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Indian Multinationals: The Dynamics of Explosive Growth in a Developing Country Context (ebook)
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Please enter a valid email address. Walmart Services. Get to Know Us. Customer Service. According to Chesnais a, pp. In conjunction with the changes in macro techno-economic conditions, the conditions in the labor market for talented personnel have also been changing, with cost, quality and accessibility implications. The demand for scientists and engineers, and national disparities in the incentives offered to them, has led to reported shortages in several OECD countries as early as in the late s OECD The shortages of research personnel are compelling companies to widen their research networks in order to tap more geographically dispersed scientific talent Doz , such as Israel, Brazil and India.
A more recent study by OECD indicated that over the last decade the proportion of young people studying science and technology has been decreasing in many European countries. Although this problem seems to be more acute in the case of European countries, almost all countries seem to face similar problems to one degree or the other. For instance, with the emergence of ICT industry and its demand for personnel, young people in countries such as India and China are now showing more interest in ICT-related engineering subjects rather than pure sciences.
With the pervasive influence of new technologies and their integration into traditional products, this phenomenon of divisibility of innovation process is now extended to even traditional industries such as the electrical and mechanical engineering industries. The emergence of new generic technologies is also affecting the operations of MNCs, first, by increasing the need for global sourcing of technologies, and second, by facilitating such globalization of technology development activities.
This divisibility of innovation processes, which has been mainly prevalent in new science-based technologies such as electronics and biotechnology, is now extended to even traditional industries such as the electrical and mechanical engineering industries. This new dynamics of innovation is also affecting the industry structure. Previously, innovation process required large resources, long time periods and vast accumulation of knowledge, favoring large firms as they controlled the necessary resources.
In recent years, with the extension of technological convergence extending to product technology, vertical disintegration of value chain has gone beyond the manufacturing processes and into the development of components and subsystems for complex products. Conventional pharmaceutical industry is based on chemistry, with pharmacology and clinical sciences as supporting tools for drug development. In recent years, the emergence of molecular biology and, in particular, of genomic sciences, is having a great influence on drug discovery.
These developments also demand a wider knowledge base incorporating several disciplines, which is beyond the capacity of an individual company. Evolving technological development made the innovation process in biomedical technologies more modular and even submodular in character, enabling firms to outsource some activities or subactivities to other specialized firms and universities worldwide. Due to the technological progress, this initial screening is presently carried out in tissue culture instead of in animals.
A large number of hypothetical targets are incorporated into in vitro or cell-based assays and exposed to a variety of compounds representing numerous variations on a few chemical themes or, as in more recent times, fewer variations on a larger number of themes in high-throughput configurations Drews , p. In the third stage, after successful completion of tests on animals, clinical trials on human beings are carried out initially on a small group of healthy volunteers to test its safety phase I. Once the compound is proved to be safe in human beings, the efficacy tests to make sure that the drug does what it is supposed to do are carried out on a small group of patients phase II and then on larger groups of patients phase III.
The final phase involves getting approval of the regulatory authorities. Until recently such a rigorous, lengthy and costly innovation process favored large companies. Therefore, successful pharmaceutical companies tended to be large, vertically integrated firms. They carried out everything from building up libraries of compounds to marketing the final product themselves.
In recent years, the tools of pharmaceutical innovation have been changing, eroding the advantage of the large companies pharmaceutical giants in drug discovery. Companies that specialize in individual stages of drug discovery, i. As result, the large pharmaceutical companies are increasingly outsourcing parts of the innovation process. Figure 2. Once the target molecule is identified, the libraries of compounds are screened to find a suitable molecule that can bring about necessary chemical changes in the target.
The success, to a large extent, depends on the size of the libraries. Previously only large pharmaceutical companies could afford these libraries of a few hundred thousand compounds. But, now the new technology, in the form of combinatorial chemistry through microtiter plates , opened up new opportunities for smaller players. This technology treats all but the smallest organic molecules as consisting of modules, which can be put together in several different combinations, generating a large number of molecules from a small number of modules.
In the past a chemist could only create about 50 to new compounds a year. Now, with combinatorial chemistry one can create about a couple of thousand new molecules a year, and the advanced versions of this technology even permit creation of up to 50, new compounds a year. Small companies such as AxyS Pharmaceuticals, US, which focuses on drugs that affect the action of protease enzymes, have been able to generate their own libraries with the help of combinatorial chemistry. AxyS created a library of about , compounds.
