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Globalization of R&D
By Arun Kottolli
As companies become global corporations, all their operations become global. Until
recently, all R&D activities was concentrated in the home country of the MNC. Companies
like Microsoft, Oracle, Intel, HP etc... had all their R&D done in US while their sales,
manufacturing & other operations were global. Traditionally companies were reluctant to
globalize their R&D, partly due to the fear of losing out their competitive advantage, partly
due to non-availability of talent in other countries & partly due to ethnocentrism. This
attitude started changing in 1990s when companies realized the need to customize their
products to the local markets and when companies gained confidence in using research
talent found abroad. By late 1990s, most companies had R&D centers abroad to attract
local scientific talent, to lower costs of R&D, to better respond to local markets and to meet
regulatory requirements.
Factors for Globalization of R&D
Cost Factor: As the business environment changed in 1990s due to increasing global
trade. To maintain competitiveness companies increased their R&D spending. R&D is
expensive, it needs large investments in equipment and highly skilled scientists. In 2000,
US companies spent about $180 billion on R&D activities. A high investment led to
concentration of R&D activities in one location to prevent duplication of resources.
However, with globalization there is a need to locate R&D centers in strategic countries and
availability of skilled scientists in other countries is driving businesses to spread their R&D
efforts. Globally distributed R&D network helps firms to benefit for lower wages abroad and
at the same time allows them to tap into a wider pool of talent which helps to speed up
innovation, thus lowering the overall costs of R&D.
Market Factors: The concept of a global product was not viable in many sectors.
Consumers in other countries demanded products which suits their tastes and started to
refuse products designed for other markets. (For example, cell phone users in China
wanted phones which displays Chinese script and Indian cell phone users wanted ring
tones which is similar to Indian music). The need for localization or customization of global
products is driving firms to have R&D centers close to the major markets. E.g. Nokia has
established R&D center in US to enable them to respond quickly to American needs.
Competitive Factors: Companies need to be concerned if their competitors pursue a
global R&D strategy. Companies that conduct their R&D activity primarily in their home
country will risk losing out competitive advantage when their competitors setup global R&D
centers. The ability to obtain technical expertise and enhancing the scale of R&D operations
adds to the competitiveness of a company. Companies can gain by having a R&D center in
the lead markets by scanning for information on customer requirements and competitor's
capability and competitor's activity. For example, Phillips, a large consumer electronics firm
has R&D centers in Europe ,US & J apan. Phillips had very capable R&D centers in US &
Europe, but the management wanted another R&D center in J apan to enable them to
access to J apanese development. Phillips has hired J apanese scientists and made
contacts with J apanese companies, universities and government labs. Phillips gains by
learning from highly demanding J apanese customers and from collaborative R&D with
J apanese firms.
Government Factors: Government rules and regulations makes it necessary to have R&D
centers in other countries. For example, complex and lengthy drug approval process in US
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makes a R&D center in US beneficial to get approval for new drugs. Having a local R&D
presence will help to better understand technical specifications and regulations.
Additionally, governments encourage technology transfer into their country. Having a local
R&D in other countries will improve the bargaining power for the companies with the local
governments.
Technology Factors: New and cheaper communication technologies like Internet,
dedicated fiber-optic lines and satellite communication now allows companies to transfer
huge amounts of data across the world for faster information sharing. This communication
revolution was the key enabler for globalization of R&D. Telecommunication is enabling
firms to establish and manage a global R&D network.
Selecting R&D Location
Location for R&D centers is based on strategic factors such as:
Presence of highly skilled and/or low cost R&D staff
Lead markets and highly demanding customers
Encouraging government policies and availability of required support infrastructure
Trends in Global R&D
Some of the notable trends are :
y R&D spending abroad by global companies is rising much faster than in their home
country. More than one third of R&D in global companies are now done abroad.
y Technical alliances with other companies and universities abroad are being increasingly
used for R&D. Example, GE has an alliance with IIT Delhi, Intel has an alliance with
Barcelona university, BOSH has tie-up with Motorola.
y Companies have established R&D units in North America, Europe, J apan, China and
India.
y Companies now recruit researchers from anywhere in the world based on their skills
rather than their nationality. Companies are willing to setup R&D centers closer the
talent rather than relocate researchers.
y There is an increasing external and cross-border sourcing of technology among
multinationals through various means.
y The links between university research and industrial R&D are no longer dependent on
the nationality of the firm and the university.
y R&D centers with in a company are increasing their collaboration for joint product
development. This decreases product development cycles and lowers cost.
R&D Builds Competitive strengths
Companies rely on R&D for competitive advantage in high tech business. The underlying
technical skills of the business plays a bigger role on the success of a particular product.
This id forcing companies develop core technical skills to remain competitive. Developing
technical skills is not easy, it requires steady investment over a period of time. On the
product side, the product life cycles are becoming shorter. In such a situation, the product is
the intermediary between the company's technical skills and the market it serves. Rather
than being the focus of corporate activity, products are actually transient mechanisms by
which the market derives value from a company's skill-base while the company derives
value from the market. The high tech companies are therefore asking `what skills,
capabilities and technologies should we build up?' rather than the stereotype question
`which markets should we enter, and with which products?'
To acquire new skills and remain world class in all the core competencies, companies need
to increase their R&D investments. The pressure on the top management to maximize
share holder value places a pressure to minimize all expenditure, including R&D
expenditure. Therefore it becomes imperative for companies to explore ways to lower R&D
costs while retaining competitive advantages. One direct effect of this is that companies
have become very selective on the R&D projects that they are willing to develop in house
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and are increasingly in favor of a strategic alliance with other companies who have
complementary technologies. This allows both the companies to trade their technologies
and remain competitive. The other method to lower R&D costs is to source R&D from other
countries which have lower labor costs. Both these techniques are currently being used. For
developing countries, this trend has helped them catch up in technology with developed
countries thus leading to an accelerated technology leveling among countries. In other
words, technology innovation is no longer limited to a particular country, instead the
innovation is shared by multiple countries.
