presentation at the international symposion on “r&d outsourcing and smartsourcing”

International Management & InnovationProf. Dr. Alexander Gerybadze

Presentation at theInternational Symposion on “R&D Outsourcing and Smartsourcing”

Bucharest, Romania20 February 2008

Prof. Dr. Alexander GerybadzeCenter for International Management and Innovation

Center for Research on Innovation and Services (FZID)University of Hohenheim

R&D Offshoring and Outsourcing: NurturingSustainable R&D Capabilities in a Globalized World


Global Innovation / Trends inR&D Offshoring


Strategic Implications for R&D andInnovation Policy


R&D Outsourcing / New PartnershipModels in Innovation


R&D Offshoring and R&D Outsourcing: Nurturing Sustainable R&D Capabilities in a Globalized World

The Agenda / Key Issues


Major Trends in the Global Innovation Arena

R&D and Innovation is Key for International Competitiveness

Multinational Corporations are the Drivers of Technical Change

Trend to Globalize R&D: Persistent R&D Offshoring

Trend to Externalize R&D: R&D Outsourcing / Open Innovation

Trend to Commercialize R&D

Trend towards Downstream Innovation


Do In-houseat the Home-baseof a Multinational

Firm

Do sth. at aForeign location(Foreign direct

Investment)

Contract outto suppliers and / or

External partners

Type of Value-addingActivities

OFFSHORINGIncreasing trend of globali-

zation of all value-adding acti-vities including R&D

OUTSOURCINGIncreasing tendency to

„harvest-out“ / Focus on few core activities in-house

First of all, Offshoring and Outsourcing need to be differenciated


Source: OECD, Main Science and Technology Indicators 2006.

Western Europe224 Mrd. $

Rest EU 25

UKFrance

Nether-lands**

Switzerland*Germany

Austria

* Data for 2003; ** Data for 2004.

Asia283 Mrd. $

Japan**

China

Korea

Singapore

Taiwan

North America 339 Mrd. $

USA

Canada Mexico*

World R&D Expenditures / GERD 2005 Total 845 Billion $ PPP

World R&D Expenditures strongly concentrated on a few CountriesWithin the Triad regions / Gross Expenditures for R&D (GERD) 2005

By Comparison: 27 Billion $ PPP in Eastern Europe (of which 64% in Russia)


Increasing Global Dispersion of Innovation Activities / R&D Globalization andR&D Offshoring outside of Home Region

Source: Gerybadze 2004, p.246; Roberts 2001 / Global Benchmark Survey on the Strategic Management of Technology

1995 2001 1992

10%

20%

30%

40%

Share of R&DOutside of HomeRegion (in %)

Europe

North Amerika

Japan

1998


Business Expenditures on R&D also concentrated on few Industrieswhich increasingly go Global

1. Pharmaceuticals & Biotech

2. IT-Hardware & Equipment

3. Automobiles & Parts

4. Electronics & Electrical

5. Software & Computer Services

6. Chemicals

7. Aerospace & Defence

8. Consumer / Leisure goods

9. Industrial Engineering

10.General Industrials

70 523

64 532

60 807

27 139

26 523

17 186

15 991

14 209

9 319

8 868

15.9

8.6

4.1

4.4

9.8

3.1

4.8

6.5

2.7

2.1

Source: EU Industrial R&D Investment Scoreboard 2007, INTERIS Database University of Hohenheim 2007

Intensity ofR&D Offshoring

* * *

* * *

* *

* * *

* * *

* * *

* *

* * *

* *

* *

R&D Expen-ditures 2006

(in Mio €)

Industry R&D In-tensity

2006 (%)

* * *Very strong R&D Offshoring

* *Strong R&D Offshoring


Increasing Globalization of R&D: What does thismean for Building R&D Capabilities in Host Countries?

Increasing Globalization of R&D: What does thismean for Building R&D Capabilities in Host Countries?






Presentation Part 2


Changing Pattern of Knowledge Flow in the Innovation Process

Lead MarketInnovation / Advanced

Services


Services

Engineering-Innovation / Advanced

Manufacturing


ManufacturingResearch-

based Innovation

Research-based Innovation

Traditional Interpretation / Linear-sequential Innovation Process

Increasing Trend towards Downstream Innovation in many dynamicIndustries

Many Host Countries build up Universites and Science base …

… but R&D Location not just driven by need to access Research

Most important „new drivers“ for R&D Offshoring - Access to Advanced Market / Lead Market - Manufacturing Excellence / Engineering Innovation - Strong Innovative Competitors - Standard setting / Innovation enhancing Regulation


Home-base-Exploiting R&D

Where is the most

critical concen-

tration of talent?