Similarly, there are also specialist combinatorial chemistry firms offering on hire their libraries of compounds. For example, Pharmacopeia, US, is one such specialist company. Even the screening of these large libraries is now done through a new technology called high-throughput screening. This new technology allows screening of over one million compounds against a single target protein.
In the emerging method of combinatorial chemistry, the reactions will take place in a silicon chip rather than in the microtiter plates through simulations on computers creating virtual laboratories. After the promising molecules and their structure are identified through simulations, the chemists will perform the actual drug development activities. After a lead compound is identified, the animal tests will indicate the modifications to be made in the molecular structure. These preclinical trials are not very expensive but are time-consuming.
There are also other pressures on the companies to reduce the animal testing e. So new technologies are gradually emerging in this stage of the drug discovery process. A number of small outsourcing service providers have emerged in this stage of the drug discovery value chain. Clinical trials are the next stage of drug discovery.
This stage is the most expensive and time-consuming. Now, specialized contract research organizations CROs have emerged to perform this process. With regulations becoming tighter, the clinical trials are becoming difficult to handle for pharmaceutical companies themselves.
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For instance, up to the early s, the number of trials required for approval in the USUS was 40; now the number is Drug companies prefer to conduct simultaneous trials among a variety of ethnic groups of patients and in wider geographical areas. What CROs do is basically efficient management of the trials.
It also helps in determining the number and the size of trials that will be needed to test the drug to an appropriate level of rigor. Chip design activities typically consist of routine functions i. The semiconductor chip design process is becoming increasingly complex, mainly due to two factors: 1 progress in manufacturing technology miniaturization has made it possible to fabricate millions of transistors on a single chip.
This requires to be matched by significant improvement in design productivity; and 2 the convergence of digital computing, communication and consumer devices has increased the complexity of design process for electronic systems, which need to be increasingly smaller, faster, cheaper and more energy efficient, but at the same time support growing multifunctionality. At the same time companies face pressures to speed up time-to-market due to rapidly shortening product life cycles ITRS The complexity for chip design itself basically arises from two sources: 1 silicon used on the chip; and 2 integration of the system.
As a result of this growing design complexity, verification of the design for yield and performance becomes critical, accounting for about 60 to 70 percent of all system-on-chip hardware design, with cost and time implications ITRS , pp. Until the mids, the system companies and the device manufacturers carried out almost all their semiconductor chip design by themselves in-house. But, technological development since then resulted in vertical specialization enabling firms to disintegrate the design process into activities and subactivities and disperse it geographically see Figure 2. Since the beginning of the s, vertical specialization within design networks has transformed the semiconductor industry structure, just as in the case of the biomedical industry.
Now the design of a typical system-on-chip requires interfaces with at least six types: system designers, silicon intellectual property providers, software developers, verification teams, electronic design automation tool vendors and foundry services fabrication , who are geographically spread across the world Ernst a. There is a distinction between engineering functions and engineering service functions.
For instance, an engineering function involves manufacturing of an auto engine, but a related engineering service function deals with the designing of that engine. At a broader level, the following steps are involved in engineering product design and development:. Idea phase—Identification of a problem or an idea e.
Design phase—Analysis of the idea or problem and design of solutions to meet the requirement, under certain guidelines;. Test phase—Application of the design to a model test. This occurs frequently with the product design and development;. Manufacturing phase—Supervision of the manufacturing processes or improvements to a plant, operating system;.
Product completion or production—Service provider may simply hand product over to the client i. Engineering design services are complex as they revolve around technical skills, domain expertise and good engineering judgment. Offshore outsourcing of engineering services, which are part of the innovation, is a relatively new phenomenon, and only a small subset of activities are currently being offshored, e.
Testing and analysis for thermal management, engine simulation, vehicle crash-worthiness, fatigue and durability analysis, meshing, plastic design and mold design validation;. Since the s, global competition, in several industries, has been intensifying rapidly, mounting pressure on the profitability and survival of the companies. The characteristic features of the internationalization process have been considerably affected mainly due to two factors: the deregulation of economies both for FDI and portfolio investments; the emergence of new technologies that enabled as well as compelled moves toward increased globalization.
The ongoing processes of economic liberalization and technological changes, as Porter predicted, are leading to growing international competition and widespread globalization of industry scope:. Countries are becoming similar in terms of availability of infrastructure, distribution channels and marketing approaches. Similar products and brands are being marketed worldwide, reflecting the convergence of customer needs in different countries. The economic differences among developed countries and some emerging economies are narrowing in areas like income, factor costs and energy costs.
