Multinationals

Multinationals and Emerging Economies
INNOVATION, CO-OPERATION and DEVELOPMENT

INNOVATION, CO-OPERATION and DEVELOPMENT
MERIT
Maastricht University, the Netherlands
In recent years two connected realizations have dawned upon scholars
studying economic development: innovation is indispensible for development
and, crucially, successful innovation depends upon co-operation.
Monographs and edited volumes in this series will explore this theme
theoretically and empirically, studying the developed world as well as
emerging and developing economies. This is the first series to bring
together a range of different perspectives that explore diff erent aspects
of innovation, co-operation and development. Containing cutting-edge
research with a multi-disciplinary approach, the books in this series will
be of great interest to scholars, practitioners and policymakers working
in these fi elds.
Multinationals and
Emerging Economies
Multinationals and
Emerging Economies
Edited by
Wilfred Dolfsma
Professor, University of Groningen, The Netherlands, and
corresponding editor of the Review of Social Economy
Geert Duysters
Scientific Director, Maastricht University India Institute,
Professorial Fellow, UNU-MERIT and Professor of
Innovation Management, Eindhoven University of Technology,
The Netherlands
Ionara Costa
UNU-MERIT, Maastricht University, The Netherlands
INNOVATION, CO-OPERATION AND DEVELOPMENT
Edward Elgar
Cheltenham, UK
Northampton, MA, USA
Wilfred Dolfsma, Geert Duysters and Ionara Costa 2009

Wilfred Dolfsma, Geert Duysters and Ionara Costa 2009
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2009928600
ISBN 978 1 84844 008 1
Printed and bound by MPG Books Group, UK
Contents
List of figures, tables and boxesList of contributorsList of abbreviationsPrefac
e
vii
ix
xi
xiv
Introduction
Ionara Costa, Wilfred Dolfsma and Geert Duysters
1
1 Multinationals are multicultural units: some indications
from a cross-cultural study
Nantawan Noi Kwanjai and J. Friso den Hertog
6
2 The innovativeness of foreign firms in China
Branka Urem, Ludovico Alcorta and Tongliang An
233 New Europe s promise for life sciences
Sergey Filippov and Klmn Kalotay
414 Facing the trial of internationalizing clinical research to
developing countries: evidence from Mexico 58
Fernando Santiago-Rodrguez
Intermezzo I. Do multinationals matter for emerging markets,
or vice versa? 75
Rajneesh Narula
5
Strategic motivations for international alliances: the Chinese
perspective 78
Tina Saebi and Qinqin Dong
6
Cross-border investment and economic integration: the case of
Guangdong Province and Hong Kong SAR 92
Naubahar Sharif and Can Huang
v
Multinationals and emerging economies

The making of national giants: the international expansion
of oil companies from Brazil and China
Flavia Carvalho and Andrea Goldstein
1118 Beyond the emission market: Kyoto and the
internationalization of firms from the waste industry
Asel Doranova, Geert-Jan Eenhoorn and Ionara Costa
127Intermezzo II. Emerging knowledge economies
Jojo Jacob and Luc Soete144
9 Changing configuration of alternative energy systems
Radhika Perrot
14910 Serving low-income markets: rethinking multinational
corporations strategies
Shuan SadreGhazi and Geert Duysters
166Index 183
Figures, tables and boxes

FIGURE
Figure 6.1 Foreign direct investment in Guangdong,
1985 2006 94
TABLES
Table 2.1
Table 2.2
Table A.2.1
Table 4.1
Table 4.2
Table 6.1
Table 7.1
Table 10.1
Innovations of high novelty by nationality of fi rm
ownership, propensity indicators (% of number of
fi rms)
Innovations of high novelty by nationality of fi rm
ownership, intensity indicators (% of number of
fi rms)
Descriptive statistics
Distribution of clinical trials by main countries
and regions, 1948 2008
Mexico: main causes of death, 2000 2005
Average annual TFP growth rate of state-owned,
collective, shareholding, and foreign enterprises
in Guangdong Province (percentage), 1997 2006
Chinese and Brazilian oil companies at a glance
BOP population and income
32
33
40
63
65
102
116
169
BOXES
Box 5.l
Box 6.1
Box 10.1
Box 10.2
Chinese strategic motives to enter international
alliances
Formation of variables for TFP calculation
Overcoming the low purchasing power barrier
Understanding and accommodating expected
functions
85
99
174
175
vii
viii viii
Box 10.3
Box 10.4
Box 10.5
Marketing in remote locations
Educating users and overcoming lack of
awareness
Effect of low-income market characteristics on
multinationals activities
176
177
179
Contributors
Tongliang An, Nanjing University, Jiangsu, China
Ludovico Alcorta, Director, Research and Statistic Branch; Programme
Coordination and Field Operations Division
UNIDO
Flavia Carvalho, PhD Candidate, United Nations University
MERIT
Ionara Costa, Researcher, United Nations University MERIT
Wilfred Dolfsma, Professor of Innovation, University of Groningen, the
Netherlands
Qinqin Dong, PhD Candidate, Wuhan University of Technology, China
Asel Doranova, PhD Candidate, United Nations University
MERIT
Geert Duysters, Professorial Fellow, United Nations University
MERIT
Geert-Jan Eenhoorn, Manager, Carbon Assets, Energy and Climate
Strategy
Ecofys
Sergey Filippov, PhD Candidate, United Nations University
MERIT
Andrea Goldstein, Senior Economist, OECD Development Centre
J. Friso den Hertog, Professor, United Nations University MERIT and
Maastricht University
Can Huang, Researcher, United Nations University MERIT
Jojo Jacob, Researcher, United Nations University
MERIT
Klmn Kalotay, Economic Aff airs Offi cer, UNCTAD
Nantawan Noi Kwanjai, PhD Candidate, United Nations University
MERIT
Rajneesh Narula, Professor of International Business Regulation,
University of Reading, UK
Radhika Perrot, PhD Candidate, United Nations University
MERIT
Shuan SadreGhazi, PhD Candidate, United Nations University MERIT
ix

MERIT
Naubahar Sharif, Assistant Professor, Division of Social Science, The
Hong Kong University of Science and Technology
Luc Soete, Director, United Nations University
MERIT
Branka Urem, PhD Candidate, United Nations University
MERIT
Abbreviations
AMIIF
AN
ARCO
BMIS
BO
BP
CANIFARMA
CARB
CCINSHAE
CDM
CEE
CEO
CER
CFCs
CIS
CIT
CNG
CNOOC
CNP
CNPC
CO2
COFEPRIS
CRO
CSN
CVCC
CVRD
EPA
EU
FDA
FDI
Asociacin Mexicana de Industrias de Investigacin
Farmacutica (Mexico)
Agncia Nacional do Petrleo (Brazil)
Atlanta Richfield Oil Company
Bioresearch Monitoring Information System
Base of the pyramid
British Petroleum
Cmara Nacional de la Industria Farmacutica
(Mexico)
California Air Resources Board
Comisin Coordinadora de Institutos Nacionales de
Salud y Hospitales de Alta Especialidad (Mexico)
clean development mechanism
Central and Eastern Europe
chief executive officer
certified emission reduction
chlorofl uorocarbons
community innovation survey
Commission on Innovation and Technology (Hong
Kong)
compressed natural gas

China National Offshore Oil Company
Conselho Nacional do Petrleo (Brazil)
China National Petroleum Corporation
carbon dioxide
Comisin Federal para la Proteccin contra Riesgos
Sanitarios (Mexico)
contract research organization
Companhia Siderrgica Nacional (Brazil)
compound vortex controlled combustion
Companhia Vale do Rio Doce (Brazil)
Environment Protection of America
European Union
Federal Drug Administration (US)
foreign direct investment
xi

P
good clinical practices
GDP
gross domestic product
GHG
greenhouse gas
GLP
good laboratory practices
HAWT
horizontal-axis wind turbine
HKD
Hong Kong dollars
HKSAR
Hong Kong Special Administrative Region
HRM
human resource management
IC
internal combustion
ICH
International Conference on Harmonization
ICT
information and communication technologies
IEA
International Energy Agency
IMF
International Monetary Fund
IMSS
Instituto Mexicano del Seguro Social (Mexico)
IND
investigational new drug
INEGI
Instituto Nacional de Estadstica, Geografa e
Informtica (Mexico)
INPI
Instituto Nacional de Propriedade Industrial (Brazil)
IOCB
Institute of Organic Chemistry and Biochemistry
(Czech Republic)
IPM
integrated pest management
IRB
Institutional Review Board
ISSSTE
Instituto de Seguridad y Servicios Sociales para los
Trabajadores del Estado (Mexico)
ISWA
International Solid Waste Association
IT
information technologies
ITF
Innovation and Technology Fund (Hong Kong)
JI
joint implementation
KW
kilowatts
LNG
liquefied natural gas
M&As
mergers and acquisitions
MD
managing director
MNC
multinational corporation
MW
megawatts
N2O
nitrous oxide
NCEs
new chemical entities
NGO
non-governmental organization
NHI
National Health Institutes (Mexico)
NIH
National Institutes of Health (US)
NLM
National Library of Medicine
NOCs
national oil companies
NREL
National Renewable Energy Laboratory
Abbreviations
Abbreviations
OEM
OLI
OLS
OPEC
PPP
PROLCOOL
PURPA
R&D
SINAIS
Sinopec
SS
TCSDD
TFP
UFRJ
UN
UNCTAD
UNDP
UNEP
UNFCCC
UNICAMP
US
USD
USPTO
UTC
VAWT
VP
WRI
WTO
ZEV
Organisation for Economic Co-operation and
Development
original equipment manufacturing
ownership, location and internalization
ordinary least square
Organization of the Petroleum Exporting Countries
purchasing power parity
Brazilian Program of Alcohol
Public Utilities Regulatory Policy Act (US)
research and development
Sistema Nacional de Informacin en Salud (Mexico)
China Petroleum and Chemical Corporation (China)
Secretara de Salud (Mexico)
Tufts Center for the Study of Drug Development
total factor productivity
Federal University of Rio de Janeiro
United Nations
United Nations Conference on Trade and
Development
United Nations Development Programme
United Nations Environment Programme
United Nations Framework Convention on Climate
Change
State University of Campinas