Location with

most advanced

Scientific base?

FOREIGN BASE

(e.g. USA)

FOREIGN BASE

(e.g. USA)

HOME BASE

(e.g. Germany)

HOME BASE

(e.g. Germany)

Leading

R&D Center in

Germany

Transfer of

Knowledge to Foreign

R&D Labs

Case Example Pharmaceuticals & Biotech: still Research-based,but strongly dominated by the U.S.

Most European and Asian MNC set-up Lead-R&D in the U.S. Home-base-Augmenting R&D

Reverse

Knowledge

Transfer

Lead R&D

Center in the

U.S.

R&D Offshoring of MNC in Europe: few selected research areas

R&D Outsourcing: Mainly clinical studies / but often dominated by U.S. based CRO´s

Some R&D in Eastern Europe: Labour-intensive screening and Multi-center Clinical studies


European Countries often with Strong Capabilities in Downstream Innovation

ENGINEERINGINNOVATION /

Advanced Manu-facturing

ENGINEERINGINNOVATION /

Advanced Manu-facturing

RESEARCH-BASEDINNOVATIONS /

Scientific Excellence

RESEARCH-BASEDINNOVATIONS /

Scientific Excellence

LEAD MARKETINNOVATION /

Close Access toLead Customers

LEAD MARKETINNOVATION /

Close Access toLead Customers

Close Interaction betweenProduct- & Process Development /

Embeddedness advanced Supplier-Networks critical

Examples:

Automotive engineering

Mechatronics

Chemical processing

Where is the Engine in the Innovation Process?„Front-Drive“„Rear-Drive“

Research may generateNew Products and Industries / Embeddedness in Research

Community critical

Examples:

Genetic engineering

High-energy physics

Superconductivity

Very few successes in Research-based Innovation in Europe

Interaction with Lead Users /Strong Ties with Demand side

Partners & Regulatory agencies

Examples: Telecommunication Automotive electronics Medical products & services

Many success stories in Engineering Innovation / Often Medium-tech


R&D Outsourcing in Germany / Increasing Global Outsourcing ina few selected Industries

R&D Outsourcing concentrated on a few Industries with very specific requirements

1. Automobiles

2. Chemical Industry

3. Electronics / Data Processing

4. Machinery

5. Metall Processing

Total / Manufacturing Industries

4 767

1 698

886

300

128

7 940

25.0

21.1

10.4

7.3

13.5

18.6

External R&DExpenditures( 2003 in Mio €)

Industry R&D Out-sourcing

(% of BERD)

ForeignOutsour-cing (%)

16.8

48.9

5.6

12.9

18.6

22.6

Outsourcing Partners

Share of Foreign R&D Outsourcing Increasing

PrivateCompaniesin Germany

70.4

43.7

61.0

66.5

58.1

63.0

Mostly private Companies as Outsourcing Partners

PublicResearch &Universities

12.8

7.4

33.4

20.6

23.3

14.4

Role of Public Research & Universities often overestimated






R&D Outsourcing growing in Importance / but contractsgo to professional partners / mostly private firms

R&D Outsourcing growing in Importance / but contractsgo to professional partners / mostly private firms


Presentation Part 3


Learn from Success Stories / Sustainable Strategiesin other Countries

Coherent Development Strategies that build on Human Capital, Science and Industrial Innovation

The New „Eastern European Tigers“: Estonia, Slowenia, Czech Republic, Saxony

The „Baltic Tigers“: Finland, Sweden, Denmark

The „Celtic Tigers“: Ireland, Scotland, Wales

The „Alpine Tigers“: Baden-Württemberg, Bavaria, Austria, Switzerland


Case Example of a „Eastern European Tiger“ / Innovation andForeign Direct Investment in the Czech Republic

R&D Expenditures 3.5 Billion $ 2005 (up from 1.3 Billion in 1995)

R&D 1.54 % of GDP (up from 0.95% in 1995)

Strong role of R&D of Foreign affiliates (52% in 2005 / up from 27% in 1995)

R&D units typically linked to Manufacturing plants

Foreign affiliates still play limited role in stand-alone R&D labs (only 6% of R%D employmant)

R&D services industry received only 0.1% of FDI inflow (80% of this investment from Germany)

Encouraging and fostering an Innovation and Technology culture has moved to center stage of Economic development strategy

CzechInvest actively targets companies with R&D and technologi- cally advanced projects


What can a Country do to build and LeverageSustainable R&D Capabilities?