Part of the reason for this development is the aggressiveness of MNCs in diffusing technologies around the world. Successive rounds of international agreements resulting in the establishment of the WTO led to the lowering of tariff levels and other trade barriers. Traditionally the USUS has been the strategic market for global competition because of its large size. But with the liberalization of economies in countries such as China, India and Russia, they are emerging as huge markets with a number of implications.
Therefore, gaining access to these markets may become a crucial strategic factor in the future because of the scale economies it provides to the successful firm. Several industries have been significantly affected by some technological revolutions, such as microelectronics, information systems and advanced new materials that are reshaping competition.
These technological developments are redefining industry structures and opening up unprecedented opportunities for shifts in industry leadership in international markets. The forces leading to dramatic shifts in international competitive positions have resulted in some new firms, mainly from East Asia, establishing themselves as fully fledged international competitors within the space of a decade. These new players have exploited the new competitive conditions and the cross-cutting technological changes to leapfrog even well-established rivals.
The intensity of competition has also risen, setting higher standards for success. According to Levitt , technological developments over the last few decades have combined to create a unified marketplace in which companies must capture global-scale economies to remain competitive. If the artificial trade barriers were removed, the global reach would be greater.
In many industries, radical technological innovations also brought changes in industry economics and allowed companies to develop and manufacture products on a global basis, e. In some industries that were not affected by external forces of change, companies started attempting to achieve global economies, by rationalizing their product lines, standardizing parts and specializing their manufacturing operations. Such internal rationalization of operations led to a second wave of globalization in a range of industries such as automobiles, construction equipment and machine tools Bartlett and Ghoshal Over the past decade, such forces have also been increasing the need for worldwide learning and innovation.
Coupled with the convergence of consumer preferences worldwide, the diffusion of technology has significantly influenced both the pace and the locus of innovation. No longer can U. S-based companies assume, as they often did in the decades just after World War II, that their domestic environment provides them with the most sophisticated consumers and the most advanced technological capabilities, and thus the most innovative environment in the world.
Today, the newest consumer trend or market need can emerge in Australia or Italy, and the latest technologies may be located in Japan or Sweden. Companies see that they can gain competitive advantage by sensing needs in one country, responding with capabilities located in a second, and diffusing the resulting innovation to markets around the globe. Bartlett and Ghoshal , p. The issue of how to compete with these innovative companies in their own domestic markets has become a challenge for many of the global MNCs. In this respect, companies from India lead the trend, demonstrating that companies can be profitable even while catering to the poorer market segments provided they use the right business model.
Before Titan came into the market, the only watches that were available at the low end were of poor quality, without warranties and service networks. The Sonata brand is very popular, selling more than three million units a year. By the onset of the new millennium , this development became an established trend, with MNCs locating strategic innovation activities in emerging economies that include India, China, Russia, Hungary, Poland and the Czech Republic.
Friedman argues that the techno-economic forces have flattened the earth or compressed the globe, leading to a blurred distinction between the developing and developed world, and compelling as well as enabling companies to access inputs for innovation from across the globe, including the emerging economies. He identified 10 such forces that emerged in progressive phases:. The changing pattern of global competition, coupled with rapid technological changes leading to the shortening of product life cycles, placed innovation as a key source of competitive strength.
Companies are adopting a variety of strategies to attain this technological edge and thus maintain their competitiveness. Hence, the comparative advantage is expected to be derived from the location where firms perform their activities. Comparative advantage becomes specific to the activity and not the location of the entire value chain. Such intrafirm international specialization and arbitrage of activities are made possible by the growing ability to coordinate and configure globally Porter According to Cantwell , p. The blurring of boundaries between different disciplines is compelling firms to access a broader technology base through an international strategy.
These subsidiaries produced products mainly for the local markets in their respective host countries. Such subsidiaries mainly depended on the parent company for their technology requirements, which were in turn adapted to suit the local conditions. These subsidiaries produced most, if not all, of the product range of the parent. However, the subsidiaries, being small in size, often had difficulties in reaching the optimal scale of production Pearce According to Porter , pp. MNC makes a one-time transfer of know-how, which is adapted to the local conditions. In multidomestic industry, MNC manages its international activities like a portfolio, because its strategy in a country is largely determined by the competitive conditions in that country.
