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Innovation Goes Global

Part of the controversy over R&D bankrolled by overseas firms stems from its startlingly rapid growth. Until recently, most companies conducted virtually all of their R&D at home. The past decade, however, has seen an explosion of international R&D activities by large multinational firms.

U.S.-based enterprises invest nearly $15 billion per year in off-shore R&D, roughly 10 percent of their total R&D budgets, according to the Department of Commerce study. In the European Community, foreign investment in R&D has increased by more than 50 percent over the past decade, now accounting for 7 percent of European R&D. IBM has long operated a network of European labs, including a Zurich facility responsible for breakthroughs in superconductivity. Japanese companies operate an extensive and growing network of more than 200 overseas laboratories.

In Japan, U.S. and European companies are establishing a growing number of personal computer and consumer electronics laboratories. Again, IBM is an important player, having operated a major research center, the IBM Japan Tokyo Research Center Laboratory, for some time. Hewlett Packard, DEC, Intel, Microsoft, Motorola, Texas Instruments, Intel, and Apple also operate research labs in Japan.

Foreign-owned laboratories are a response in part to the rapid and thoroughgoing globalization of markets-in particular the fact that goods are increasingly produced where they are sold. Off-shore factories of multinational enterprises produce 6 trillion worth of goods and services annually, far exceeding the $500 billion generated by international trade, according to the United Nations Division on Transnational Corporations and Investment.

These offshore investments contribute to corporate innovation by allowing companies to get close to their customers. At Nissan’s automotive design studio in San Diego, for example, engineers drive the streets asking motorists what they do and don’t like about their cars. Just such an on-the-road encounter with a frustrated minivan user led Nissan to design a track system for Ford’s Quest minivan so that motorists can slide seats back and forth inside the vehicle when cargo space is needed, rather than having to remove the bulky seats altogether.

The drive to get close to the customer has been compounded by pressure from local governments, which have in many cases demanded that companies setting up factories in their countries also conduct R&D there. This pressure wouldn’t mean much, however, if the countries overseas weren’t capable of conducting research. But European countries, Japan, and the newly industrializing nations of Asia have made substantial investments in science and technology as part of their quest for economic growth. As a result, chief technology officers in Europe, Japan, and North America expect to rely much more heavily on technology originating from external sources in the near future, according to a recent survey by Edward Roberts of MIT’s Sloan School of Management. Indeed, Joel Birnbaum, senior vice president for R&D and director of Hewlett Packard Laboratories, says his company no longer thinks of R&D along American, or even national, lines, but instead as a global system.

These massive outflows of research and development funding often involve international business alliances. To develop the competitive technologies the market demands, companies engage in joint ventures with customers, suppliers-even rivals from other countries. For example, when Nissan realized it needed bigger projects to help support its large-scale R&D facilities, the company formed an alliance with Ford to build the Nissan Quest/Ford Villager minivan. Ford made the product Nissan designed. IBM and Toshiba not only worked together to develop the flat-panel displays of the IBM Thinkpad, they also jointly manufacture them. IBM, Toshiba, and Siemens are collaborating at IBM’s North American facilities to develop next generation semiconductor memory chips. Off-shore labs facilitate these partnerships by allowing companies to have scientists and technical people on the ground who can engage in such collaborations, and by acting as satellite connections to sources of ideas and technology wherever they are.

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