Active, long-term and stable investment in Education at all levels

Focus on Academic Excellence in Targeted fields

Increase of R&D as % of GDP (to levels of >2%)

Build / Nurture Local Firms / Spin-offs

Build Technology Centers

Build Business Support Services

Participate in European R&D Support Programmes

Attract Foreign Firms in areas where the Country offers appropriate Capabilities


Develop Strategic Partnerships with Corporations andGovernment Agencies in Continental Europe

Even in a Globalized World, Proximity and Cultural Heritage still matters

Build alliances with Firms and Research centers especially in „Alpine Tiger“ states

Baden-Württemberg - Machinery / Manufuture BW - Mechatronics - Automobiles / Automobile components - Materials

Bavaria - Specialty Electronics - Food / Beverages - Data processing / Software

Austria

Switzerland


Setting the Agenda for a dedicated Programme aimedat Fostering Innovation and Economic Growth

Don´t just follow the „High-tech Bandwagon“ / Every government in the World targets IT and Biotech!

Emphasize Country-specific Capabilities / Country-USP

Build on Industries with Downstream Potential / High Value-added in Country plus Innovation - Specialty Machinery - Food Chain / Wine - Supplier Industries

Build Strong Innovation Clusters for particular Industries

Develop growing Business Services / Knowledge-intensive Business Services (KIBS)

Design and Administer EU Structural Fund projects aimed at enhancing Innovation Strong Investment Promotion Agency as Promoter and Implementor of National Development Programme


Etwas In-housedurchführen und

am Stammsitz desUnternehmens

Etwas im Auslanddurchführen, aber

innerhalb einesMNU

Etwas durch einanderes Unterneh-men durchführen

lassen

Differenzierte Formender Wertschöpfung

Offshoring and Outsourcing Strategien for different elements of the Value Chain in Multinational Corporations

„Made in Germany"

„Made by BMW"

Marketing

Sales

Administration

R&D

OFFSHORING OUTSOURCINGManufacturing


Research-basedInnovation

Research-basedInnovation

EngineeringInnovation

EngineeringInnovation

Lead MarketInnovation

Lead MarketInnovation

FOREIGN BASEFOREIGN BASE

HOME BASEHOME BASE

Strong Home-base in World-class Manufacturingand Engineering / Functioning

Supplier and EngineeringInfrastructure

Foreign Direct In-vestment in Manufacturing& Advanced Foreign Plants

of German Firms

First Commercialuse often in Germany

The Innovation Performance of Research-based Innovation andHigh-tech Industries is rather limited in Germany

German Innovation Performance is much higher in areas where the core of value added is in Engineering Innovation / which build on a strong Home-base of Manufacturing and Engineering excellence

Examples: Automobiles, Process engineering, Special purpose machinery

Advanced R&DIn Germany

Export

Strategies

Home-base

Exploiting R&D


Innovation Strategies within Multinational Corporations addressingtwo Key Issues


Manufacturing


ManufacturingResearch-

based Innovation

Research-based Innovation


Services


Services

Changing Pattern of Knowledge Flow in the Innovation Process

Traditional Interpretation / Linear-sequential Innovation Process

• Key Issue 2: Where is the Core of Value Added in the Innovation Process / The Functional Source of most advanced Knowledge?

Where is the Engine in the Innovation Process?

• Key Issue 1: Where is the Geographical Center / Locus of Innovation Where can we best learn about the Winning Combination?

Increasing Trend towards Downstream Innovation


Business Expenditures on R&D also concentrated on few Industrieswhich increasingly go Global






6. Chemicals




10. General Industrials

70 523

64 532

60 807

27 139

26 523

17 186

15 991

14 209

9 319

8 868

15.9

8.6

4.1

4.4

9.8

3.1

4.8

6.5

2.7

2.1


CompetitivePositionGermany

Weak

Weak

Leading

Weak

Weak

Leading

Weak

Weak

Leading

Strong

CompetitivePositionJapan

Extent ofR&D Globa-

lization

Weak

Strong

Leading

Strong

Weak

Average

Weak

Leading

Strong

Strong

* * *

* * *

* *

* * *

* * *

* * *

* *

* * *

* *

* *

R&D Ex-penditures

2006 (Mio €)

IndustrieR&D In-tensity2006 (%)

* * * Very strong R&D Offshoring * * Strong R&D Offshoring


EuropaABBBoschSiemensPhilips

AlcatelEricssonNokia

AkzoBayerBASFAventisGlaxo WellcomeMerck KGaANovartisRocheSt.GobainThyssenKruppSulzerDaimlerChryslerRenaultVolkswagen/AudiEADS

Electronics / ElectricalEngineering

Consumer Electronics

IT / Telekommunication

Chemical Industry

Pharmaceuticals

Materials / Engineering &Maschinery

Automotive & AutomotiveSuppliers

Aerospace & Defense

USAGeneral ElectricHoneywell

Agilent TechnologiesHewlett-PackardIBMLucent TechnologiesMotorolaDow ChemicalDuPont

Ely LillyPfizerJohnson&JohnsonMerck Co.