Therefore, each subsidiary is allowed substantial autonomy and control of all the important activities needed to do business in that industry. Industries in which this pattern of competition is prevalent include retailing, consumer packaged goods, distribution, finance and chemicals. The global industry is a series of linked domestic industries in which the rivals compete with one another on a worldwide basis.
In global industry, a company must find ways to integrate its activities on a worldwide basis to capture the linkages among countries. In global competition a company has to perform some activities in each of the countries in which it competes. This type of competition is seen in industries that include commercial aircraft, TV sets, semiconductors and automobiles. Companies are increasingly moving away from the multidomestic approach toward a new approach in which each subsidiary forms an integral part of the global strategy, where subsidiaries are assigned specialized tasks in the activities planned and organized from the center.
Bartlett and Ghoshal , pp. In a transnational approach the strength of the configuration comes from its fundamental characteristics: dispersion, specialization and interdependence. The ability to sense diverse market needs, technological trends and competitive actions remains crucial, however, because such stimuli represent an important source of innovation. A dispersed configuration allows MNCs to capitalize on factor cost differentials. They not only have access to low-cost labor and materials, but also can tap into an international pool of increasingly scarce technological and managerial resources.
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By specializing operations and giving them a broader mandate, MNCs can capture minimum-scale efficiencies and yet retain a dispersed structure. The viability of this approach has been greatly enhanced by the latest generation of technologies. One version of a rationalized structure of an MNC is what Pearce , pp. Such specialization allows achievement of a greater level of efficiency and optimal scale economies. A common form of such a rationalized structure involves subsidiaries specializing in the production of specific components or parts for final products or executing a specific stage in a vertically integrated production process.
In other words the subsidiary becomes the international center for that product. In its product development activities, the subsidiary may also draw from the basic research of the group. Earlier location of such higher-order activities was confined to the industrialized countries Reddy There are large reserves of scientists and engineers in the developing world. According to them, in the case of industrialized countries who are at the world frontier, the core issue is how to make conceptual knowledge more market-oriented or how to move from pure science and basic research to more applied and developmental work.
In contrast, the problem in developing countries is how to move from advanced or exploratory development, focused on manufacturability and material substitution, to the generation of at least a differentiated product through better design. Using cases from Singapore, Amsden and Tschang suggest that moving into applied research is a major hurdle for a latecomer to industrialization, as the techniques used in applied research tend to involve more science and engineering. Such cooperation or alliance exists not only between the firms, but also between the firms and academic establishments.
Interfirm cooperation as such is not a new phenomenon. Joint ventures between firms have been in existence for many decades. However, since the s the number and the variety of forms of interfirm alliances grew significantly. Teece , pp. A strategic alliance denotes some degree of strategic and operational coordination.
Such agreements take a variety of forms ranging from non-equity agreements associated with one-way or two-way licensing, through to joint venture agreements, equity participation or consortium. Mowery , p. These resources may be physical, such as product designs and production processes, or intangible, such as brand equity. They include knowledge of specific markets or user needs, decision-making process or management systems and complex networks for marketing and distribution of products Mowery et al. But what constitute core activities or competences keep changing with technological progress and economic development.
Consequently, innovation activities are becoming global, with pockets of technological expertise available at competitive costs in Asia, Eastern Europe and even Africa. In comparison to industrialized countries, the availability of research personnel in fields such as ICT, biotechnology and chemistry that are particularly relevant to the globalizing companies is larger in emerging economies, mainly because qualified personnel in these fields of expertise are employed in other sectors of the economy in the industrialized countries Arora and Gambredela Third, innovation activities in science-based technologies do not seem to require long years of industrial experience.
This is mainly because much of the required knowledge is codified. Consequently, science-based industries facilitate qualified personnel and companies from emerging economies to participate in global innovation activities; Last, emerging economies are also home to some of the internationally acclaimed universities and research institutes in terms of their research and publication activities. Therefore, companies, including MNCs, can not only recruit graduates from these universities, but also use these organizations for outsourcing of innovation activities.
Mathews , with East Asian firms in perspective, argues that it is changes in the character of the world economy, particularly its globally interlinked character what he calls the worldwide web for inter-firm connections that are mainly responsible for driving the new patterns of internationalization. Firms, particularly those that lack substantial resource base, are adapting the strategies of linkage and leverage.
They are perfect strategies for latecomer and newcomer firms, and for SMEs, rather than for large incumbent firms. As newcomers and latecomers, these firms from emerging economies had to find innovative ways to make space for themselves in markets that were already crowded with very capable firms. They did so through offering contract services, through licensing new technologies, to forming joint ventures and strategic alliances. It is not on the basis of their existing strengths, but on the basis of their capacity to leverage resources from the strengths of others, through making international connections Melin Among the findings of the study are Dehoff and Sehgal , pp.