United States
US dollars
United States Patent and Trademark Offi ce
United Technologies Corporation
vertical-axis wind turbine
vice president
World Resources Institute
World Trade Organization
zero emissions vehicles
Preface
This volume emerged from the ongoing research meetings at UNUMERIT
(United Nations University
Maastricht Economic Research
and training center for Innovation and Technology). Revolving around
the themes of innovation, global business strategies and host country
development, these meetings culminated in a workshop in November of
2007 on the theme summarized by the title of this volume. Junior scholars
at the cutting edge of research on the role of multinationals for development,
innovation and their combined impact on sustainability together
with scholars who in the recent past have and will in the future continue
to have a defining role joined together to discuss. Many of these contributions
have found a place in this volume in some way, but some have not
although they have contributed to the meetings and thus to the volume,
and so, Ivan Kulis, Rajesh Kumar, Sarianne Lundan, Anabel Marin and
Lynn Mytelka deserve a special word of thanks.
xiv
Introduction
Introduction
MULTINATIONALS
For long periods of time, in both policy as well as scholarly circles,
multinational corporations were approached with quite a bit of suspicion,
especially in relation to the effects of their behaviour for developing
countries. With their quintessential reach into many diff erent countries,
multinationals can tap into a broad set of resources. As a consequence,
their intentions were questioned, their workings were deemed inherently
hurtful to developing countries, and especially to the very poor living
there, and they were believed to offer goods and services that hurt rather
than benefit the interests of consumers in the countries hosting their subsidiar
ies.
Whether or not these claims ever held water, and despite the fact
that some still believe these claims hold true, the situation seems to have
changed in recent times.
Especially in recent years, the contribution of multinational enterprises
is not just noticeable through international production activities or in the
impact of their activities on such macroeconomic variables as fi nancial
flows and trade.
Multinationals are now seen as being potentially able to contribute to
the economic as well as technological development, particularly of those
developing and emerging economies. The explanations for such a dramatic
change are to be found in the transformations of the world economy over
the last 20 years or so, in the evolution of the multinationals themselves,
and in how these two movements interact with one another.
Innovation is one of the main, if not the most, important sources of
unique resources or assets that shape the competitive advantages of multinationa
l
corporations . their so-called fi rm-specific or ownership advantages.
Notwithstanding the crucial role of the institutional and systemic
conditions under which the innovation process takes place at country
level, firms are the main locus of innovation (Nelson and Winter, 1982).
Yet, it is possible to exploit, sustain and improve the fi rm-specifi c advantag
es
that propel multinationals expansion worldwide. Although the
size of multinationals may mean that not all information and knowledge
1

national
firms far beyond the borders of their original home markets, as
global actors par excellence, is partly driven by the creation and diff usion of
technological knowledge within firm boundaries. Innovating at the global
level, yet local in the sense of staying within the firm. Some multinationals
have rearranged their R&D activities, offshoring these activities primarily,
so far, to adapt products developed in the central R&D Lab to local market
conditions. The knowledge and other resources multinationals can draw
on may include those that can assist in making sure that any economic or
technological development they contribute to is sustainable as well.
As key players of the global innovation process multinationals are
active in defining the global frontier of technological knowledge. As the
main creators of (industrial) technologies, multinationals represent an
important channel for the diffusion of technologies and innovations across
national borders. The importance attached to innovation as driver of
sustainable growth has been central in turn in a number of countries economic
policies to multinationals. Countries and fi rms . multinationals or
otherwise . have pursued innovation as their engine for their sustainable
growth. This quest for both innovation and sustainability can be assumed
as the central link between multinationals and national economies.
Sometimes the two goals may not be compatible, but sometimes they may.
Particularly relevant in this regard is the link between multinationals and
the so-called emerging economies.
EMERGING ECONOMIES
Having foreign multinationals within the national border, or having local
firms that ally with multinationals, is a familiar experience to countries
worldwide. In relation, the rapidly growing economies of Asia, eastern parts
of Europe and Latin America have drawn quite a bit of attention. Emerging
economies have seen in innovation a way to catch up with the world s most
advanced countries. Much is expected of them for their inhabitants as well
as for the world economy as a whole. They may, for instance, reduce the
extent to which a stable economic situation globally is dependent on just
one or a few economies. They may be sources of technological development
and economic growth and they may alleviate poverty and inequality.
Introduction
Introduction
A similar problem of definition arose when Japan rose to economic
prowess. While assimilating one country under the umbrella of western
countries and economies, doing so for whole swathes of them would
make the term ultimately meaningless. Using the arguments to include
Japan in the G8, for instance, will no longer do without making the
institution unwieldy. It raises the issue of how to structure a governance
model to take care of supra-national aff airs (The Economist, 2008).
Multinationals are bound to play an important role in this.Increasing
interdependencies of countries and economies across the globe is not
only evident from an economic and technological perspective; social
and ethical responsibilities cannot be ducked by multinationals. This
holds for how clinical trials are undertaken, for how dire poverty in
the bottom of the pyramid is to be tackled. Some, indeed quite a few,
multinationals are aware of this and are actively involved. Some see
such considerations as a fringe phenomenon, perceiving it as something
that they are required to do in order to show some kind of corporate
(social and environmental) responsibility. Others are more centrally
involved and, thus, seek to make a profit, at least at some point, in
developing and emerging economies while minding the social and ethical
considerations faced.
While Albert Hirschman (1982) hinted at the effects of market on society
being civilizing, destructive, or feeble as a theoretical question, we suggest
that the answer is very much dependent on empirical circumstances and
choices by actors involved. Multinationals and national governments play
an important role here.
INNOVATION AND SUSTAINABILITY
The quest for innovation and sustainability is at the heart of concerns
among different groups of actors in the current globalization era (Freeman,

ment.
Innovation may both clash with and encourage the sustainability
of the economic processes in an environmental and social sense . partly
depending on the institutional context in an emerging economy.
Innovation has been defined from different perspectives. In essence, it is
understood as a change resulting from the creation of new technological
knowledge and its introduction into the market. Stricto sensu, innovation
represents a change in relation to the world market, and a true novelty at
the edge of the world technological frontier (Kim and Nelson, 2000; Bell
and Albu, 1999). The developmental impacts of an innovation depend
on the level of novelty and originality of the (technological) change it
implies to the market and to the knowledge frontier, and on the systemic
environment under which it takes places.
The ability of countries and their institutions and organizations, fi rms
particularly, to introduce innovations into the global market in a sustained
manner is at the core of the matter in explaining the gap between developed
and developing economies. Hence, innovation is the key element for
the catching up of countries lagging behind in the global economy.
Sustainability refers to a cumulative and persistent trajectory of growth,
at economic level . the economic sustainability or at firm level . the business
sustainability; an inclusive growth trajectory that yields benefits to people at
different levels of social position, both within countries and worldwide . the
social sustainability; and a growth trajectory that recovers and preserves
the natural environment, and is well balanced in terms of exploitation of
natural resources . the environmental sustainability. In all of these senses,
sustainability can be linked to the cumulative and path dependent nature of
the innovation process (Nelson and Winter, 1982). If developing economies,
the emerging one in particular, are to catch up with the developed ones, they
are to reach a sustainable innovation process, economically, socially and
environmentally. Multinationals are due to play a part in it.
THIS VOLUME
This volume sheds new light on these connections, bringing together
insights from business studies and economics. It provides novel and profound
analyses of how multinational corporations and emerging economies
are related to one another, and how this relationship is implicated in
the dynamics of the global economy. It combines the perspectives of both
firms and countries; it addresses multinationals from developed as well as
emerging economies; and deals with sustainability in an environmental
Introduction
Introduction
Moreover, it combines concise theoretical discussion with empirical
analyses of unique data, quantitative as well as qualitative. The chapters
have all been discussed extensively in a series of regular seminars involving
the editors and the authors of the chapters, as well as during a one-day
workshop at UNU-MERIT in November of 2007. By having a fi rm basis
in empirical knowledge and analyses, chapters in this volume off er valuable
insights on the multifaceted role multinationals have to play in the economic
development of emerging countries. Two intermezzi, authored by
internationally well-known scholars who are experts in the fi eld, provide
the kind of backdrop and critical note that readers might fi nd valuable.
REFERENCES
Bell, M. and M. Albu (1999), Knowledge systems and technological dynamism in
industrial clusters in developing countries , World Development, 27(9),1715.34.
Freeman, C. (2003), A Schumpeterian renaissance? , SPRU electronic working
paper series no. 102.
Hirschman, A.O. (1982), Rival interpretations of market society: civilizing,
destructive, or feeble? , Journal of Economic Literature, 20,1463.84.
Kim, L. and R. Nelson (eds) (2000), Technology, Learning and Innovation:
Experiences of Newly Industrializing Economies, Cambridge: Cambridge
University Press.
Nelson, R.R. and S. Winter, S. (1982), An Evolutionary Theory of Economic
Change, Cambridge, MA: Harvard University Press.
The Economist (2008), What a way to run the world , July 3.
1.
Multinationals are multicultural
units: some indications from a crosscultural study
Nantawan Noi Kwanjai and J. Friso den Hertog
INTRODUCTION
Academic and policy discourse on multinational corporations has been
prolific in both economic and management communities with substantial
interdisciplinary influences, notably of the former on the latter. A
side effect of the dominance of economic thinking in the discourse on
multinationals is a sore lack of attention on one fundamental element of
multinational corporations, namely culture.
Culture, although not entirely ignored in economics, has never been
given a rigorous attention (DiMaggio, 1990; Fernndez, 2008; Guiso et
al., 2006). Treatment of culture in economics, in brief, is still in elementary
state. For this, management thinking may return the favour and inject
an inspiring infl uence. This chapter makes a case for the value of looking
at culture and multinationals from a management and organizational
perspective because it is one that could direct greater attention towards
culture as a significant factor in future investigation on multinational corpora
tions.
This is because multinationals are fundamentally multicultural
units in more ways than one, as we attempt to illustrate in this chapter.
Culture permeates many aspects of a multinational and to ignore, put
aside, or downplay its role may render our understanding of multinational
corporations inexcusably simplistic and critically incomplete.
This chapter is based on selected materials from a qualitative study of
culture and learning in organizations and management that was informed
primarily by the interpretative paradigm of inquiry (Kwanjai, forthcoming).
The study investigated four selected subsidiaries of Dutch multinationals
located in Thailand using evidences collected through observations
and open-ended interviews. All evidences were analysed under grounded
theory procedure (Corbin and Strauss, 1990; Glaser and Strauss, 1967;
Locke, 2001; Strauss and Corbin, 1998). A grounded theory of cultural
6
Multinationals are multicultural units