AlcoaUnited Technologies

FordGeneral MotorsTRWBoeing

JapanHitachiMitsubishi ElectricToshibaMatsushitaSharpSonyNEC

KaoToray

Eisaj

Kyocera

Toyota

International R&D and Innovation Study (INTERIS) - Sample Firms

Global Innovation: New Modes of Knowledge Production


Academic Excellencein Host country

Home-based MNCsin related technical

area

Foreign MNCswith R&D unit

in Host country

Does Excellence in Academic Research attract foreign R&D Units?

Academic Excellence can be key for attracting foreign R&D, but …

Many countries / regions build up strong research base, but do not attract foreign MNCs

… often a necessary / not a sufficient condition

Hypothesis: Foreign MNCs locate where strong local presence of Benchmark Co´s signals academic excellence


Global Innovation / R&D Offshoring

Major Trends of Innovation: Increasing Global Disperion of Innovation Activities and New Forms of Open Innovation

Success in Innovation increasingly dependent on Global Presence and on strong Participation in most advanced innovation networks abroad

Globalization of R&D / R&D Offshoring

Increasing Complexity of Innovation processes

Open Innovation / Partnering and Networking

Innovation moving Downstream / Strong role of Lead customers New types of Standard-setting Competition

New transnational projects combining joint R&D and joint standard-setting







6. Chemicals




10. General Industrials

70 523

64 532

60 807

27 139

26 523

17 186

15 991

14 209

9 319

8 868

15.9

8.6

4.1

4.4

9.8

3.1

4.8

6.5

2.7

2.1


CompetitivePositionGermany

Weak

Weak

Leading

Weak

Weak

Leading

Weak

Weak

Leading

Strong

Top 10 Leading Industries / World Industrial R&D Spending

Managing Global Innovation

CompetitivePositionJapan

Extent ofR&D Globa-

lization

Weak

Strong

Leading

Strong

Weak

Average

Weak

Leading

Strong

Strong

* * *

* * *

* *

* * *

* * *

* * *

* *

* * *

* *

* *

R&D Ex-penditures

2006 (Mio €)

IndustrieR&D In-tensity2006 (%)

* * * Very strong R&D Offshoring * * Strong R&D Offshoring


New Forms of Managing Innovation and the Role ofNetwork Embeddedness in Foreign Countries

Research basedInnovation

Research basedInnovation

Corporate / Home-basedR&D Capabilities

Multipolar / Globally-Distributed R&D

Key issue:Embeddedness in

Research System / Talentbase abroad

Engineering-Innovation / IntegratedProcess Development

& Manufacturing

Engineering-Innovation / IntegratedProcess Development

& Manufacturing

Advanced Manufacturingconcentrated in Home-base

Multipolar / Globally distributedManufacturing & Engineering

Key issue:Embeddedness in mostAdvanced Engineering

locations abroad

Home-basedLead Markets

Multipolar / ForeignLead Markets

Lead MarketInnovation / Customer

and Service Inte-gration

Lead MarketInnovation / Customer

and Service Inte-gration

Key issueStrong network relation-

ships with Lead customersin „Avantgarde markets“

Managing Global Innovation

German Firms

Japanese Firms


Managing Global InnovationManaging Global Innovation

Managerial Issues for three selected Projects: Jaspar, Autosar and FlexRay


Innovation Networks and Standard-settingin Automobile Electronics


Managing Global Innovation Networks: The Case of Automotive Electronics

Presentation Part 2


Managing Global InnovationManaging Global Innovation





Managing Global Innovation Networks: The Case of Automotive Electronics

Presentation Part 3


Organizational Issues in Managing Transnational Innovation Networks

Corporate R&D / ProductDevt. at German HQ

Project team in JapaneseR&D subsidiary

Corporate R&D / ProductDevt. at Japanese HQ

Project team in EuropeanR&D subsidiary

Cooperative R&DProject in Japan

Cooperative R&DProject in Germany

CoordinationProblems betweenHQ and European

Subsidiary

CoordinationProblems betweenHQ and Japanese

Subsidiary

Weak represen-tation of HQ

agenda in Japa-nese coopera-tion projects

Weak represen-tation of HQ

agenda in Germannese coopera-tion projects

Managerial issues


WorldMarketRollout

LeadMarket

Capability

Manufactu-ring Ex-cellence

Standardsetting

Strength

IntellectualPropertyPosition

New Pro-duct Per-formance

IndustrialR&D

BasicResearch

University Education

World Class(Top 3 Countries)

Competitive(Keeping pace with Top 10 Countries)

Developing(Catching-up Countries)

The Global Value Chain

High Performance Innovating Country

The Global Innovation Value Chain and the Battle for Standards

Sucessful Global Innovation requires to manage the Full Rangeof the Innovation Value Chain

Downstream Innovation increasingly important

Standard-setting and IP-Position most critical !


