From Arbitrage to Global Innovation: Evolution of Multinational R&D in Emerging Markets.

VerfasserJha, Srivardhini K.
PostenRESEARCH ARTICLE - Research and development - Report

1 Introduction

Multinational enterprises (MNEs) engage in overseas R&D for one of two dominant reasons: Either to adapt products to meet the unique requirements of attractive foreign markets, or to leverage geographically embedded sophisticated technical know-how (Cantwell and Mudambi 2005; Gerybadze and Reger 1999; Kuemmerle 1999). However, when the host country is an emerging market, MNEs are faced with problems on both these fronts. Demand tends to be mostly in price-sensitive mass market, technological ecosystems are underdeveloped, and intellectual property regimes are weak (Govindarajan and Ramamurti 2011; Zhao 2006). The observation in the literature is that MNE R&D in these markets is of low value or narrow in scope, and mainly driven by cost arbitrage (Demirbag and Glaister 2010; Kumar 2001; Reddy 1997; Zhao 2006). However, in recent years MNEs such as GE, Microsoft, and IBM have been announcing large-scale R&D investments in countries like China and India (Businessweek 2010; Economist 2010). Recent field studies in these countries suggest that these are not just low-cost R&D locations, although they may have started as one, and that there is a new dynamic that seems to be driving the growth of R&D here (Govindarajan and Trimble 2012; Jha et al. 2016; Kumar and Puranam 2012; Yip and McKern 2016). Our study explores this dynamic with the research question: How does an MNE's R&D evolve in an emerging market?

While our research question is timely and critical, this is still a relatively new phenomenon and due to the sensitivity associated with R&D, available empirical data is limited. So, we pursue an inductive theory-building exercise, using multiple in-depth case studies (Eisenhardt 1989; Yin 2009) as appropriate for exploratory work. The research setting is India, a hub of MNE R&D activity among emerging economies (UNCTAD 2005). India's sustained importance as an R&D destination for over a decade makes it a suitable context to study the MNE R&D pattern unfolding in emerging markets. We employ a nested design, focusing on three firms in each of three most R&D intensive sectors in India, namely, automotive, information and communication technology (ICT), and pharmaceutical industry (Yin 2009). Drawing on strategy process research, we analyze how these R&D units have evolved over the years, and identify significant triggers that drive this evolution (Doz 1996; Mirabeau and Maguire 2014; Vaara and Lamberg 2016).

Our model maps out the evolutionary path of R&D units in emerging countries that typically start with an arbitrage motive, and isolate the mechanisms that drive their evolution. We build on the insight that embeddedness drives legitimacy, knowledge and resources within MNE networks (Andersson et al. 2001, 2002; Dhanaraj et al. 2004). We distinguish between different types of embeddedness--internal and business embeddedness--analyze the process of their formation, and relate how each of these dimensions impacts the R&D unit's evolution. We analyze these movements to develop testable propositions and integrate them into an evolutionary framework.

Our study makes two distinct contributions. First, our evolutionary framework uncovers an alternative trajectory of R&D evolution predominantly found in emerging markets, which starts with a 'cost arbitrage' motive and progressively moves towards a higher competence-creating role. This trajectory is different from the trajectory of evolution prevalent in developed markets and noted in extant view that begins with a dominant 'adaptation' motive. Second, we unpack 'embeddedness' and isolate the underlying processes that create embeddedness within organizational units. Complementing previous work that has explored the antecedents and consequences of embeddedness of an MNE subsidiary (Andersson et al. 2001, 2007; Frost et al. 2002), we bring forth 'how' different types of embeddedness are created and its implication for competence-creating roles. These findings, grounded in R&D evolution in emerging markets, also inform the broader internationalization theories.

2 A Short Survey of R&D Evolution Literature

Vernon's (1966) product life cycle theory provides the anchor for early MNE R&D literature suggesting that as demand for a firm's product rises in foreign markets, its functions--first marketing, and eventually production and associated functions such as R&D--would relocate there. These foreign R&D units were established with an adaptation motive i.e., to adapt existing MNE products to foreign markets by supporting local production, making minor modifications to suit the local needs and providing technical services to local customers (Ronstadt 1978; De Meyer and Mizushima 1989). Essentially, foreign R&D was market-driven or demand-driven and the R&D units acted as a vehicle to transfer firm's technology from the home country to the foreign production location.

