sample fall into this category.) The exceptions are the two automotive companies and the optics companies with large research units (200 people and more). There is no indication that R&D units in nontriad nations receive less funding then those in other markets. The budget size rather seems to be a function of industry and task orientation, Le.,


capability-augmenting versus capability-exploiting tasks. Semiconductor and optical industries typically require high budgets for their research whereas the available funds in machinery are comparatively low.

Laboratory mission, global integration and local embedded ness To further investigate the mandates as well as the internal and external relationships of triad and non-triad laboratories we conducted a series of bivariate tests. Looking at the laboratories' mission first, Table 8.1 confirms that most investments in non-triad nations are capability exploiting rather than capability augmenting in nature. The majority of our sample, 20 units, is dedicated to capability-exploiting tasks. The remaining five units fulfill a capability-augmenting mandate. Furthermore, most NTLs are geographically attached to a manufacturing plant. While Ambos (200S) reports the same tendency for all exploitation laboratories, over time this trend seems to change towards more independent R&D laboratories.

Another interesting finding relates to the responsibilities of the sampled laboratories. While it might be intuitively plausible to assume that a large share of capability-exploiting laboratories possesses only local, or at best regional, market responsibilities, evidence from our sampled units speaks a different language. While some, in particular chemical laboratories, still possess only local market responsibilities, most R&D laboratories have a global outlook. Statements such as the following seem to reflect the exceptions:

The reason for setting up an R&D unit in India is due to the fact that they cannot get the same ingredients in India as in Germany and thus have to do some research to fine-tune and adjust their product using the resources available in India.

This came from a manager in Chemical Company A, a specialist chemical manufacturer. But in general terms we conclude that, even in nontriad countries, R&D laboratories do not focus on the local market but concentrate on supplying the global organization.

Such findings become clearer when we jointly consider the laboratories' relationships to other internal partners. Many of them are highly integrated in the global organizational network. Exhibiting a high input and output dependence, they come close to what Birkinshaw (2002) calls modular centres. These units' mission is to provide inputs that other units subsequently use. Evidence from the focal laboratories shows that the beneficiary of inputs from non-triad units is usually headquarters. Our


R&D units are highly linked to the headquarters' operations but maintain far looser ties in horizontal relationships, such as to other R&D laboratories or to manufacturing units. This observation might suggest that non-triad R&D units are rather perceived as headquarters' agents than other units' equals in the global organization. Interestingly, a comparison between TLs and NTLs shows that the lateral ties between TLs are much denser. This leaves room for speculation whether NTLs are not part of the MNC model as a 'differentiated network' (Nohria and Ghoshal, 1997) but remain 'ancient bricks' in the organizational model.

Next to the laboratories mission and mandate, the external embeddedness has been found important to explain the management of R&D units in prior studies (Ambos, 200S; Andersson et al., 2001; Asakawa, 1996; Narula, 200S). The underlying rationale is that R&D laboratories need external inputs from the host country environment to work effectively. As we expect the host country environment to differ across TLs and NTLs, this is a potentially interesting area of investigation. To further investigate the degree of embeddedness we computed mean differences for TLs and NTLs for several internal (e.g., central R&D, production, other R&D labs of the firm) and external collaboration partners (e.g., competitors, suppliers, customers, private research institute, universities and government agencies) (Table 8.2). A direct comparison of TLs and NTLs suggests that TLs are slightly more embedded into the local community than NTLs, but - except for customers, competitors and suppliers - none of these relations significantly differs from the non-triad country sub-sample.

A series of studies have put efforts into understanding which factors determine the degree of local embeddedness. One of the most prominent impact factors was found to be the nationality of the laboratory's director (see Asakawa, 2001). While the non-triad units used somewhat higher expatriate ratios than others, this is not reflected in the position of the laboratory director. About half of the units have a local director; the other filled this position with an expatriate. The presumed purpose of these assignments is that local directors might be in a better position to negotiate and link up with external institutions. A look at mean values of embeddedness attributed to TLs and NTLs, however, does not support this argument. Laboratories run by home country nationals were throughout more externally embedded than those units with local directors. The only exception to this trend is their relation to government agencies, where host country nationals seem to score. Still, relationships with governments are generally not strong and it is questionable whether this relationship is simply not important for R&D

Tabl

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tral

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ab

1.97

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nal t

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ing

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Notes

: (a

) M

easu

rem

ent s

cale

: 0 =

no

rela

tions

hip,

1 =

wea

k re

lati

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ip, 2

= m

oder

ate

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tion

ship

, 3

= st

rong

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(b)

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item

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e m

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le, w

ith

1 =

not u

sed

at a

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5 =

use

d to

a v

ery

larg

e de

gree

. (c

) A

vera

ge n

umbe

r of

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ents

file

d by

the

labo

rato

ry, a

ll ot

her

perf

orm

ance

indi

cato

rs a

re r

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ive

mea

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s, i

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laboratories or whether managers find it hard to link up with local authorities.

To understand potential hidden rationales of MNC management it might be worth looking at the number of expatriates within the R&D unit's management team instead of overall expatriates only. On average, the ratio of expatriates to locals in the management team is quite high in the surveyed units. Although we cannot rule out other reasons, this fact might suggest that the laboratory is formally run by a local but informally controlled by parent country nationals. But this issue definitely deserves greater attention in a separate study.

