Internationalization of TNCs’ R&D activities to developing countries

By | April 18, 2014

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1.     Research background…………………………………………………………………………………. 2

2.     Reasons of internationalization of TNCs’ R&D activities……………………………….. 2

2.1      Domestic market size………………………………………………………………………… 3

2.2      Geographic distance…………………………………………………………………………. 3

2.3      Overall R&D capacity………………………………………………………………………. 4

2.4      Low labor cost of the R&D personnel………………………………………………… 5

3.     Hints and implications of internationalization of TNCs’ R&D activities…………… 5

3.1      Leader effect…………………………………………………………………………………… 5

3.2      Increased competition for key resources in the Asian developing countries 6

3.3      Possible conflicts with the stakeholders………………………………………………. 6

3.4      Impacts on the host country………………………………………………………………. 8

 

 

Internationalization of TNCs’ R&D activities to developing countries

 

1.        Research background

According to Peter Dicken (2007, p.145), it’s been a long time when very little of the foreign research and development (R&D) activity of TNCs (transnational corporations) from the developed economies such as the United States, Japan and some European countries (Germany, United Kingdoms and Italy) is located outside the global triad.  Such phenomenon is known as “home country bias persist” for a number of consideration such as difficult assessment of needed infrastructure and labor talents. But in nowadays, as there is a trend of increasing number of TNCs from developed countries would like to internationalize their R&D activities to developing countries, in particularly in the emerging markets such as Asian developing countries, this research will focus on the study of this field.

2.        Reasons of internationalization of TNCs’ R&D activities

Based on the study outcomes of Athukorala and Jayasuriya (2003), the internationalization of MNCs R&D activities from the developed countries such as the Unites States will depend on the following factors: domestic market size, geographic distance, overall R&D capacity and also the labor cost. We will discuss these factors below.

2.1    Domestic market size

 

The continual growth and increasing size of the China market has been one of the most critical reasons behind the trend of internationalization of TNCs’ R&D activities to developing countries (Fung & Zhang 2002, p.227). Take the Chinese market as an example, since the implementation of the reform and opening up policy in the 1980s, using a FDI led and export oriented growth mode China has been one of the fastest growing economies in the world for the past two decades in term of a continual double digit GDP growth. With the increased market size of China, China has become a more and more popular destination market of the products made by the TNCs. With the increasing importance of the Chinese market, many MNCs choose to set up their subsidiaries and manufacturing plants into the Chinese markets. After the set up of these plants, gradually these TNCs also would like to set up R&D centers in China for multiple functions. One key reason is to study the consumer behaviors of the Chinese consumers by setting a R&D center in China. Beside the market size, the government is another factor. According to Joe Y. Eng (2005) the Chinese government also plays an important role to persuade the foreign TNCs to make up their mind to relocate or set up new R&D centers in China by offering various incentives and also proactively create conditions such as the building of logistics by government expenditure.

 

 

2.2    Geographic distance

Geographic distance also plays an important role in deciding the location of the foreign R&D centers of the TNCs from the developed countries. Take the Japanese TNCs as an example. According to National Research Council (U.S.) (1999, p.10) many Japanese TNCs have show a preference to locate the divisional labs within or at least beside the manufacturing plant geographically whether in Japan or in off-shore product sites. There are two key considerations to locate the R&D centers in the geographically near locations: on one hand, closer locations of the R&D centers would maintain a strong control over the R&D centers by the headquarters because it takes much less time for the senior management and company staffs in the home country to get to the R&D centers in the foreign locations to handle any accidents and issues if needed; on the other hand, by locating the R&D centers in the geographically near locations which share similar business cultures, it could help reduce the cultural differences and conflicts which is detrimental to the foreign business efficiencies if not well managed.

 

2.3    Overall R&D capacity

When a foreign TNC search for a new location to build up a new factory, one key consideration if to find a place where there is enough of infrastructure such as convenient transportation. And to the criteria of setting locations for the R&D centers for the TNCs in the developing countries, such infrastructure conditions not only include the basic transportation but also the resources required in the R&D activities. In other word, it is the overall R&D capacity that matters. As research and development (R&D) could be typically defined as the efforts to create new products or service (Hergert 1987), to do the research to make the new products, the key resources needed include relative R&D personnel, related raw materials and equipments.

 

2.4    Low labor cost of the R&D personnel

Within the three mentioned key resources, R&D personnel, related raw materials and equipments, the most important resource is the R&D personnel, if a developing country does not have the necessary R&D human resource for the TNCs to access, there is no way that these TNCs will select the country as a alternative location to build up the R&D centers even the countries provide perfect fundamental infrastructure such as transportation tools.