Challenges with Global R&D
Global R&D offers companies several advantages and benefits, but these gains are not
without challenges. Having worked at Intel R&D, the main challenge for a successful global
R&D can summarized as :
Communication barriers.
Communication barriers exists in two forms
y Differences in time zones & work hours makes it tough to communicate in real
time.
y Different levels of technical skills and different standards of measurement
between countries will impair smooth communication. Often there is
misunderstanding of what is being said and what was understood.
Differences in implementation of intellectual property rights.
Different countries have different policies and implementation levels of
intellectual property rights. As a result companies are reluctant to share critical
technology with their own R&D centers located in other countries.
Embargos and Government policies hinder technical collaboration.
Often countries have some sort of embargo or sanctions against other countries.
For example US had imposed a ban on exporting high tech computers to India, US
currently prohibits transfer of several technologies to China. These sanctions were
imposed for political reasons, but R&D center located in US must comply with those
rules.
Cultural Differences plays a havoc
Differences in culture plays as a big spoil sport while working in joint ventures or
collaborations. Cultural differences are not easy to overcome and takes a while for all
parties to understand each others culture. When quick product development is
needed, cultural differences can hamper the project.
Personally, I have observed that it takes a couple of projects for all the parties to
understand each others culture. Once the cultural barrier is crossed, then
communication becomes smooth & the joint development produces better results
than a stand alone centers.
Global coordination and Management of R&D
Often R&D centers would have developed as a stand alone unit. The concept of
joint development with another R&D center is new and may not be welcome by the
staff. There will friction between R&D centers arising from communication
challenges. Global coordination of R&D is a management challenge. Creating a
cohesive network of coordinated R&D centers requires dedicated efforts from top
management, Human resources Department and R&D staff.
In addition to the above challenges, the other factors which undermine global R&D are
ethnocentric and parochial attitude of the management. The belief that people in other
countries cannot match their technical skills, our way is the best way attitudes prevents
the company from reaping the full benefits of the global R&D.
Maximizing benefits
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Maximizing benefits in a complex environment spread across different countries is a tough
task. Difficulty arises due the factors mentioned above. However there are means to solve
those issues. In my opinion, the key factors to maximizing benefits are:
y Common understanding of goals and objectives. Full commitments from all
groups to these goals. The goals must be well defined to avoid misunderstanding in
overall Vs local priorities. Establish a common language, common terminologies &
common corporate language to avoid misunderstandings. E-mail addresses, phone
numbers of all members must be available to all members of the team. This enables
faster communication.
Provide easy access to e-mail, phone, cross site meetings, video conferencing
etc.. for better communication between sites. IT/Computer infrastructures across
sites must be comparable to get the maximum benefits of improved communication.
y The main project manager must have very skillful people skills and must be
capable of establishing a creative and positive environment. Team members
must be committed to solve problems quickly to prevent damage to the project
schedules or objectives. Project leader must be capable of resolving any cross-site
issues and disputes quickly and equitably. If disputes are not resolved quickly, it may
soon escalate thus forcing a costly intervention from the top management.
The project manager is responsible for setting up the hierarchy of the J oint R&D
organization. Having a clear line of command is vital to the smooth functioning of the
joint teams. The project manager must be empowered to handle any organizational
issues.
y Establish trust between different R&D teams. If the teams are from different
countries or locations, companies must arrange for a face-to-face meetings early on
in the project. Such meetings help to build trust between R&D centers, breakdown
small fiefdoms and increase productivity. Team rotation between sites should be
encouraged during the project to build better co-operation and overcome cultural
differences. This also removes any ethnocentric or parochial view held by both sides.
It must be noted that cultural differences are difficult to overcome. Experience has
shown that increasing contact between cultures reduces cultural differences as
people understand other cultures better. In a global R&D project, increasing face-to-
face contact either by meetings or by team rotations, companies can minimize the
impact of cultural differences.
y Requirement gathering must be done with great care. R&D teams must work
closely with marketing and other departments to document a detailed project
requirements ahead of starting the project. Project requirement specifications must
be circulated to all members and explained clearly to avoid any misunderstanding
arising from different interpretations. However, it is impossible to document all the
requirements and issues do arise during the project. To mitigate this, regular meeting
must be held with marketing to resolve any new issues.
In my experience, I have seen that having at least one person per site who
understands the requirements completely helps resolve issues. Marketing
department must closely work with R&D teams during the life of the project. Often it
is necessary to have weekly or bi-weekly meetings with marketing to resolve any
issues with the project requirements.
Establish a strong change request system. Any changes to the requirements
must go through the change request system. The change request must be reviewed
by a committee within a reasonable time frame and their opinions must be clearly
communicated.
Closing thoughts
Global market place requires global R&D. Internet & fast communication technologies
opens the possibility for global R&D. Although the project management on a global scale
has its challenges and specific problems, experience shows that R&D activity serves end
markets best when the activity is also located in those markets. Global R&D strategy needs
to consider:
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1. The need to tap into sources of knowledge and information where ever they might be
located on the globe.
2. The need to transfer that knowledge to other R&D centers and other parts of the
organization.
3. The need to coordinate activities between various R&D centers to ensure that
knowledge is used appropriately.
4. The need to balance the allocation of priorities and resources globally based on
strategic need rather than proximity.
5. The need to develop global products with customization to meet local markets.
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