Who defines the Standard in Automobile Electronics: the European OEM or U.S.based High-tech Firms?

Hig

h-t

ech

Lo

w-t

ech

European strengths

Automobile-OEM(Final assembly & System integration)

3-4% R&Dintensity

AutomobileSuppliers

(Sub-systems & Components)

5-7% R&Dintensity

AutomobileElectronics &

Vehicle IT

8-10% R&Dintensity

U.S. dominated

Software(15% R&Dintensity)

Semiconductors(12% R&D intensity)

The Global Innovation Chain and the Battle for Standards


Case Studies of the Battle for Standards are well documentedin the Literature

IBM 360

IBM Personal Computer

VHS vs. Betamax

Microsoft Windows

ETHERNET

Mobile Telephony

In many cases, innovators with the best technology lost out because they were incapable of influencing the standard and / or unable to securea strong IP-Position


Internet standards & protocol


CAN

AUTOSAR

MOST

FlexRay

In most of these Cases, European firms have become quite successful inpushing the frontier and in coordinating the Innovation race and theStandard-setting race

PROFIBUS

Industrial Ethernet

More recently, European firms have taken a more active role inStandard-setting Competition

PROFINET

. . .



Success in the Standard-setting race requires to follow a stringentProcedure

Core members of a Standard-setting Cluster pursue aconsistent strategy emphasizing the following elements:

A. Explore basic concepts that are likely to result in an accepted standard

B. Convince customers and downstream complementors to invest in widespread application thereby strengthening the standard

C. Enable suppliers and upstream complementors to invest in necessary equipment, tools and supplies

D. Manage intellectual property (patents, brands, trademarks) for the major knowledge domains

E. Organize a Club that clearly defines the roles, responsibilities and access rules for its members



WorldMarketRollout

LeadMarket

Capability

Manufactu-ring Ex-cellence

Standardsetting

Strength

IntellectualPropertyPosition

New Pro-duct Per-formance

IndustrialR&D

BasicResearch

University Education

Specialization along the Global Innovation Value Chain is feasible . . .

Science-driven Upstream Innovator Strategy / Downstream Activities Abroad

Downstream Innovator Strategy / Exploiting Foreign R&D Capabilities


. . . as long as the Standard-setting process and IP-Management is well under Control


Strategic Implications

Innovation strategies of should focus on areas for which Full Range of Global Innovation Value Chain can be controlled

Downstream Innovation Competence and Standard-setting Competence as Important as Research Competence

Innovation Policy should be concentrated on areas for which standard-setting competence and downstream elements of the value chain can be secured

Less emphasis on high-tech programs for which global standards and Business models are determined in other Countries

The New Geography of Innovation: Clusters of Leading Firms, Suppliers, Standard-setting Clubs and Research Centers

Better linkage between Research community and Innovation- oriented Business community within a region (country)



Industry / Sector

Information-Technology / IT-Hardware

Pharmaceutical, Biotechnology

Automobiles & Parts

Electronics & Electrical

Software & IT-Services

Chemicals

Leisure Goods / Electr. Consumer Goods

Aerospace & Defense

Industrial Engineering

General Industrials

Telecommunication Services

Health Care Equipment & Services

Packaged Consumer Goods

Other Industries (Sum of 23 Sectors)

All Companies / Total of Z Co.

82,368

80,382

75,479

31,551

28,158

19,597

18,356

17,424

10,457

10,693

8,605

7,754

6,825

24,219

421,868

R&D-Expen-ditures in

million $ 2005

8.2

14.9

4,2

4.8

10.4

3.2

7.0

4.6

2.7

2.4

N.A.

6.4

ca. 2.0

N.A.

3.8

R&D as %-of Revenues

2005

Extent ofR&D Globa-

lization

**********************************

*** High Degree of R&D Globalization

** Medium Degree of R&D Globalization

* Low Degree of R&D Globalization

Sources: INTERIS-Database / University of Hohenheim; The 2006 R&D Scoreboard

Ranking der technologieintensiven Sektoren und die Bedeutungder F&E-Internationalisierung in den Sektoren

presentation at the international symposion on “r&d outsourcing and smartsourcing”

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