India produces 95, graduates a year in electrical, information technology and computer-science engineering—the fields in highest demand— while the USUS produces 85, a year. For instance, a major automotive component MNC is aggressively expanding its network into China and India. Moreover, the markets are growing faster in emerging economies than in the industrialized world. Consumers in these markets tend to demand equally sophisticated products as their counterparts in the industrialized world, in terms of multifunctionality, but at much lower prices.
This calls for newer business models than the traditional Western business models of creating value-addition without consideration of additional costs for innovative products. Companies from emerging markets seem to better understand this phenomenon e. These are considered emerging products for the emerging markets. With successful deployment of such products, the companies from emerging economies may in the future also satisfy the hitherto-unsatisfied demand from the marginalized and low-income consumers in the industrialized world, giving them the scale and profit volumes to become MNCs by themselves in direct competition with the traditional MNCs.
This study, on the other hand, deals with the new trend of locating strategic innovation activities in some developing countries, which are considered as emerging economies. Therefore it becomes relevant to begin by a brief review of some of the theories pertaining to internationalization of production. The reasons for this are twofold. These studies explained FDI as a natural growth process of an oligopolistic firm i. All firms are not equal in their ability to operate in an industry; some have considerable advantages in particular activities, and the possession of these advantages may cause these firms to have extensive international operations.
Such advantages may be that a firm can acquire factors of production at a lower cost than others can, or it may have knowledge or control of a more efficient production function or may have better distribution channels or a differentiated product. Extending this argument further, other studies argued that imperfections in markets are important additional factors that ensure successful exploitation of their specific advantages through discriminatory pricing Kindleberger ; Caves ; Horst Other types of expansion abroad are called conglomerate diversification, where a firm deals with a wide variety of products, even unrelated to one another.
Horizontal expansion takes place because of the possession of a special asset, which once acquired by the firm can be utilized in additional activities at little or no cost. Firms resort to FDI to exploit these oligopolistic characteristics. The investments involving vertical integration are motivated by the need to avoid oligopolistic uncertainty and the erection of barriers to the entry of new competitors. Vertical integration means internalization of the market for intermediate products for reasons of contracting costs and uncertainties.
It is transactional costs that determine the decisions regarding the allocation of different production processes between internal facilities and facilities abroad. In the innovation stage, the design of the product often changes, technology is not stable and the market is not familiar with the product. During the growth stage, sales of the product increase, a mass production system would be introduced, the industry attracts more entrants and competition among producers increases. In the final maturity stage, technology and product parameters become standardized, while managerial skills and production costs become more important than innovative skills.
Vernon further developed the link between location of production, multinationality and oligopolistic structures. The search for equilibrium in the mature oligopolies leads to geographical concentration of investment, which cannot be explained on the basis of comparative costs. In situations where economies of scale are not a strong enough barrier, oligopolistic equilibrium is maintained through cartels or product differentiation.
In a later paper, Vernon himself analyzed the applicability of the product cycle model to the scenario of the late s and s and admitted to its shortcomings. He analyzed two main factors to arrive at his conclusions: a the degree of internationalization and diffusion of new products; b the changes in the European macro environment. As MNCs increasingly adopted a global approach, the spread of their operations increased, and the overall time lag between the introduction of a new product in the US and its diffusion into other locations decreased dramatically.
There are three sets of factors, which enable internationalization of production. There are three types of ownership advantages: a those that accrue from the ownership of proprietary or intangible assets and need not arise due to multinationality; b those that a subsidiary enjoys from belonging to an established large firm over the others producing in the same location; c those that accrue from multinationality.
There are three conditions for FDI to take place. The motivation for internalizing comes from the existence of market imperfections that confer special advantages to internal markets as opposed to external ones. Differing policies among countries create incentives for internalization across national boundaries, and internalization further helps firms to acquire and enhance those assets that give them an ownership advantage Dunning In relation to the developing world, a country may have locational advantage in one factor, such as availability of trained personnel, but it may lack other advantages such as communication and infrastructural facilities.
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Therefore, even if a firm wants to internalize the advantage it finds in a location, the lack or inadequacy of complementary assets required may prevent it from doing so. Mathews , pp. Thus, a global market orientation from the beginning becomes a source of advantage for these firms. A global market orientation carries higher risks and uncertainties than a conservative domestic market focus. In such situations, joint ventures and other forms of collaborative partnership as a mode of entry into the foreign market become a crucial strategic option;.