tural
webs became the key outcome of the study.
The chapter begins with two cultural riddles from one of the cases
in the study . the Dutch multinational ADT1 . as a backdrop for subsequent
discussions. Following the riddles is an abridged version of
the key finding of the study . the aforementioned grounded theory of
cross-cultural intelligence. Then the two riddles are revisited, this time
to illustrate how the proposed theory could illuminate an understanding
of their covert meanings vis--vis culture and learning in multinationals.
Last, we reinstate how our study and its theoretical and empirical fi ndings
can elucidate the central thesis that multinationals are essentially
multicultural units.
CULTURAL RIDDLES OF DEADLINE AND
MISTAKE
Deadline: dead or alive?
Take the routine case of setting up a delivery schedule, for example. Khun2
Joeri, ADT s VP of sales and marketing, always presented himself to the
Thai subsidiary as their biggest customer. In a typical Dutch tradition,
Khun Joeri believed that he only needed to make his wishes clear and then
there should be no question about the delivery to fulfil those wishes. As a
production manager/HRM, Khun Maleewan was directly responsible for
scheduling the resources, physical as well as human, so that production
could be done to meet delivery requirements, vis--vis quantity, quality
and time.
ADT itself served a client-base that was very demanding and competed
in a computerized technology market, which changed so rapidly that
stockpiling was not a viable solution. Put simply, the clients wanted the
right products, at the right time, with the right quality. What this meant to
Khun Joeri was that once a commitment was made for a delivery, it had
to be delivered as and when committed. Delivery schedule for Khun Joeri
was thus a deadline with the emphasis on dead. Khun Maleewan knew this
of course and always tried to set a production schedule so that it matched
with Khun Joeri s expectation. For the Thai subsidiary, however, that
commitment could be no more than a delivery schedule . as an intended
date of completion, or a point of reference. Khun Pim, the manager director
(MD) of the Thai subsidiary, on his part, could only trust that Khun
Maleewan and her team would try their very best to keep to that point of
reference.

sidiary,
this was a matter of working harder to meet the new point of reference.
However, for Khun Joeri this could spell disaster. He needed to deal
with anxious or, more often than not, disgruntled customers worldwide.
He might even need to take costly action to keep the deadline alive, such
as having the shipment delivered by expensive air cargo across continents
instead of cheaper sea freight. This dented the profit margin and did not
reflect well on sales and marketing. As it was, Khun Joeri and Khun Kees,
the ADT s CEO, faced pressure from the clients everywhere and everyday
to deliver on schedule. How could this pressure be felt just as acutely at
the Thai subsidiary, so that delivery schedule would translate into delivery
deadline to them?
Khun Pim had experienced that kind of pressure before, so he knew
how it felt. Yet, everyday, he also witnessed how hard his staff tried to do
their job and he learned that putting pressure on the staff was not really
the Thai way of getting results. At the same time, Khun Maleewan also felt
the pressure. She knew full well that when Khun Joeri, who was as blunt
as blunt could be, said he wanted things delivered, it must be delivered and
she tried her best to keep to the estimates. Still, she could only push the
factory so far. The production was these people s jobs, yes, but it was not
their lives. She knew that in Thailand people worked to live, not vice versa.
She wished the schedules could be a tad more fl exible as reference points,
rather than the deadlines that the Dutch made them out to be. How could
everyone be served and pleased at the same time? How could the delivery
deadline and schedule be synchronized?
Mistake: three strikes and you re out?
Murphy s Law governed the ADT s Thai subsidiary once in a while, that
was to be expected. Nobody at ADT had the unrealistic expectation that
mistakes would not be made. Still, mistakes could bring complications
that were beyond their simple direct consequences. The question was how
should one deal with mistakes?
ADT had a strict policy that the sales and marketing department must
be the only focal point of all communications with clients. This code of
conduct was the key to keep ADT s tactical and strategic responses to
the market as solidified and competitive as possible. Khun Joeri took
this to be not only his main responsibility but also his crucial marketing
tactic. He did not really mind dealing with the clients concerns. It
did not matter where in the company the concerns were related to, be it
design and development, production, or after sales support. To deal with

age
his negotiation with the clients. If a client had any issue with ADT s
products or services, Khun Joeri and his team were there to deal with it.
All in a day s work.
However, the clients sometimes did not really care to observe the ADT
internal code of conduct, like in the case of a Singaporean client who took
it upon himself to approach the ADT s Thai subsidiary directly regarding
his dissatisfaction with a particular shipment. To the client, this was
the shortest route to having his concern addressed. The Thai staff at the
factory who received the complaint were very embarrassed and anxious.
They knew that they should tell the client to go to Khun Joeri but they
suspected that the client was reluctant to do so for a combination of
reasons. The client was in Asia and it was more convenient to contact
the Thai subsidiary than the Dutch office. All that the client wanted was
a direct, instant response he could get with a face-to-face meeting or
simple phone call, without having to bother with time-zone diff erence or
delayed e-mail communication. Moreover, most local clients preferred
to deal with their local counterparts. To most Asians, it could be quite
uncomfortable to approach, and deal with, the Dutch who were too far
away and often too direct for them to cope with. To the Thai staff, it was
their obligation to please the client and rectify the shameful situation that
arose out of their domain. They did not even feel comfortable to refer the
problem to Khun Pim, the MD. In the end, they tried their best to satisfy
the client s request exactly as asked. After all, such direct dealings were
not uncommon in most Thai business operations. Why involve sales and
marketing in the Netherlands when it was actually the Thai subsidiary s
fault? All s well that ends well.
Until Khun Joeri found out what happened. This made his job incredibly
difficult. The Thai subsidiary was thus given a clear warning . a
written announcement from the top boss, Khun Kees, the CEO, who was
not happy about the incident. Please next time, if and when the factory
get any request from a client, whoever that is, refer the customer to sales
and marketing and do nothing else whatsoever until you hear from your
biggest customer . VP of sales and marketing. End of Act One.
Act Two: a similar request from another local Asian client was addressed
to the Thai subsidiary. This was followed again by a similar arrangement
between the client and the Thai staff. Another very stern warning was
issued and made clear to all parties. This time it was specifically stated that
whoever disobeyed this policy again would be simply asked to take leave.
Three strikes and you are out. End of Act Two.

Intriguing questions remained. How could the best intention result in
such unintended tension? Why was it that, for the same incident, the Thais
focused purely on the mistake at the production line as a shame to be rectified
with honour while the Dutch were more concerned with the guilty
disciplinary violation and its consequences? How could the best intention
be aligned with the best practice? What exactly was the mistake and was it
a shame or guilt?
Before we attempt to decipher these two cultural riddles, a roadmap to
the analysis must first be drawn.
CULTURAL INTELLIGENCE
Culture is a concept that defies a universal definition. Numerous conceptualizat
ions
of culture span several decades and disciplines since its inauguration
in anthropology in the 1960s (Adler, 2002; Boyacigiller et al., 2004;
Geertz, 1993; Groseschl and Doherty, 2000; Hofstede, 2001; House et al.,
2004; Inglehart et al., 2004; Kroeber and Kluckhohn, 1963; Leung and
Bond, 2004; Sackmann, 1991; Schneider and Barsoux, 2003; Schwartz and
Sagiv, 1995; Trompenaars and Hampden-Turner, 1998). The conceptualization
of culture in our grounded theory resonates with what has been
previously put forward by Geertz (1993) and stands as yet one more variant
for the meaning of culture. What emerged as the locus of culture in our theorizi
ng
are the sense-making process and the meanings that are the results of
that process. Culture, under this locus, is thus a web of shared meanings that
underlies two basic processes in social interaction: 1) cognitive process, which
comprises sense-making and interpretation of all that a person encounters,
be that material objects, social behaviours, or mental concepts, and 2) behaviou
ral
process, which comprises action, inaction and interaction, based on
meanings given to the objects of that action, inaction or interaction. To wit,
culture is a shared way of being and sense making that is unique to a distinct
group of people and can distinguish that group from others.

