Policy Update 024 Pre-event Interview No.2
Ongoing Internationalization of R&D Operations
Faculty Fellow, RIETI
In an increasingly globalized and knowledge-based economy, the survival of Japanese corporations is being seen to hinge upon how well they apply global management. Construction of innovation and supply chains in global corporate management is crucially important in determining the international competitiveness of enterprises. Where should globalizing firms seek optimal locations for their innovation and supply chains, and how should they combine their optimal resources in global corporate management to achieve and maintain dynamic competitiveness on a global scale? The RIETI policy symposium, "Global Management and Innovation of Japanese Enterprises - The Strengths of Global Management and Further Challenges," discussed the issues and challenges for Japanese firms in global corporate management. The symposium further looked into policy implications concerning economic partnership agreements (EPAs) in the Asian region. RIETI interviewed Faculty Fellow ASAKAWA Kazuhiro about the factors behind internationalization of research and development (R&D) activities, the issue of intellectual property rights, and means of fostering Japan's innovation system.
RIETI: In recent years, many multinational companies have expanded their global R&D operations and established the R&D centers not only in their home countries or headquarters but also overseas. Why is this happening?
Asakawa: One big factor behind the ongoing internationalization of corporate R&D operations is the increased dispersion and mobility of knowledge and technologies across borders in recent years. Companies can no longer afford to stay nestled within their existing innovation cluster. It is now becoming apparent that the conventional approach of building competitive advantage globally by using only domestic resources has its limit even in areas where a company's home country has a competitive edge. In addition, markets are becoming more and more internationalized and geographical differences in consumer preferences are becoming conspicuous in certain business sectors.
What logic guides companies to internationalize their R&D operations in the first place? First, there is a market-oriented logic. This is the idea that companies need to localize their R&D activities in order to enhance their capabilities to adapt local needs.
Second, there is a supply-oriented logic, in which the localization of R&D is considered as a means to secure access to indigenous resources - i.e. locally embedded knowledge, know-how, capable human resources, raw materials and even supplier networks - unique to each country or area.
Third, there is a strategy-oriented logic. That is, it is now becoming indispensable for companies to mobilize, learn from and use all management resources dispersed globally if they are to develop competence.
A fourth logic is organization-oriented. It has been pointed out that when a company locates an R&D center overseas, it often helps improve the morale of local employees of the company's affiliate in that country. Conversely, there has been a case of international acquisition in which the acquiring company thoughtlessly closed down a laboratory that had been taken pride in by the acquired company, ending up deteriorating the morale of local employees.
Then, finally, there is logic geared to the relationship with the government of a host country. Host country governments often offer certain preferential treatment such as subsidies and tax breaks. Such incentives are important factors for companies to consider in selecting the destination of their R&D investments.
Such are the factors driving the internationalization of corporate R&D operations. At the same time, however, numerous concerns have also been raised. For instance, there is concern that the geographical dispersion of R&D activities might undermine the economies of scale; that decentralized operations would result in the mounting cost of coordination between and among R&D bases; and that leakage of proprietary knowledge may occur in overseas laboratories, particularly those in some Asian countries and other newly emerging economies. We must not forget that the internationalization of R&D also has these negative aspects.
RIETI: In your study, you have cited Shiseido Co. as a successful case of R&D internationalization. What specific factors make it a success? Also, why has Shiseido opened its perfume factories in Gien and Val de Loire, and not in Grasse in southern France which is known as the perfume capital of the world? Dose this have anything to do with the geographical advantage of the proximity of those two locations to Paris?
Asakawa: I think this case illustrates a good global strategy for companies in fields where their home country does not have a competitive advantage. Also, it should be noted that "R&D" in this particular case of Shiseido refers to the product development stage, i.e. the final stage, of the R&D process. Now, what has been so successful here is that Shiseido, a Japanese company with its cultural foundation rooted in a country lagging in the perfume business, has been able to develop and launch the products that can compete with those of the world's leading perfume makers. The key to the success is in its strategy; Shiseido established a foothold in France, a mecca for the perfume business, as a way to overcome the environmental disadvantage and earned recognition as being an "insider" in France. Moreover, the company leveraged the achievements to promote global expansion.