These firms will be concerned with the issues of accessibility to such resources, with their imitability, or transferability or substitutability;. An analysis of this data by Craemer , pp. Studies in the late s Craemer ; Ronstadt ; and Behrman and Fischer confirmed these practices. TTUs were closely linked to manufacturing units and were established when the product and process technologies needed to be adapted to the local conditions, and when there was a need for continuous support of technical services.
GTUs were established when a single product was envisaged for the global market. CTUs were often established abroad to recruit top scientists, who could not be relocated to the US on a long-term basis. Only India, among the developing countries attracted two TTUs, because the host country had the potential for a large market with unique characteristics. Behrman and Fischer surveyed 31 US and 17 European companies during — Such subsidiaries often need to adapt the products and processes to suit the local demand and conditions or sometimes even create distinctively new products for the local market.
Burstall et al.
The primary function of SL is to assist the production and marketing facilities in the host country through technical services and adaptation of products and processes to suit local conditions. The LIL also caters to the local markets and production by developing products that are more than marginal adaptations of the existing product range of the parent company.
Its work is likely to be oriented to original development work rather than a fully independent creative process. On the other hand, the minor development work of adapting them to specific material and marketing needs in each manufacturing unit is closely linked with production but not with the strategic planning at headquarters.
The need for development work varies between industries, being most prevalent in engineering industries where detailed design is an integral part of the production process. In the late s itself, MNCs were seen as seeking to exploit valuable supplies of scarce skilled labor as well as the much larger supplies of low-skilled and low-cost workers in the more general production process Schoenberger The above studies provided valuable insights into the organization of overseas research activity.
Internationalization is usually motivated by the need to support overseas production and marketing, whereas globalization is independent of such motives. These include: proximity to a manufacturing site; availability of local universities and professionals; ability to build up a critical mass of local researchers most important for global technological research ; attractiveness of sources of technical excellence, e. Even in the selection of low-cost locations, it is observed that MNCs followed the same criteria.
Although emerging economies are lagging behind the developed countries in industrialization, some of them have internationally reputed academic institutions. MNCs consider them to be almost on a par with the academic establishments in the industrialized world. In such centers, technology transferred from the parent company to the subsidiary is adapted to local market and production requirements. According to Granstrand et al. Over time, technology-related motives are observed to have become more important than market-related motives Cantwell In recent years, supply-related factors, i.
This has to be achieved without compromising the primary objective of generating new technologies and improving the innovativeness of the company. The past research studies have neglected to take this key relationship into account. Whatever implications are suggested by these few studies, they tend to be postulated hypotheses. The benefits are larger, while the costs involved may be marginal.
But, knowledge and skills cannot be isolated over the long term. The mobility of researchers and the need for local procurement of materials are bound to diffuse technologies throughout the economy. This, in turn, may benefit the host country by increasing the size of output, employment and tax revenue, and the consumers would have access to products better suited to their requirements, perhaps at a lower price.
The local ties are virtually nonexistent for a TTU, whose main technology links are with the parent; somewhat strong for an ITU, which may to some extent draw on the local SI to develop products particularly designed for the local market; stronger for a GTU; and strongest for a CTU.
Freeman used the concept in analyzing the success of Japan over the postwar period. Lundvall , p. A few scholars, however, argue that even in these cases where the particular technologies and sectors have their own dynamics, the national factors play an important role. As Nelson , p. But, if one broadens the focus the factors that make for commonality within a country come strongly into view, and these largely define the factors that make for commonality across sectors within a country. Archibugi et al. By integrating both concepts the broader SI can be analyzed.
According to Archibugi et al. So they suggest an analysis of the technology dynamics that allows a better understanding of the globalization process, as there is a mutually reinforcing interplay between the two. At the same time, the process of generating new technologies and diffusing them has been further strengthened by the flows of people, products and capital.
This implies that the technology-based innovation systems will be characterized by common technological regimes, irrespective of the geographical location in which the related production is carried out. The international distribution of technological and production activities is reflecting more sectoral differentiation. Globalization is resulting in increased division of labor, with each country specializing in selected industries and resorting to international trade for others Archibugi et al.