The cultural onion model is a widely accepted conceptualization of the
internal dynamics of culture (Adler, 2002; Hofstede, 2001; Schneider and
Barsoux, 2003). Although there are as many variations of the cultural
onion as there are cultural theorists, all variants of the model, including
ours, share the following fundamental implications. Culture manifests
itself in diverse ways, shapes and forms, ranging from the most visible to
the least fathomable. These many diverse manifestations of culture can be
likened to the many layers of an onion. The outer layers are the more easily
seen and comprehended components of culture, such as material objects,
costumes, verbal and non-verbal languages, or architecture. The inner
layers are the less visible facets, such as institutions or cognitive attributes
.
Most theorists would go on to state that these layers are all related to one
another in a particular fashion. The most frequently theorised relation,
again ours included, is that the inner layers are the ones that infl uence the
outer layers, and the innermost, namely the cultural core, bears signifi cant
illumination to all cultural infl uences. For our conceptualization, the cultura
l
core is theorised to encompass the core meanings of self, others, the
environment, and the relationship among these elements.
Cross-cultural intelligence amid intricate cultural webs
A grounded theory of cross-cultural intelligence amid intricate cultural
webs3 is a theory of how a cultural unit (such as a person, group, organization,
nation and so on) operates in a cross-cultural platform and as such
could aid in analysis of cross-cultural phenomena.
The key property of any cultural unit is its cultural identity, which
comprises dynamic webs of cultures. A cultural unit, even an individual,
usually belongs to or is made up of multiple cultures. The property of a
cultural unit can thus be depicted as a cluster of many cultural onions.
Most, if not all, cultural units will have many overlapping and oftentimes
conflicting cultural layers from many cultural onions, thereby forming
webs of cultures.
When a cultural unit operates in a cross-cultural platform, it then must
function also amidst other webs of cultures. By defi nition, cross-cultural
platform itself is also a cultural unit, with its own webs of cultures in force
since cross-cultural platform designates a social condition that comprises
people from at least two distinct cultures. As such, any real world crosscultural interaction is intractably complex, because it invariably involves
a multitude of competing meanings that are constantly in flux. To cope
in such an intractably, non-deterministic situation, a cultural unit has

cultural
by its very nature.
UNDERSTANDING THE CULTURAL RIDDLES OF
DEADLINE AND MISTAKE: ADT AS A CULTURAL
UNIT
The study and its theorizing centred on what actually transpired. Hence,
the very central unit of analysis was ADT s Thai subsidiary, which was fundamental
ly
a unique set of intricate cultural webs in itself, with multitude
of competing meanings. For this study, it was the crossing of two distinct
cultural units of the same level . national, that was the primary crosscultural context: the crossing of Dutch and Thai cultures. This particular
crossing of cultures thus became the exact spot where the theoretical lens
zoomed in to expound upon. This section explores the underlying webs
of meanings in these two cultures and identifies the potential competing
meanings when the two cultures come into contact with each other.
Core meanings: Dutch and Thai
Analysis of the evidences in our study yielded a set of possible core meanings
in the Dutch and Thai culture. Even at cursory glance, the contending
nature of the two sets of meanings is interestingly evident. Not only do
the two sets of meanings differ, they differ in quite a contrasting fashion.
This is the first signal that the undercurrent of the two contrasting national
cultures has a high potential to exert consequential infl uences, because
it provides a rich ground for competing meanings. The following are
elaborations on this observation.
The meaning of self
First is the meaning of self, or in other words, the meaning of one s existence.
In Dutch culture, this is primarily defined by the individual him or
herself, meaning you are what you make of yourself. Not surprisingly, the
Netherlands scored very high in Hofstede s individualism index . with
an index of 80 and a rank at the top 4.5, on a par with Canada and only
surpassed by the US, Australia and Great Britain (Hofstede, 2001:500).
Yet, the Dutch s view of self has its unique quality, in line with what
has been theorized to be a major common Dutch trait: egalitarianism
(van der Horst, 1996). As van der Horst inferred, the Dutch version of

ality
but not personal egoism (van der Horst, 1996:57). For the Dutch, the
meaning of oneself is first and foremost a responsibility before it can turn
into a right or privilege. You are responsible for your own signifi cance but
that does not mean that you are the only one that matters. Everybody is
subject to this one responsibility and that is what makes for equality. You
have to earn your meaning, in the Dutch eyes; you are not simply born
deserving it. To repeat, you are what you make of yourself.
The Thais, by contrast, tend to define the meaning of themselves based
primarily on how they think other people view their existence. It is not
that they do not take their own ideas of themselves into account, they
do, but only after and in relation to what they deem to be the ideas other
people have of them. Not surprisingly, Thailand scored in the opposite
direction to the Netherlands in Hofstede s individualism index . an index
of 20 and ranked towards the bottom half at 39.41. Many analyses of
Thai culture unanimously classified it as a collectivist society, where collecti
ve
thinking exerts decisive forces on individuals (Atmiyanandana and
Lawler, 2004; Holmes and Tangtongtavy, 1997; Komin, 1991; Mulder,
2000; Redmond, 2002). Komin s (1991) interpretation of the Thai egoorientation described exactly how the Thai ego was shaped in a collectively
oriented way, because by ego oriented she meant highly conscious of selfimage. As such, for the Thais, self or ego is what is out there in the open,
defined and revealed by how others treat and define you. In a nutshell, you
are what people make of you.
Holmes and Tangtongtavy (1997) gave an insightful view of how Thais
would behave based on other people s views. They theorized on the exact
nature of others that Thais take into account under the framework of the
three circles of Thailand (Holmes and Tangtongtavy, 1997:39.44), which
classified the three spheres of social circles. From the most intimate one
.the family circle, to the not intimate but important one .the cautious
circle, to the negligible one .the selfi sh circle. They elaborated on how
Thais would behave differently when operating in each of these circles.
Their observation sheds interesting light on how Thais defi ne the meaning
of themselves. How a typical Thai takes into account what other people
think of him or herself, depends very much on which of these circles those
others belong to. How a family member, which also includes someone
you consider as virtually your family, thinks of you is meaningful but can
be taken for granted. Those from the cautious circle, however, are ones
whose notion of you must be cautiously cultivated and harvested. These
are the people you interact with on a social or formal basis, at work, social
functions, and so on. How the views of these others would contribute to
the meaning of your existence, in turn, depends on who they are to you.

leagues
and so on. Finally, the negligible others are those from the selfi sh
circle, the circle where you can totally define your own ego without paying
much attention to the views of these insignificant others. These are people
who have no material or lasting influences on your life, and as such, what
they make of you has no influence on the meaning of your existence in the
Thais view.
The meaning of
others
The meaning of others in the Dutch and

to the meaning of self. Generally, how
to others is a kind of mirror image of
although the process has its own slant
Thai cultures are logically related

the Dutch and Thais give meanings
how they give meaning to themselves,
and emphasis.
The Dutch defi ne the meaning of others by their conduct in a situation

and in relation to what contributions their actions make to the situation.
In a way, this is also rooted in the egalitarian spirit of the Dutch culture .
each person is judged based on how he or she is and acts, individually. It
also relates very much to the Dutch utilitarianism as identified by van der
Horst (1996). For the Dutch, those who contribute positively to a situation
are people whose existence bears valuable meaning. The opposite is
of course true when their acts contribute negatively to a situation. Thus,
the Dutch judge people based on what they do and the contributions that
they make.
The Thais, on the other hand, are first and foremost concerned with
what role a person has and how he or she fulfils that role. The meaning
of other people is fi rst defined by looking at who they are in a situation.
The role of each person in a situation has to be established fi rst, before
one knows how to address and interact with each individual one meets.
There is, however, more than a simple rule of hierarchy in the Thai webs of
meanings. Again, the framework of the three circles of Thailand provides
an elucidation. The Thais see meanings in others, first and foremost, based
on which circle those others belong to. Within each circle, there are a set of
roles, each of which has its own specific rank, status, behaviour, contribution
and so on, or in brief, the total meaning of a person in that role. What
role a person takes in a particular situation is then based on a combination
of diverse factors . initial birth condition, age, gender, education, social
status, achievement, responsibility, task and so forth.
Once roles are established in a situation, Thais would then see others
based on how they fulfil their particular roles. Certain expectations of
character and behaviour are always associated with each role. In general,

relate
in a person, the meaning of that person diminishes signifi cantly. In
the work place, for example, a boss is expected to be superior in all aspects
of character and behaviour. He or she is supposed to know best, act kindly
but decisively, make good decisions, lead with confidence, take responsibility,
be morally and ethically sound and so forth. If a boss does not fulfi l
these expectations, a Thai subordinate tends to think less of him or her. A
subordinate, by comparison, has a different set of expectations to fulfi l. In
general, a subordinate does not need to know best but must follow orders
well and be loyal to the boss without a speck of doubt. Loyalty usually
implies defending the boss s honour, or face, as if it were one s own.
The meaning of environment
The Dutch and the Thais look at the environment, again, in a starkly
contending way. For the Dutch, the environment is simply a given whose
value must be explored and exploited. By explore we mean a practical
survey to evaluate the situation and by exploit we mean to make the best
possible use of what is given. This applies to all aspects of environment.
Thus to the Dutch, natural environment serves a functional purpose and
must be managed to the best of its potential. The famous Dutch dykes and
other ingenious ways to make use of land and water are testimonials to
this spirit and often used to characterise the Dutch utilitarian view of their
physical environment (Hampden-Turner and Trompenaars, 1993; van der
Horst, 1996). The Dutch treat abstract environment in the same fashion.
Time and space are truly scarce resources to the Dutch, they serve functional
purposes and must be managed and used effi ciently. Punctuality
is a virtue in Dutch culture because time is precious and must be well
observed. The deadline episode at ADT is a classic illustration of how the
Dutch view time and how that view can cross with the meaning of time in
other cultures, as will be duly elaborated on.
The Thais, by contrast, take environment as a gift, to be thankful for
and revered. Natural environment is deemed sacred and animate; there are
gods for all various natural artefacts . rivers, mountains, valleys, forests,
rain, drought, the sun, moon, stars, sky and so on. Countless rituals are
associated with how Thais look at natural environments not as physical
objects but animated entities. Abstract environment is regarded by Thais
in a similar fashion. Time is regarded as a part of life, it is a mere point of
reference and its meaning is relative. As Klausner observed: the Thai are
adverse to being slaves to the clock (Klausner, 1993:334). Time, in other
words, is part of what transpires and not a dictate of them. In fact, Thais
tend to regard haste as something that could lead to undesirable results,