Coordination and control

Generally, NTLs do not deviate much from the control pattern applied to TLs. There are no significant differences for the use of socialization mechanisms, teams etc. revealed (see Table 8.2). Usually the means for NTLs are marginally higher, but do not reach statistically significant levels.

The exceptions are mechanisms of personal and direct control. Table 8.2 shows that the categories personal surveillance, centralization and planning are significantly higher. An agency theory perspective underpins these findings. The central assumptions related to the agency view are a potential goal conflict among the principal and the agent and the measurability of outcomes. The latter is important in order to align the appropriate form of control. If the behaviour of the agent is easily observable (complete information), behavioural control - the equivalent of direct control in our study - is deemed more efficient (Eisenhardt, 1989). If the behaviour is not observable the recommended choice is output control (Gencturk and Aulakh, 1995). Assuming that R&D units in non-triad countries are primarily dedicated to capability-exploiting activities, deal to a relatively large extent with explicit knowledge and their behaviour is consequently observable, the use of personal and direct control mechanisms is in line with the theoretical predictions.

While the small sample size does prohibit a more rigorous analysis of these findings, the relatively high values for central and direct control among NTLs as opposed to TLs suggest that headquarters tend to keep their reins tight, whereas we have evidence that some units in triad countries are let 'of the hook' - especially if they fulfill capabilityaugmenting mandates. Possible explanations for this behaviour include the high uncertainty in many non-triad economies, such as political, inflationary or exchange rate risks, which demand immediate action from the central organization, or cultural and psychic distance arguments (Johanson and Vahlne, 1977).


laboratory performance Last not but least our investigation will address the performance of TLs and NTLs. Such an analysis is important as the occurrence of significant performance differences would imply further investigations on why NTLs under- or outperform laboratories in triad nations. To shed some initial light on this question we compared triad and non-triad markets along six separate performance indicators (Table 8.2): the number of patents per annum filed by the R&D laboratory; the percentage of projects completed successfully; the number of projects terminated before completion; the degree of slack or inefficiency within the local laboratories' operations (as judged by the head of technology at headquarters); and the amount of time and budget overruns. The most striking difference is that NTLs achieved only a fifth of the comparable patent output of TLs. These results even hold when we normalize the number of patents by the size of the laboratory, or when we examine capability-exploiting laboratories only. Thus, at least when using patents as a measure, non-triad laboratories appear to be less innovative. While there are no significant differences observable in the achievement of successful projects, the termination of projects, the inefficiency as well as the budget overrun of these units, time management was significantly better than for TLs. On average they had less than 10 per cent time overruns, compared to 16 per cent for triad country labs. The explanation might lie in the form of control they experience. As discussed earlier, NTLs are exposed to higher levels of direct control and higher planning intensity. Thus, headquarters are also likely to monitor their time management.

6. Conclusion

This chapter aimed to shed some light on overseas R&D units in nontriad economies. Pursuing an exploratory approach, several questions concerning the location and the management of R&D units were investigated, mostly by contrasting operations in triad and non-triad countries. However, this study has to be seen as a first attempt, which leaves many open questions and white spots on the map. It has hopefully become evident that this is an exciting and promising field of research, which calls for further studies in several areas. By concluding our findings, we will point towards some of them.

What became evident from our analysis of entry patterns in triad and non-triad economies is that, despite a steady increase in NTLs, the gap between triad and non-triad countries is widening. Judging from the slope of the curve in Figure 8.2, only an increase of capability-augmenting


units will lead to a substantial increase in NTL establishments. As Chung (2001) suggests in his analysis, the outcome from and market choice of FDI is contingent upon market characteristics and markets, where location-specific capabilities reside, will attract capability-augmenting investments. In other words, our results tend to suggest a latent endogeneity as knowledge clusters do not only attract capability-augmenting FDI, but the same investments also contribute to the sustainability of these clusters. This is probably the most important implication for peripheral economies and policy-makers aiming to attract FDI. In order to gain more attention in the future, they have to establish pockets of knowledge which are attractive for MNCs. India's emerging position in computer science is a good example. But in order to be able to come up with more precise recommendations and tools, longitudinal analyses of specific industries would be needed.

In view of the modest increase of NTL establishments, the question arises whether this is an area of interest for managers of multinational corporations at all. However, despite the relatively small numbers to date, there is evidence that major companies in nearly all industries invest in peripheral countries and they will need to know more on how to staff and to control these labs. While our study could not detect significant differences in the local embeddedness of TLs and NTLs, we found that NTLs are less horizontally integrated, are tighter controlled and are less innovative than their counterparts in triad nations. Following recent research findings on how to control R&D units (Ambos and Reitsperger, 2004; Asakawa, 2001; Hansen, 1999) it might be advisable to give these units more autonomy in order to enhance their innovativeness. Still, to gain more insights into this field, researchers will have to conduct larger-scale analyses about the management of NTLs. One such approach appears to be selecting a sampling frame of all R&D laboratories in one country (see, e.g., Zedwitz, 2004, for China). Whereas the present study is more suited to explain the motivation for foreign R&D investments controlling for the home country, one country studies will be able to establish a larger sample and consequently hold country or even industry effects constant when analyzing the management of R&D laboratories in non-triad countries.

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