Let me be more specific. First, Shiseido, by essentially taking advantage of its environmental disadvantage, humbly learned the know-how of the perfume business from overseas. Second, the company selected the optimum location for each function. For instance, the administration and marketing functions are located in Paris, a perfume plant in Gien which is located within the industrial cluster along the banks of the River Loire, and a basic research center in Yokohama. Third, the company has defined designer brand perfumes as "out-of-Shiseido line" (OSL) products to clearly distinguish them from the conventional Shiseido brand perfumes, thereby giving absolute autonomy to the local operations over the development and production of OSL items. Fourth, Shiseido, while delegating substantial authority to the local subsidiaries, has been ensuring that internal coordination is frequently made as required for the development of new products. For instance, BPI, a Paris-based subsidiary handling OSL perfumes, is placing great emphasis on communications with the Gien plant producing the OSL perfumes, as well as with the Shiseido headquarters in Tokyo. All these efforts are the key to Shiseido's success.
Indeed, Grasse in southern France is famous for perfume blending. But Shiseido chose the location along the River Loire as its plant site because this area has a substantial agglomeration of perfume-related companies. Also because the factory is producing perfumes for BPI, Shiseido must have seen the merit in having it located in an area reasonably near Paris where BPI designers are based.
RIETI: In your article, "Organizational tension in international R&D management: the case of Japanese firms" (Research Policy, 2001), you point to perception gaps between the headquarters of multinationals and their overseas laboratories (R&D bases) over the degree of information sharing, noting that organizational tension caused by such perception gaps tend to increase with the degree of R&D internationalization. But some companies have extensive laboratory operations overseas. How have these leading companies managed to cope with such organizational tension?
Asakawa: Until now, not much attention has been paid to the fact that the internationalization of R&D entails organizational tension between the headquarters and overseas laboratories (R&D centers). There are two types of organizational tension, i.e. organizational tension over the degree of autonomy and control of overseas laboratories, and organizational tension over the degree of information sharing between the headquarters and overseas laboratories. A survey of the R&D internationalization of Japanese companies, which I conducted in the late 1990s, indicates that tension appears to be more salient in information-sharing issues.
R&D internationalization proceeds in two stages: the disintegration stage and the reintegration stage. For some time after their establishment, overseas laboratories, particularly those engaged in basic research, are typically encouraged to undertake creative activities unique to the country or region in which they operate, receiving little interference from the headquarters in terms of information sharing. In this stage of disintegration, overseas laboratories generally enjoy substantial freedom. Yet at the same time, as they feel unconnected to the headquarters in terms of information, a sense of discontent may arise. In due time, the R&D internationalization process enters into the reintegration stage, whereby overseas laboratories are expected to produce results and contribute to the headquarters. In this stage, overseas laboratories are often frustrated with the lack of information about the needs of the headquarters, whereas the headquarters is frustrated with the laboratories' lack of understanding as to what sort of research results the headquarters want them to produce. Having enjoyed autonomy but been kept out of information flows in the disintegration stage, overseas laboratories need to get more information from the headquarters in order to contribute; at the same time, however, they do not want to get too much information because doing so may result in greater control by the headquarters.
Given this general background, let me return to your question as to how some leading companies have managed to overcome organizational tension. Many of the companies that have managed to bring R&D internationalization into the reintegration stage have worked out measures to maximize information sharing while maintaining an appropriate level of autonomy at overseas laboratories. In my paper, this is referred to as a state of "semi-connected freedom." Certain model cases show that Japanese companies have implemented a series of measures to realize such an optimal condition. For instance, such measures include: 1) promoting mutual understanding by increasing the frequency of opportunities for personnel exchanges, 2) designating certain personnel to act as a "broker" between the headquarters and overseas laboratories to properly "translate" exchanged information, 3) making "short-term" reciprocal visits so as not to undermine the originality of each laboratory, and 4) conducting personnel exchanges on a "project-by-project" basis, rather than on the scale of whole laboratory, so as to ensure that the independence and originality of each laboratory will be maintained.
RIETI: In your book on global management1, you address the issue of intellectual property rights as one of important management issues in developing global strategy for research and development. Could you explain this issue?