Interpreting the cultural riddles
The above set of potentially contending core meanings in the Dutch and
Thai cultures gives rise to great possibilities that the two cultures will give
meanings to many concepts, entities or acts, not just in diff erent manners
but more so in a divergent fashion and hence most likely to bear signifi cant
force in the crossing of the two cultures. It must be mentioned that
the term significant force emphasizes only the issue of strength and does
not carry with it any judgemental insinuation. It suggests simply that the
starkly contending meanings have a great potential to define the nature of
the crossing of these two cultures, but does not claim to predict any specific
property of that nature . good or bad, positive or negative. Opposites
can attract as well as repel and that is exactly the case with cross-cultural
cultural contention.
Deadline: dead or alive?
The riddle on delivery schedule versus delivery deadline is a web of contending
meanings at many levels. At the very core are the contending
meanings of time. For the Dutch, time is precious and schedule is a sacred
contract; for the Thais, time should not be allowed to dictate but only to
provide a point of reference. As such, for the Dutch, particularly Khun
Joeri, the VP of sales and marketing, the delivery timetable was a guarantee
of commitment. It designated what he guaranteed to deliver to customers,
which equated to what the production line guaranteed to deliver
to him. It was a deadline, meaning failure to fulfil this commitment would
result in a fatal consequence. In Thai culture, as time is usually seen as
something one should take command of and not be subject to, Thais tend
not take appointment time too seriously. It is only a point of reference,
something that you set up so you have an idea of your target. Not meeting
an appointment means no more than that either the target is wrongly set
or something else happens that has not been included in the estimation.
That means a new target can be set and life goes on, no fatality needed.
The deadline episode also illustrates influences of a few other contending
meanings: valuation, lifestyle, work and play and privacy. For brevity s
sake, these manifestations are not elaborated further.

The episode concerning mistakes at ADT provides a good illustration of
how the Thais and the Dutch see mistakes so differently in many aspects.
Fundamentally, it illustrates how the different ways the Dutch and Thais
give meaning to themselves could influence their views of a mistake. For
Thai employees, the company and their bosses are almost family and the
mistake was seen as a loss of face to the outer immediate cautious circle,
the client, whom they needed to be most careful with. Their reasoning
could be as follows: The customers must always think well of you and your
boss, else you would lose your face and your business. How the bosses
thought of you and how you acted in this case was an internal aff air that
could or should be easily resolved in near-family relations. Thus, it was
more important to take quick action to remedy the customer s negative
view. Moreover, this interpretation also brings out the complexity of intricate
webs of cultures since it illustrates how there can be no deterministic
rule of when a particular cultural force will be the trigger of a particular
action. In this case, the force of the familial role as part of the company
was stronger than the force of the role as an obedient employee, because
Thais are most concerned with face when dealing with the cautious circle.
The boss was almost part of the family circle, whose collective face was
pre-eminent to any violation of internal agreement.
Then, there were at least two other aspects to the meaning of mistake:
what a mistake signifi es versus what is identified as a mistake. The Thais
tend to look at mistakes with apprehension. This has to do with the
abhorrence of losing face. To most typical Thais, it is very important to
be perceived well by the two important circles of others in the community,
particularly the cautious circle; and to be perceived well is achieved mostly
by fronting respectable, fl awless appearances, reinforced by the eagerness
to please others. In reverse, anything that signifies a weakness, failure or
inferiority is to be avoided, covered up, or readily rectified. Mistake signifie
s
negative quality and is a cause for shame. While Thais are shameful of
mistakes, the Dutch tend to take it simply as a sign of ineffi ciency or incorre
ct
choice. To a typical Dutch, one learns from one s mistake and moves
on. As such, to make the same mistake repeatedly in the Dutch eyes is a
sign of either inexcusable ignorance or misguided stubbornness.
The above interpretation may explain partly why the Thai staff acted
the way that they did when confronted with a client s complaint and why
the Dutch were not amused at the repeated violation of the company
policy. It may also explain why there was a mismatch of identifi cation of
what exactly the mistake was. The Thai staff felt responsible for having
delivered bad products and at the same time, when confronted by the
client, they identifi ed themselves as part of the company. They must have

ment
than with the outright violation of the company s key policy. To
them, as executives, the consequences of the production mistake were at
operational level, while violation of code of conduct struck at company s
strategic and tactical cord. The incident thus illustrated a rather tangled
web of mismatched meanings of mistake.
So what?
It must be emphasized that the above analyses are but our interpretations
of the story. We do not claim to deliver the impossible task of having a
complete or absolute understanding of it. Our intention is to illustrate how
the webs of meanings based on cultural interpretation could give a plausible
explanation to what can influence people to act the way they do in real
world cross-cultural encounters. Also, it is not our intention to prescribe a
cultural deterministic view that culture is the only force in social phenomena.
We intend to only point out only that culture is one of the signifi cant
forces. What is important is not to see culture everywhere, but rather to
see it where it matters.
That is when cross-cultural intelligence comes into play. So far, we
may have given an impression that the complexity of webs of cultures are
beyond comprehension and solution or resolution. That is far from the
case. We intentionally did not go beyond deciphering the possible competing
meanings in the case. We did not conclude which meaning was most
appropriate, because, as our study has revealed, such a conclusion is highly
situational and the key to finding a solution or resolution to the complexity
of cross-cultural condition and its multitudes of competing meanings
lies in an understanding and practice of cross-cultural intelligence.
CULTURE AND MULTINATIONAL CORPORATIONS
Under the view of the proposed grounded theory on cross-cultural intelligence,
it can be argued that multinationals are multicultural units. By
its defi nition, multinational corporations are cultural units made up of
more than one culture, that is, more than one national culture, for starters.
In most cases, there is more than one national cultural force within
multinationals, since they must function in a variety of cultural webs of
international markets, employ employees from a variety of countries,

tional
corporations, viewed from our proposed theory, are complex webs
of cultures operating in yet other webs of cultures. It should not be difficult
to imagine the many possible levels and layers of cultures . clique, team,
department, profession and so on, that must be spinning their webs within
one single multinational corporation.
This is our simple assertion of a very complex issue that carries one key
implication: a multitude of cultural forces and their competing meanings
form a potential influencing factor underlying multinational corporations.
What happen with and within multinationals are essentially a form
of cross-cultural interface in more ways than one. As such, a genuine
understanding of the dynamics of these cultural forces, their competing
meanings, and the cross-cultural interactions that they may be driving
must be one of the indispensable insights needed in the study of multinational
corporations. To date, as observed in the introduction, this has yet
not been the case in the economic discourse of multinationals. It is hoped
that the work on cross-cultural management, where culture has received
a more rigorous attention during the past half century, together with the
implications of the proposed theory, would inspire some in the economic
community to put culture at a prominent place in economic investigation
of multinational corporations. A set of elementary observations on how
this could develop serves as our conclusion.
CONCLUSIONS
As culture has received relatively little attention in economic study of
multinational corporations, the first challenge is to concentrate the eff ort
on driving home the significance of culture in research on multinationals.
A conviction that multinationals are multicultural units with complex
webs of cultures as their cultural identity as well as their operating
context may be one instrument in such effort. Theoretically, economics
could benefit from the advances in the conceptualization of culture
accomplished by the management community and make a jump start in
further delving into relating culture to economic issues in multinationals.
The question of how cultural dimensions relate to the many economic
aspects of a multinational, such as growth, profit, mode of entry, or
innovation, could be investigated based on the success of many management
studies that relate culture to management topics. Last, and probably
most importantly, economic study of multinational corporations

munity
regarding culture, namely, that this is one theme of research that
demands diversity of views, methods, and cultures (Boyacigiller et al.,
2004; Usunier, 1998). As such, it may be crucial for the economic community
to include in their study of culture and multinationals paradigms
of inquiry and methodologies that are not the mainstream in economics.
For example, non-positivist perspective and qualitative approach should
be encouraged, a prospect that admittedly may not be easily accomplished
given the established inclination in economic study. That may yet
be the ultimate challenge for economic research that seeks to investigate
culture and multinationals.
NOTES
1.
For anonymity, company and character names were replaced with fictitious ones. T
he
stories, however, were based on real incidents and factual details were kept as
accurate as
possible.
2.
To give local flavour to the narration, all characters are addressed in Thai sty
le as it was
in real life, with the Thai Khun, which is equivalent to Mr or Mrs in English, f
ollowed by
the first name, except when first introduced. Character job titles follow what t
hey were in
real life.
3.
The concept of cross-cultural intelligence (with the emphasis on cross) as devel
oped
in our theory bears a subtle, yet significant, distinction and relationship to a
recently
established concept of cultural intelligence (Ng and Earley, 2006; Thomas and In
kson,
2003; Triandis, 2006). Broadly speaking, the former is a specific subset of the
latter. See
Kwanjai and den Hertog (2008) for further details on this issue.
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2.
The innovativeness of foreign fi rms
in China
Branka Urem, Ludovico Alcorta and
Tongliang An
INTRODUCTION
While the traditional literature on the role of multinationals in innovation
in host countries has emphasized the signifi cance of multinationals
in international technology transfer, the emphasis of recent literature has
been on the increasing role of multinationals in the generation of innovations
in host countries. Consistent with these developments it seems
important to raise the issue of the impact of foreign ownership on the
novelty of innovations in host countries.
The research on the novelty of innovations in relationship to the nationality
of ownership is recent and relatively limited. Existing studies typically
make a distinction between two levels of novelty, innovations new to the
firm and innovations new to the market, consistent with the distinctions
suggested by the Oslo Manual (OECD, 2005) and adopted in the European
Community Innovation Survey (CIS). The focus is typically on the impact
of foreign ownership on innovations new to the market, as a high level of
novelty, and on propensity indicators. In the case of developed countries,
there are several studies based on CIS data, but evidence on the impact
of foreign ownership is mixed. Sadowsky and Sadowsky-Rasters (2006)
report a positive impact among firms in the Netherlands that include both
innovators and non-innovators but, among innovators only, they fi nd no
impact or a negative impact when controlling for sources of innovation.
Dachs et al. (2007), in a group of five small European countries, detect
a positive impact of at least one category of foreign firms (grouped by
the home-country corporate governance into three categories) in three
countries (Denmark, Finland and Sweden) and no impact on the introduction
of new to the market innovations in two (Austria and Norway).
Disaggregating the effect associated with foreign firms, Frenz and IettoGillies (2007) find positive impact of high multinationality on the introduction
of new to the market innovations in the UK, but no impact of
23