They are mainly involved in improving products or processes. Second, the focus on innovation is strongly connected to the broader issue of achieving economic growth. As some of the Asian developing countries have shown, it is not always necessary to be able to generate fundamentally new knowledge in order to achieve higher economic performance. Third, the first firm to bring new innovative products into the market may not be the firm that appropriates most economic rents from the innovation.
Edquist , in his review of literature on SI, analyzed that whereas there are several commonalties among different approaches, there is also a high degree of diversity among them. Among the core characteristics of the SI approach are—innovation and learning; holistic and interdisciplinary nature; natural inclusion of a historical perspective; differences between systems and nonoptimality; emphasis on interdependence and nonlinearity; inclusion of product as well as organizational innovations; the central role of institutions; conceptually diffuse nature; and focus on conceptual constructs rather than on a theoretical framework.
Whatever may be the approach, as Mytelka , p. In the present global business environment the competition faced by firms is based more on innovation dynamics rather than on the static elements of relative comparative advantage. In order to meet such competition, new strategies and policies are required. According to Edquist , organizations and institutions are the main components of SI. The important ones among them are firms, universities, venture capital funds and public agencies responsible for innovation policy, competition policy and regulation.
For instance, the patent laws and the rules and norms influencing the relations between universities and firms come under institutions. The activities are those factors that influence the development and diffusion of innovations. They are equivalent to determinants of the innovation processes. A list of such main activities which have subactivities under each of them is categorized as: i the provision of knowledge inputs to the innovation process, ii demand-side activities, the iii provision of constituents of systems of innovation and iv support services for innovating firms.
The common innovation infrastructure provides resources for innovation throughout an economy, but it is the firms in specific industrial clusters that introduce and commercialize specific innovations.
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There is also opportunity for productivity-enhancing knowledge to spill over across industrial clusters. Conventional wisdom states that the most viable point of entry into the industrialization process for developing countries to be in mature technologies because of low production costs and low skill requirements. But, according to Perez and Soete , these are industries that have already exhausted their technological dynamism.
Countries adopting this strategy may face the risk of getting caught in a low wage and low growth pattern. In other words, a change in the techno-economic paradigm opens up new windows of opportunity for the latecomers to industrialization. One of the main weaknesses of the product life cycle theory had been that it assumes that products are independent of one another.
Every new product is regarded as a radical innovation, and the successive improvements to it and to its production process are the incremental changes, which bring it to maturity. The next product is again a radical innovation following a similar evolutionary path. In practice, however, each product cycle develops within a broader family, which in turn is part of an even broader technological system.
Successive products within a technological system are equivalent to incremental innovations to a product Freeman and Perez According to Perez and Soete , the life cycles of the technology systems approach are more relevant for development strategies than that of the product life cycle approach, because the former facilitates the identification of those families of products and processes that will provide better opportunities for learning and catching up, as conceptualized in the following phases:.
Phase I introduction , involves original design and engineering, with the product in focus. The level of locational advantages required may be high for successful introduction. Phase II rapid market growth , with the product development completed, the focus shifts to the production process and improvements to the product. Locational and infrastructural economies generated by the innovation itself would also grow, making them more easily available to the late entrants.
Scaling up the plant and incremental innovations to improve productivity become important. The capital costs and management skills required can be very high. Entry at this stage for new entrants will be extremely difficult. The importance of locational advantages will also be low. Phase IV maturity , the whole system is by now standardized and further investments in technological improvements result in diminishing returns.
Firms would be willing to sell the technologies to others. Firms and locations with low costs of production will become competitive, but fixed investment costs will be high. The threshold of entry at this point is low, even though costs of entry could be high. Phases I and IV are potential entry points for entrants, but with vastly different costs and requirements. This partially explains the cases of some innovations in electronics and biotechnology occurring outside the industrialized countries. However, as the system evolves, it may require not only constant technological effort, but also a growing flow of investment to generate synergies for self-sustained growth processes.
This implies that, if a developing country has adequate reserves of well-qualified university graduates, a window of opportunity opens for relatively independent entry into new products in a new technology system in its early phases Perez and Soete The technology systems, in turn, constitute the elements of a techno-economic paradigm, which also evolves through different phases and is composed of a series of interrelated technology systems. Each new techno-economic paradigm requires, generates and diffuses new types of knowledge and skills and creates an environment for an easier entry into more products within these systems.
But the new firms and latecomer countries, for whatever reason, acquire the new knowledge and skills more quickly. The emergence of new technologies has changed the rules of the game in global competition by transforming the industrial production system. Because of this change in the technological paradigm, no country or firm, however well-entrenched in the global markets, is certain of maintaining its competitive lead.