Asakawa: For companies, launching global R&D operations means exposing themselves to the risk of having their intellectual property rights (IPR) infringed upon. They cannot operate R&D activities in a country that does not have a proper legal framework for protecting IPR. Thus it is an iron rule that a company must avoid countries with an insufficient legal framework for IPR in selecting a destination for R&D investments and, because of the risk I mentioned, it is not rare that companies develop R&D operations within their home country.
Researchers have undertaken various empirical studies on this topic. Findings from these studies suggest that companies tend to select countries where intellectual property rights are soundly protected as a destination for their R&D investments. While the majority of these studies find that the protection of intellectual property rights is vital particularly in newly emerging countries such as China, some studies conclude that the level of intellectual property rights protection in developing countries is not so important (see Sanyal 2004, for instance, as a relatively recent study). The latter perception may be based, in part, on the idea that establishing a presence within the market is more important provided that companies are not engaged in such advanced knowledge-creating activities as those they might be undertaking in developed countries.
The intellectual property rights protection regime in a host country is also closely associated with corporate strategy for R&D collaborations with overseas partners. With technologies growing in diversity and the pace of innovation accelerating on a global scale, it is becoming extremely difficult for any company to single-handedly undertake all R&D activities. R&D collaboration with a local partner is often important particularly when operating in a country where companies have little experience. The question is what sort of partnership should be sought in a country whose regime for intellectual property rights protection is weak. A group of researchers at Maastricht University (Netherlands) led by Haagedoorn have been engaged in an empirical study on this (Haagedoorn et al. 2005). According to them, when operating in countries with a weak intellectual property rights protection regime, companies tend to prefer forming a capital alliance with a local partner to jointly undertake R&D. This finding makes a great deal of sense; it is consistent with what has been perceived in the theory of internalization and the theory of transaction costs in that a capital alliance can reduce the degree of uncertainty compared with a contract relationship without any capital involvement. However, it is only recently that such empirical studies have been made and further examinations will be required before we can say anything conclusive.
RIETI: Establishing a mechanism for protecting intellectual property rights is extremely important as a way to increase incentives for innovation. In this regard, the Chinese government has been making vigorous efforts to reinforce intellectual property rights protection in a bid to promote capital investment by foreign companies. Against this backdrop, what do you think the Japanese government should be doing toward establishing an efficient innovation system?
Asakawa: To make Japan an attractive destination for R&D investment so as not to lose out to China, it is necessary first and foremost to demonstrate that the Japanese innovation system is open to the rest of the world and offers great participation opportunities and benefits. To that end, Japan needs to accept many outstanding researchers and students from overseas while at the same time sending Japanese researchers and students to other countries. It will be necessary to establish within Japanese universities and/or graduate schools a program specialized for nurturing R&D from overseas (or to establish a world-class graduate school in Japan exclusively for that purpose), thereby providing vigorous support including the reinforcement of scholarship programs. Also, the government should be encouraging Japanese companies to establish some sort of mechanism for accepting foreign researchers and engineers. Another urgent task is to satisfy all the necessary conditions (in terms of living environment, visa status, duration of stay, social security and so forth). When this entire infrastructure is properly in place, a greater number of excellent non-Japanese researchers and those in the making will come and stay in Japan, whereby the number of joint patent registration filed by a Japanese company and a non-Japanese researcher as well as the number of research papers co-authored by Japanese and non-Japanese researchers will increase. Finally, it will be also necessary to enhance the English-language capability of those engaged in R&D because their work on will not progress without proper communication.
Interview conducted by Takako Kimura, online editor, on January 24, 2006.
- Asakawa, K. "Gurobaru keiei nyumon" ("Introduction to Global Management"), Nihon Keizai Shimbun, Inc. 2003
- Pre-event Interview No.1
"Harnessing Global Knowledge for Metanational Innovation" by Yves DOZ, Timken Chaired Professor, Global Technology and Innovation, INSEAD
- Pre-event Interview No.2
"Ongoing Internationalization of R&D Operations" by ASAKAWA Kazuhiro, Faculty Fellow, RIETI
- Pre-event Interview No.1
January 24, 2006