This chapter is also focused on the relationship between the nationality
of ownership of firms and innovations of high novelty, but with an
approach that differs from the literature in three ways. First, while existing
studies focus only on direct effects of foreign ownership on propensity of
innovations of high novelty, building on the literature on the internationalizat
ion
of R&D by multinationals this study also examines a moderating
impact of R&D on the relationship. Up to now, studies on the impact of
foreign ownership on innovation in host countries have considered the
direct effects of R&D only, despite the role of R&D in the generation of
innovations in multinational subsidiaries. Second, unlike other studies
that are based on a single indicator of innovation of high novelty . propensity,
here the analysis is based on two indicators . propensity and
intensity. The propensity indicator (measuring whether firms have introduced
innovation) rates an ability to introduce innovations on the market.
In contrast, the intensity indicator (calculated as a share of innovation
sales in total sales) measures the degree of the commercial success of
introduced innovations and, thus, represents a direct measure of the innovation
output. While the propensity indicator shows whether a firm is an
innovator, the intensity indicator measures the volume of sales generated
by introduced innovations, that is the extent of economic benefits of innovative
activities (Arundel et al., 1998). However, the intensity indicator
has been neglected in prior studies on the impact of foreign ownership on
innovation in host countries. Third, the relationship between the nationality
of ownership of firms and innovation novelty is examined in context of
advanced developing countries. While these countries attract not only an
increasing share of foreign direct investments, but also an increasing proportio
n
of foreign R&D investments (UNCTAD, 2005), studies on eff ects
of foreign ownership on innovation novelty have primarily been oriented
on developed countries (with exception of Kannebley et al., 2005).
The empirical analysis is based on data from China, which represents a
suitable research context for two main reasons. First, in the last decades
China has achieved remarkable progress in building innovation capabilities
in the enterprise sector, despite this its patent performance remains
low both relative to its share in R&D as well as in comparison to foreign
firms (OECD, 2007). Second, up until recently foreign multinationals have
been primarily establishing low cost manufacturing operations, but China
currently has the highest inward foreign direct investments on R&D in the
Innovativeness of foreign firms in China

tions
of high novelty and to assess the moderating effect of R&D internationalization
on propensity of innovations of high novelty.
The remainder of the chapter is organized as follows. The fi rst section
provides a conceptual background and develops hypotheses about the
relationship between foreign ownership and propensity and intensity of
innovations of high novelty. The next section describes the innovation
survey data used, the variables and the method of analysis. The results
are presented in the third section. The last section contains discussion of
empirical findings and main conclusions.
MULTINATIONALS AND INNOVATION IN HOST
COUNTRIES
Building on eclectic theory of international production (Dunning, 1993,
1988), two issues are considered particularly important in the understanding
of the role of multinationals in innovations in host countries. On one
side, the international exploitation and generation of innovations by
multinationals, associated with their ownership advantages and, on the
other side, the locational aspect associated with the context of advanced
developing host countries.
Regarding the role of multinationals in the generation and transfer of
innovations and implications for the novelty of innovations of their subsidiarie
s
located in advanced developing host countries, a starting point
is a conceptual distinction between international exploitation of home
developed innovations and international generation of innovations (following
Archibugi and Michie, 1995). Internal (intra-fi rm) international
technology transfer processes are considered associated with pre-existing
ownership advantages on the basis of which multinational fi rms exploit
innovations developed in home countries through international production
as postulated by the traditional theories (Caves, 1982; Vernon, 1966;
Dunning, 1993). Multinationals have generally been seen as the most efficient
institutional form for the transfer of technological knowledge across
national borders due to either the transaction costs-based arguments
about imperfect markets in the intangible assets (Teece, 1981), or the
knowledge-based arguments about characteristics of the tacit technological
knowledge (Kogut and Zander, 1993). In traditional approaches, overseas
subsidiaries are mainly seen as more passive recipients of the parent
technology. The argument is that both development and fi rst commercial
application of new products and processes take place in home countries of

Consistent with recent trends of increasing internationalization of
generation of innovations by multinationals, overseas subsidiaries seem
increasingly likely to also engage in the development of improved or new
products and processes. It has been argued that the generation of innovations
in multinationals subsidiaries in host countries can be driven
by two motives. The asset exploitation (Dunning and Narula, 1995) or
home-base exploiting (Kuemmerle, 1999a) motive is associated with generation
of innovations in response to local conditions either by adapting
the parent innovation or by creating new innovations for the local market.
In addition, the asset-seeking (Dunning and Narula, 1995) or home-base
augmenting (Kuemmerle, 1999a) motive for the internationalization of
innovation drives generation of innovations for the global market. The
nature of the motives for international generation of innovations by multination
als
imply that their overseas subsidiaries are unlikely to remain
passive recipients of the technology transfer from the parent, but are likely
to also engage in innovation generation, especially as they become further
established in their host economies. Multinationals subsidiaries recombine
learning with the knowledge from their home countries through the
evolutionary process of knowledge accumulation in the host economy
(Kogut and Zander, 1993). The increasing involvement of overseas subsidiaries
in the process of innovation generation is associated with the creation
of a variety of innovation networks within multinationals (Zander,
1999), in which, in addition to traditional parent-subsidiary technology
flows, reverse flows from subsidiaries to parent, as well as technology fl ows
among subsidiaries are gaining importance.
When considering the impact of foreign ownership on the innovation
of high novelty in host countries, the locational conditions have to be
considered also. The empirical evidence on recent trends of international
generation of innovation by multinationals reveals that overseas R&D
investments are primarily located in developed countries but have also
recently been increasing in advanced developing economies, particularly
in South East Asia and China (UNCTAD, 2005). Since in the generation
of innovations overseas subsidiaries rely not only on access to the knowledge
of the parent, but also on sources of innovation in the host environment
(Cantwell and Santangelo, 1999), availability of complementary
local scientific and technological capabilities is an important locational
factor for multinationals overseas R&D activities. More specifi cally, asset
exploiting foreign R&D investments seem to be primarily attracted to
countries with large markets and asset augmenting R&D to countries with
a strong science base (Kuemmerle, 1999b). While advanced developing

Hypotheses
In studies of the impact of foreign ownership on innovation in host
countries, it is typically argued that foreign-owned firms will be more
innovative than domestically-owned firms because of existing ownership
advantages. Since Hymer (1976), it has been widely accepted that due to
the advantages of domestic firms in their own national environment, the
multi nationals ownership advantages represent a precondition for the
entry into production in foreign countries. The international production
is based on an intra-firm transfer of technology developed in the home
countries. According to the transaction cost-based theory transfer of
technological knowledge is internalised within multinationals because
of transactional difficulties in the market for technological knowledge
(Teece, 1981). The knowledge-based theory argues that multinationals
internally transfer technological knowledge that cannot be more efficiently
obtained by either international inter-firm technology transfer or by
imitation (Kogut and Zander, 1993). Given the technology gap between
home countries and host advanced developing countries these arguments
imply a higher level of innovation novelty of multinational subsidiaries
on the basis of exploitation of innovations generated in home countries.
Consistent with these arguments it is hypothesized:
Hypothesis 1a. Foreign firms will have higher propensity of innovations of
high novelty than domestic fi rms.
An inherent aspect of the international generation of innovations by multination
als
is the internationalization of R&D. Studies on R&D internationalization
suggests that there are both centripetal as well as centrifugal
forces influencing the location of R&D by multinationals in home versus
host countries (Hirschey and Caves, 1981). The main centralizing forces
include the protection of fi rm-specific technology, home-market conditions
as a basis for fi rm-specific technological advantages, economies
of scale in R&D and minimization of costs of coordination and control
(Granstrand et al., 1992). Decentralizing forces include both demandoriented factors, such as an adaptation of products and processes to local
conditions and government regulations, as well as supply-oriented factors,
including scientific infrastructure, cost of R&D and R&D subsidies

Hypothesis 1b. Foreign firms with formal R&D will have higher propensity
of innovations of high novelty than domestic fi rms.
It has been argued that the successful commercialization of introduced
innovations depends on access to capabilities or assets complementary
to innovation capabilities, typically those in manufacturing and marketing
(Teece, 1988). Ownership advantages of foreign multinational subsidiaries
over domestic firms typically include not only technology related
advantages, but a variety of other intangible and complementary asset
advantages, for example in relation to input sourcing, marketing, fi nance,
management, knowledge of international markets and so on (Dunning,
1993). While multinational subsidiaries resemble independent firms, it is
the access to assets of their parents that distinguishes them from independent
firms (Penrose, 1956). This implies access to capabilities and resources
of the corporation that are likely to be superior to those accessible by local
firms. Therefore, multinational subsidiaries are more likely to have access
to the relevant complementary assets needed to successfully commercialize
introduced innovations than domestic firms are. This is especially likely
in the case of host developing and transition economies because of the
gap in their capabilities and resources in relation to multinationals home
countries (Hitt et al., 2000). Thus, it is hypothesized:
Hypothesis 2: Foreign firms will have higher intensity of innovations of
high novelty than domestic fi rms.
DATA AND METHOD
The empirical analysis is based on data from Jiangsu province of China.
Jiangsu, located on the East coast, is one of the most developed provinces,
and has the characteristics of an advanced developing economy