The threats posed to the MNCs by the emerging high-tech start-up firms in the electronics and biotechnology sectors are an evidence of this phenomenon. For instance, Nokia of Finland, which was new to the business field, emerged as the first largest supplier of mobile telephones worldwide Reddy Developing countries were not considered as potential locations for carrying out innovation activities. This study is an attempt to develop a conceptual framework in an integrated manner, for better understanding of the globalization processes relating to innovation.
Figure 3. The greater the degree of complementarity available abroad, the greater would be the degree of globalization. So the greater the degree of complementarity between the home and host countries, the greater would be the degree of globalization from home country and greater would be the degree of integration with the host country Reddy With the emergence of a new techno-economic paradigm discussed earlier, MNCs are finding that some countries outside the industrialized world are in a position to provide complementary knowledge at a competitive cost.
Indigenous Technology Units ITUs —to develop new products for the local market, drawing on local technology;. Corporate Technology Units CTUs —to generate basic technology of a long-term or exploratory nature for use by the corporate parent. While markets worldwide are integrating in terms of standards and technologies, some regional clusters have also emerged.
National markets in these regional clusters share some common features and needs for specialized products. Examples of this could be found in biotechnology—food processing special types of food, taste and so on , pharmaceuticals drugs for regional diseases or agricultural pesticides—or in microelectronics— special software applications. Each wave represents a set of distinctive characteristic features, yet reveals the continuation from one wave to the other Reddy This needed adaptation of the product and process technologies to local conditions and the need for continuous support of technical services.
The categories of industries involved in this process were mostly mechanical, electrical and engineering, including automobile industries. The main driving force was to increase the local market share abroad. ITU types of laboratories were set up to develop new and improved products for the local markets.
Global Innovation in Emerging Economies
This type of activity was predominant in branded packaged consumer goods, chemicals and allied products and so on. Hence, the change in the term from internationalization to globalization, reflecting the characteristic differences from the earlier waves. These trends are visible mainly in the industries relating to microelectronics, pharmaceuticals, biotechnology and new materials.
The categories of industries involved are microelectronics, biotechnology, pharmaceuticals, chemicals and software. Since the s, emerging economies have been witnessing rapid economic growth rates, increasing the incomes of their populations. Consumers in these markets are demanding more sophisticated products as the consumers in the industrialized world, i. But these consumers are not willing to pay high prices like their counterparts in the industrialized world. To meet this demand and derive economies of scale, MNCs need to substantially change their business models, designing and developing products that are cost-effective, but contain all the functionalities e.
These products are not meant just for local markets, but global markets, where such market segments exist. The category of industries involved includes both conventional and new technologies ranging from automobiles through ICT to biopharmaceuticals. In each of the phases the driving forces acting on are categorized as supply-side and demand-side forces. These factors are categorized as the demand-side forces in the figure. By the late s, the situation changed, as can be noticed from the new demand- and supply-side forces. This is also the period when the pervasive effects of new technologies i.
In addition, the changes in the general business environment started exerting external pressures, which necessitated rationalization of MNCs internal operations. Such a move was facilitated by the supply-side forces emanating from some developing countries emerging economies. This chapter provides an overview of the innovation environment in emerging economies. The discussion here does not focus on the structure of the innovation system as such, but on its dynamic aspects such as characteristic features, linkages, strengths, weaknesses and ongoing changes that provide a conducive environment for innovation.
This chapter focuses only on developing countries that are emerging as locations for global innovation, particularly the countries chosen for this study. Many emerging economies have an innovation environment characterized by dualism. In these countries, the industrial and education policies of the s and s have led to the emergence of an advanced segment that is small, but in terms of features and quality is comparable to the innovation systems of some of the industrialized countries.
MNCs as well as some local companies are attempting to utilize this advanced segment for their innovation activities. Since then these countries have attracted the attention of policymakers and investors worldwide. The growth of BRICs is likely to slow significantly toward the end of the period, with only India attaining growth rates significantly above three percent by As early as , the annual increase in spending by the BRICs economies in US dollars would be greater than that by the G6 economies and more than twice as much in US dollars terms as it is now.
Consequently, the relative importance of the BRICs economies as engines of new demand growth may increase dramatically. Higher growth may lead to higher returns and increased demand for capital in these economies, increasing the weight of the BRICs in investment portfolios sharply. Rising incomes in these economies is expected to increase the demand for different kinds of products because of changes in local spending patterns.