Subsequent studies posited that the R&D units set up to support production gradually took on a more creative role, first innovating for the local market and then adding value beyond their local market (Ronstadt 1978; Roth and Morrison 1992; Birkinshaw et al. 1998; Pearce 1999; Kuemmerle 1999; Cantwell and Mudambi 2005; Hayashi and Serapio 2006). Some of them emerged as centers of excellence for certain technologies (Frost et al. 2002) while others took on product mandate for global markets (Roth and Morrison 1992).

This progress was shaped by two forces--unique and sophisticated demand from the local market (Vernon 1979); and rapidly advancing national innovation systems that offered learning opportunities (Nelson 1993; Porter 1990). With this, the motivation for foreign R&D was not just demand-driven but also knowledge-driven i.e., to leverage strategic knowledge assets in multiple locations and integrate them into global products (Gassmann and von Zedtwitz 1999; Granstrand et al. 1993; Hedlund 1986, Kogut and Zander 1993; Kuemmerle 1999; Veliyath and Sambharya 2011). In general, foreign R&D units evolved from being competence-exploiting units that take existing MNE products to the local market to being competence-creating units that leverage the local knowledge to add value to the global market (Cantwell and Mudambi 2005).

The evolution of an R&D unit is not only impacted by changes in the external environment but is also shaped by the unit's own strategic choice (Birkinshaw and Hood 1998). With the MNE R&D being conceptualized as a heterarchy (Hedlund 1986)--a network of relatively autonomous but interdependent R&D units--the role of subsidiary strategy in steering its evolution has gained traction. In this vein, the literature on 'relational embeddedness', which delves into subsidiaries' strategy regarding who they interact with, the intensity of the interaction, and the resources they can access and control as a consequence of those interactions, provides useful insights into the evolution of R&D units.

Relational embeddedness (henceforth, simply embeddedness) can be defined as closeness in a relationship (Andersson et al. 2002) and captures the intensity of information flow and mutual adaptation between two actors. Embeddedness plays a crucial role in the activities and outcomes of individuals, organizations and organizational sub-units such as MNE subsidiaries (Andersson et al. 2001, 2002; Polanyi 1957; Granovetter 1985; Uzzi 1996, 1997). In MNE subsidiaries, it has been found that external embeddedness i.e., the relationship of the subsidiary with local suppliers and customers, has a positive impact on its performance as well as competence creation for the MNE (Andersson and Forsgren 2000; Andersson et al. 2001, 2002, 2007). On the other hand, internal embeddedness i.e., the relationship of the subsidiary with the corporate headquarters, does not directly impact competence development or innovation-related business performance (Ciabuschi et al. 2011; Yamin and Andersson 2011). However, it indirectly improves performance by strengthening the subsidiary's influence within the MNE which enables it to secure resources needed for innovative projects (Ciabuschi et al. 2014). Further, subsidiaries that simultaneously have a high degree of internal and external embeddedness are more innovative. In other words, dual embeddedness positively impacts competence creation (Figueiredo 2011; Achcaoucaou et al. 2014; Athreye et al. 2014).

The survey of literature on R&D evolution, and embeddedness as a key enabler of that evolution, reveals two gaps. First, the trajectory of R&D evolution has been developed based on observations in developed countries and does not account for the MNE R&D phenomenon unfolding in emerging markets. We know little about how R&D units in emerging countries like India, which were setup to leverage cost arbitrage for efficient R&D (Reddy and Sigurdson 1994; Reddy 1997; OECD 2008), are evolving into innovation hubs for MNEs (D'Agostino and Santangelo 2012; Jha et al. 2016). A second gap is in our understanding of the process of embeddedness. While embeddedness is accepted as an effective strategy for subsidiary evolution into a competence-creating role, the literature is silent on the process through which an R&D subsidiary might achieve embeddedness. Embeddedness evolves over time, from arms-length to more intense (Andersson et al. 2002), but exactly how, is unexplored. We hope to address both these gaps through our study.

3 Research Design

Our research question is exploratory in nature and aspires to unravel a nascent and underexplored phenomenon. MNE R&D in emerging country context has received limited attention because it is a recent phenomenon (UNCTAD 2005) and data from this context is sparse (Khan et al. 2011). Even though there are hundreds of R&D units in place now (Zinnov 2012), there are very few that have a history that we can theorize on. The purpose of our study is to explore the contours of the changes in MNE R&D in emerging markets and lay down the key...

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