ence
of foreign R&D too (23 per cent share of industrial R&D) (OECD,
2007). Lastly, within the innovation system of the province, foreign multination
al
subsidiaries and small and medium size enterprises are more
important than state-owned enterprises or public research organizations
(OECD, 2007).
The data are from an innovation survey conducted in 2003 by Ludovico
Alcorta and Tongliang An. Since the official business register of fi rms
in Jiangsu province was not available, the sampling frame was based on
telephone directories of the capitals of 13 municipal counties of Jiangsu.
In contrast to typical official Chinese surveys, it includes fi rms of all sizes
(from ten or more employees). Firms were randomly sampled from a
population of urban manufacturing firms. The sample was restricted to
one fifth of the estimated population of 12,000 firms. The data collection
started with a postal survey, with follow-up visits to non-responding
firms, resulting in a response rate of 15 per cent. The innovation survey
was single-respondent, subject-based and consistent with the Oslo Manual
(OECD, 1996), with several modifications. Our survey covered both
incremental and significant innovations, included sales-based output
measurement of product innovations of all levels of novelty; and covered
innovations for one year . 2002.1
Analysis is restricted to those innovating firms that introduced product
innovations (defined as the commercial adoption of a new product) and
reported product innovation sales and the associated levels of innovation
novelty, resulting in a sample of 174 fi rms.
It is assumed here that innovation novelty distinctions based on the
Oslo manual provide a basis for the categorization of innovations by
novelty that is relevant when considering the role of multinationals in the
transfer and generation of innovations in host economies, in other words
across national borders. Apart from new to the firm innovations, as the
lowest level of novelty (considered in other classifications in the literature
as well), the Oslo manual distinguishes, on the basis of geographical criteria,
new to the region (in case of large countries), new to the country and
new to the world innovations, in increasing order of novelty. Consistent
with the Oslo manual, our innovation survey distinguished between fi rst to
the fi rm, first to Jiangsu, first to China and first to the world innovations.
For the purpose of this study the first to China and first to the world innovati
ons
are considered as innovations of high novelty. Thus, innovations
of high novelty as defined here are at least new to the host country.2

sity
variable is dichotomous with value one if the firm reported sales of
innovations of high novelty and value zero if the firm did not report sales of
innovations of high novelty. Reporting sales of innovations of high novelty
is interpreted as their successful introduction. The innovation intensity is
measured by the ratio of sales of product innovations of high novelty in
the total sales. The innovation intensity variable is defi ned as dichotomous
with value one if a firm has a share of sales of innovations of high novelty in
total sales above mean and value zero if the share is below the mean, which
is calculated for the pooled sample of foreign and domestic fi rms.
The independent variable, the nationality of ownership, is dichotomous
with value one if the firm is foreign-owned and value zero if it is
domestically-owned. Foreign firms are defined as firms in majority foreign
ownership and in majority Hong Kong, Macao and Taiwan (that is overseas
Chinese) ownership. This definition is consistent with the ownership
categories of foreign invested enterprises and Hong Kong, Macao and
Taiwan invested enterprises in the Chinese offi cial statistics.
The moderator variable, formal R&D, is measured as a dichotomous
variable with value one if the firm has an R&D department and value
zero if it does not. In case of foreign firms, it indicates whether a decentrali
zation
of R&D to the subsidiaries of foreign multinationals located in
Jiangsu has taken place.
Consistent with the innovation literature it is controlled for the infl uence
of size and industry. The size variable is defined as a dichotomous
variable, with value one if firms are large-and-medium (that is, have 300 or
more employees), and zero if they are small (Lundin et al., 2006). The infl uenc
e
of industry is controlled by a dichotomous variable sector. It is based
on a categorization of sectors by Robson et al. (1988), which distinguishes
between core sectors that are highly innovative and primarily characterised
by product innovations, secondary sectors that are less innovative and
have similar levels of both product and process innovations and the sector
others that are low innovative. The core and secondary sectors are considered
here as high innovative, and the sector others as low innovative. The
variable sector has value one if the firm is from the high innovative sector
and value zero if it is from the low innovative sector. Following Robson
et al. s classification, the high innovative sector includes chemicals, plastics,
metal products, non-electrical machinery, electrical machinery and
vehicles, and the low innovative sector food, textile, wood and non-metal
industries and other manufacturing.
The analysis of the relationship between foreign ownership and innovation
of high novelty is based on testing of the diff erence between

parametric
tests. Descriptive statistics is presented in Table A.2.1 in the
Appendix.
INNOVATIVENESS OF FOREIGN FIRMS IN
JIANGSU
Propensity of innovations of high novelty
Results of the Chi-square non-parametric tests for independent, moderator
and control variables for the propensity of high novelty innovations
are presented in Table 2.1. Foreign firms are expected to have a
higher propensity of innovations of high novelty in Hypothesis 1a. In
contrast, Hypothesis 1b predicts that foreign firms will have a higher
propensity of innovations of high novelty contingent on the presence of
formal R&D. While the propensity of innovations of high novelty was
higher among foreign firms than among domestic ones, the Chi-square
test shows that the difference is not statistically significant. Thus, the
evidence does not support Hypothesis 1a. Contrary to our expectation,
the findings reveal that the propensity of innovations of high novelty
among foreign firms is higher both in the subgroup of firms with formal
R&D as well as in the subgroup of firms without formal R&D, but the
Chi-square test shows that the difference is not statistically signifi cant in
either subgroup of firms. Thus, the relationship between foreign ownership
and propensity of innovations of high novelty does not appear to be
moderated by the presence of formal R&D. Hypothesis 1b is therefore
not supported either. It appears that the successful market introduction
of innovations of high novelty is not associated with foreign fi rms either
directly or indirectly, through the relationship contingent on the R&D
internationalization.
The results for one of the control variables are also interesting. The
relationship between foreign ownership and the propensity of innovations
of high novelty appears to be contingent on the sector. In the high innovative
sector, the propensity of innovations of high novelty among foreign
firms is marginally lower than among domestic firms and the Chi-square
test shows that the difference is not statistically significant. However, in
the low innovative sector, the Chi-square test shows that the propensity
of innovations of high novelty is statistically significantly higher among
foreign firms than among domestic fi rms.

a)
Innovations Nationality of Chi-Square
of high ownership Test
novelty
Domestic Foreign Signifi cant?b
Without controls
Introduced 75.5 86.7 No
Not introduced 24.5 13.3
100.0 100.0
Control for R&D
With separate R&D dpt. Introduced 82.9 85.7 No
100.0 100.0
Without separate R&D dpt. Introduced 65.6 88.9 No
100.0 100.0
Control for main sector
of activity
High innovative Introduced 82.6 81.8 No
100.0 100.0
Low innovative Introduced 62.7 100.0 Yes**
100.0 100.0
Control for fi rm sizec
Large and medium Introduced 76.3 92.3 No
100.0 100.0
Small Introduced 75.0 72.7 No
100.0 100.0
Notes:
(a) Number of observations is 174, unless otherwise stated.
(b) Whether the difference between foreign and domestic firms is statistically s
ignifi cant:
* at 10 %, ** at 5 %, *** at 1 %.
(c) Number of observations is 152.
Source: Jiangsu survey.
Intensity of innovations of high novelty
Results of the Chi-square non-parametric tests for independent and
control variables for the intensity of high novelty innovations are
reported in Table 2.2. Hypothesis 2 predicts that foreign firms will have

a)
Innovations Nationality of Chi-Square
of high ownership Test
novelty
Domestic Foreign Signifi cant?b
Without controls
Above mean 27.3 63.3 Yes***
Below mean 72.7 36.7
100.0 100.0
Control for R&D
With separate R&D dpt. Above mean 32.9 61.9 Yes**
100.0 100.0
Without separate R&D dpt. Above mean 19.7 66.7 Yes***
100.0 100.0
Control for main sector of
activity
High innovative Above mean 31.5 63.6 Yes***
100.0 100.0
Low innovative Above mean 19.6 62.5 Yes**
100.0 100.0
Control for fi rm sizec
Large and medium Above mean 27.5 53.8 Yes*
100.0 100.0
Small Above mean 22.9 54.5 Yes**
100.0 100.0
Notes:
(b) Whether the difference between foreign and domestic firms is statistically s
ignifi cant:
* at 10 %, ** at 5 %, *** at 1 %.
(c) Number of observations is 152.
a higher intensity of innovations of high novelty than domestic fi rms
will. Consistent with expectations, the Chi-square test suggests that statistica
lly
foreign firms have significantly higher intensity of sales of innovations
of high novelty.3 This evidence supports the proposition that

DISCUSSION AND CONCLUSIONS
The objective of this study was to examine the relationship between
foreign ownership and innovations of high novelty in the context of an
advanced developing country . China. Two dimensions of innovation
novelty were considered, innovation propensity and innovation intensity.
The results have provided support for one of the three formulated
hypotheses.
The direct Hypotheses 1a predicted that foreign firms will have a higher
propensity of product innovations of high novelty than domestic fi rms
while, in contrast, the contingency Hypotheses 1b predicted that only
foreign firms with formal R&D will have a higher propensity of innovations
of high novelty than domestic firms. The results did not support the
direct hypothesis. This is not consistent with a single prior study, which
found a positive impact of foreign ownership on the introduction of new
to the market innovations in Brazil (Kannebley et al., 2005). However,
the finding is not surprising in light of the arguments for the alternative
contingency hypothesis, which suggest that foreign firms are not likely
to have a higher propensity of innovations of high novelty on the basis
of the exploitation of existing innovations generated in home countries.
Yet, no support was found for the hypothesized moderating impact of
the propensity of formal R&D on the relationship between foreign ownership
and the propensity of innovations of high novelty either. Thus,
it seems that the proportion of firms that introduce innovations of high
novelty is not higher among foreign firms than among domestic fi rms, not
even when the internationalization of R&D is taken into account. While
unexpected, this finding seems consistent with multinationals overseas
R&D activities that are primarily driven by asset exploitation motive. It
is congruent with preceding studies on China that have reported that the
initially high number of R&D units were established because of regulatory
requirements (Walsh, 2003) and that the majority of R&D units aimed at
adaptive innovations for the local market (von Zedtwitz, 2004). Moreover,
the finding appears consistent with the empirical evidence on the role of
locational factors, which suggests that in countries with relatively large
markets and weak science based foreign R&D is primarily oriented
towards exploitation of existing innovations (Kuemmerle, 1999b).
Hypothesis 2 predicted the higher intensity of product innovations of