 

3.        Hints and implications of internationalization of TNCs’ R&D activities

 

3.1    Leader effect

One implication to the transnational corporations themselves and also in their industry is the leader effect. A direct leader impact could be defined as a leader’s specific influence on the followers, decisions or polices in such a way that follower decisions and actions will be changed and substantially impact performance. As the followers tend to follow their leaders in decision making in a number of issues, and the location of the oversea R&D centers are is obvious one of the key decision that the followers might choose to follow their leaders, that is why when the leaders in an industry the decision to relocate their R&D centers in a developing Asian country, there is high possibility that the followers will take the similar actions and make the similar decisions.

3.2    Increased competition for key resources in the Asian developing countries

With the increasing number of TNCs from the developed countries to relocate their R&D activities into the developing countries for the purpose to access to the low priced labor and other key resources demanded in the R&D activities, one important implication to the transactional corporations and other transactional corporations together with the non-transnational local corporations in the destination developing country is that there will be more fierce competition  for the spacial key resources such as technicians and talents with the needed special skills and knowledge.

 

 

3.3    Possible conflicts with the stakeholders

One important stakeholder to the TNCs is the labor unions. As labor unions are the organizations of workers established to pursue collective interests related to employment (Krausert 2008, p.62), assume that a large TNC is to relocate its part of its R&D functions and activities to an Asian emerging market, such as China and India, there is possibility that the labor union of the R&D personnel will be unhappy with the TNC and thus conflicts with the unions could happen. And when conflicts happen, it could influence the normal R&D activities and the business activities as a result. It will be important for the TNCs to timely communicate the need of relocation of part or full of the R&D center and its activities to lower cost developing countries or in order to be closer to the market. Another key stakeholder in the issue of relocation of the R&D centers is the technicians who are required to move to the developing country to do their research work. Within this process, especially at the beginning of the relocation, cultural shocks could happen. The term cultural shock refers to the negative emotional states experienced by foreigners as a result of the loss of their own original culture, friends, family, values and also other environmental cues that they have been used to (Garza-Guerrero 1974). As when the R&D staffs in the home country are required to move to a new country to wok, there could be possibility that they would encounter the cultural shocks. It would be recommended to the TNCs to have cross cultural training before sending out the technicians and other staffs for the international assignment to equip and prepare them well for the cultural differences that they may later find out.

 

3.4    Impacts on the host country

By internationalizing the R&D activities, it would bring in impacts to the host country economies. There are two major impacts: firstly, the internationalization of the R&D to the developing countries will create job positions for the local economy. With the set up of the new R&D centers in these developing economies, it will definitely increase the demand for the specialized talents and thus create the new job positions and help the local economy in reducing the unemployment issues; secondly, it will also help the local business to get access to the advanced technology and leading management skills and methods. When many TNCs set up their own R&D centers in the same area, there will be a “gathering effect” which attracts more and more TNCs and local companies to set up R&D centers together in the same area. By the creation of such area, the local companies will also be enabled to reach out to this research result with competitive prices or even for free due to the technological spill over effects.

 

Reference list

Athukorala, P. & Jayasuriya, S. (2003), Food safety issues, trade and WTO rules: A developing country perspective. World Economy, 26 (No.9): 1395-1416.

Avery, G., Bell, A., Hilb, M. & Witte, A. E. (2004), Understanding leadership: paradigms and cases. London: SAGE Publications.

Dicken, P. (2007), Global shift: mapping the changing contours of the world economy. 5th edition, London: SAGE Publications Ltd. p.145

Eng, J. Y. (2005), China Investment Environment & Strategies: The Key to Winning in the Greater China Market. Lincoln, NE: iUniversity Press.

Fung, H. G. & Zhang, K. H. (2002), Financial markets and foreign direct investment in greater China. New York: M. E. Sharpe, Inc. p.227

Garza-Gerrero, A. C. (1974). Culturae shcok: its mourning and vicissitudes of identify. Journal of the American Psychoanalytic Association. 40 (2)

Hergert, M. (1987). Causes and consequences of strategic grouping in U.S. manufacturing industries. International Studies of Management and Organization. 18, 26-49.

Krausert, A. (2008), Performance Management for Different Employee Groups: A Contribution to Employment System Theory. Germany: Physica – Verlag. p.62

National Research Council (U.S.) (1999), New Strategies for New Challenges: Corporate Innovation in the United States and Japan. Washington DC: National Academy Press. p.10