national
subsidiaries have ownership advantages over domestic fi rms in
intangible and other assets complementary to technological assets. The
results seem also consistent with the evidence that firms from advanced
developing countries have relatively weaker resource endowments than
firms from developed countries. For example, empirical evidence suggests
that firms from emerging market economies during partner selection place
more emphasis on partner s financial, technological and intangible assets
and willingness to share expertise than firms from developed economies
(Hitt et al., 2000). Similarly, the evidence suggests that international partner
ing
by Chinese firms is primarily motivated by learning, in particular
with regard to marketing expertise and managerial skills (Luo, 2002).
The findings of the study contribute to the literature in three ways.
First, the results suggest that the relationship between foreign ownership
and propensity of innovations of high novelty in advanced developing
host countries might be more complex than is typically assumed. The
evidence does not seem to provide support for the argument that there
is a positive direct relationship based on existing ownership advantages.
A more complex contingency relationship was also examined, consistent
with the arguments that a relationship between foreign ownership and
propensity of innovations of high novelty is moderated by the creation
of ownership advantages through internationalization of R&D, yet the
evidence does not seem to support this argument either. Second, this is a
rare attempt to examine a relationship between the foreign ownership and
the intensity of innovations of high novelty. The results seem to support
the argument about a positive direct relationship based on the existing
ownership advantages in complementary assets. Third, the findings on the
relationship between foreign ownership and propensity and intensity of
innovations of high novelty taken together seem to suggest that diff erent
resources and capabilities of multinationals are associated with the two
dimensions of the innovation novelty. The important implication of these
findings is that the current focus in the literature on the single indicator,
propensity of innovations of high novelty, represents a limitation.
The finding suggests two important policy implications for China, and
other advanced developing and transition economies. First, the lower

ernment
has so far supported international alliances primarily because of
access to advanced technologies, it appears that support for alliance with
non-technological motives may also be justified. Second, while in relation
to the presence of foreign firms the emphasis is often on technological
spillovers, foreign firms also seem likely to provide an opportunity for
non-technological spillovers, as an important source of learning about
complementary capabilities, especially management, financial and marketing
skills, which seems to be weak in the majority of firms from advanced
developing and transition economies. In this sense, the findings seem to
provide partial support for the current policy of attracting foreign direct
investments, in particular that of foreign R&D and high-tech investments
in China. A further shift in foreign direct investments away from low cost
manufacturing operations is likely to contribute to the positive impact of
foreign firms on the propensity of innovations of high novelty too.
Certain caveats concerning this research should be mentioned. First, the
study is focused on urban enterprises only. Since rural firms (that is private
firms in rural areas) are less innovative than urban firms in Jiangsu (Sun
and Wang, 2004:28), the evidence presented here is likely to overestimate
the innovation level of firms in this province. Including rural firms in the
analysis in further research might be fruitful. Lastly, the data on innovation
refer to one year only. While the weakness of a single year is that it
may be atypical for the relevant period, the decision to focus on a year
rather than on a three-year period, as suggested by the Oslo manual and
commonly adopted in innovation surveys, was primarily made to increase
the recall by respondents and make answering the relevant questions
easier, thus increasing the response rate. An implication is that the empirical
results should be considered primarily as indicative. Further research
should aim to cover a common three-year period.
The study shares a weakness with other studies of innovation novelty
based on a broad concept of innovation and a dual categorization of
innovation novelty. The concept of high novelty applied here includes
two levels defined by the geographical criteria of novelty (innovations new
to the country and innovations new to the world) and this aggregation is
likely to affect the results. For example, a result of no apparent diff erence
in the propensity of innovations of high novelty could be obtained in an
extreme case in which domestic firms would only introduce innovation
that were new to the country while foreign firms would only introduce

ership
and propensity of different individual levels of novelty (which we
also follow up on in another study). Furthermore, to our knowledge, this
is the first study that considers the moderating impact of R&D internationalizat
ion
on the relationship between foreign ownership and innovations
of high novelty. Since the moderator variable measured the presence
of formal R&D, rather than its nature, there is an opportunity for further
research into the moderating role of the motivation and composition of
R&D activities in the relationship between foreign ownership and propensity
of innovations of high novelty.
NOTES
1.
For a full description of the main results of the survey, see Alcorta et al. (20
08).
2.
In contrast to the novelty levels considered here, other studies on the relation
ship
between the nationality of ownership and innovation novelty are based on CIS, wh
ich
makes a distinction between innovations new to the firm and innovations new to t
he
firm s market. Regarding the comparability of the novelty levels used here and the
CIS
distinctions, following Mohnen and Therrien (2001), it is taken that all innovat
ions that
are new beyond the fi rm (that is except new to the fi rm innovations) correspon
d to new
to the market innovations (as nearest concepts). This implies that the concept o
f high
novelty adopted here is narrower than the concept equivalent to the new to the m
arket
innovations as used in the studies based on CIS data.
3.
The tests on the median-based definition of the innovation intensity variable ha
ve
resulted in the same findings, except for small firms, where no statistically si
gnifi cant
results were found.
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Table A.2.1 Descriptive statisticsa (% of number of fi rms)
Dichotomous variables Nationality of ownership
Domestic Foreign
Nationality of ownership 82.70 17.30
Propensity of innovations of high novelty
Introduced 75.50 86.70
Intensity of innovations of high novelty
Above mean 27.30 63.30
Mean of continuous data 0.30 0.66
Standard deviation of continuous data 0.34 0.40
Separate R&D dpt.
Yes 57.30 70.00
No 42.70 30.00
Main sector of activity
High innovative 64.30 73.30
Low innovative 35.70 26.70
Firm sizeb
Large-and-medium 62.50 54.20
Small 37.50 45.80
Notes:
(b) Number of observations is 152.
3.
New Europe s promise for life
sciences
Sergey Filippov and Klmn Kalotay
INTRODUCTION
The life science industry has a significant impact on the health of the
population and the wealth of nations and has attracted a lot of attention
recently. Growth in the life sciences is fuelled primarily by the disruptive
and creative nature of biotechnology. It is similar to the changes provoked
by the technological revolution that information and communication
technologies (ICT) provoked in the recent past. There are profound diff erences
though. Because governmental regulations did not play a crucial role
for ICT, the major players in the sector were start-up firms and small and
medium-sized enterprises in general, in the life sciences sector the situation
is different (Luukkonen and Palmberg, 2007). The sector falls under a tight
control by national medicine regulatory bodies. Moreover, it is characterized
by high upfront R&D investment and long development times. Thus,
in most cases only multinational companies possessing enough capital and
facilities and able to comply with regulations can operate in the sector; and
small companies tailor their strategies to cooperate with multinationals.
Not only in the life sciences, but in most other industries too, multinationals
are playing an ever increasing role in global economy in terms
of production of goods and delivery of services as well as research and
development (R&D) activities. Already in the mid-1990s, multinationals
accounted for a large share in the R&D expenditures of the Triad economies
. US, Western Europe and Japan (Gassmann and von Zedtwitz,
1999). In 2002, the 700 largest R&D spending firms of the world . of
which at least 98 per cent were multinationals accounted for 69 per cent
of world s business R&D expenditures (UNCTAD, 2005). Traditionally,
multinationals retained their R&D activities at their headquarters, unlike
other largely internationalized functions. A recent trend, however, is the
internationalization of R&D (Granstrand et al., 1993; Kuemmerle, 1997;
1999), stimulated by various factors, such as changing technologies and
shorter product life cycles. Multinationals feel the pressure to invest more
41

The superiority of the Triad as a location for R&D is challenged by
emerging economies. Although the bulk of overseas R&D activities of
multinationals are still taking place in developed economies, recently
R&D expenditures have grown fast in emerging economies (UNCTAD,
2005). Therefore, the internationalization of corporate R&D, coupled by
dynamic growth in non-Triad regions, has changed the global landscape
for R&D.
Countries of Central and Eastern Europe (CEE), the new member
states of the European Union (EU), are emerging as prospective locations
for foreign investors too, and not only for manufacturing, but also for
higher-value added corporate activities, such as R&D. Historically, the
science and technology systems of CEE countries were well developed.
Presently they attempt to strengthen their R&D capacities by various
measures, including attracting foreign investments in R&D. It is estimated
that business enterprise R&D in the ten new EU members rose from USD
688 million in 1991 to USD 1452 million in 2003 (UNCTAD, 2005:287).
Following these developments, the focus of this chapter is placed on the
intersection of the sectoral view on the life sciences, with a special interest
in foreign direct investment (FDI) in R&D. We analyse multinational
subsidiaries in the Czech life sciences sector.
A large body of academic literature provides theoretical foundation
for this analysis. The literature on multinationals entry mode into a host
economy is well established, based on the pioneering studies by Stopford
and Wells (1972) and Wind and Perlmutter (1977). Root (1994) argues
that the choice of market entry mode is one of the most critical strategic
decisions for multinationals. Entry into a host market ultimately leads to
establishment of a subsidiary. Studies on multinational subsidiaries are a
relatively new strand of the international business literature that has burgeone
d
considerably over the recent decennia (Paterson and Brock, 2002),
with the subsidiary evolution as a core research issue (Birkinshaw, 1996;
Birkinshaw and Hood, 1998).
While insights from the international business literature on subsidiaries
are helpful for the present study, the chapter seeks to contribute to other
research areas, namely the academic literature on transformations in the
CEE region and EU enlargement. Notwithstanding the abundance of
literature on the economic transition (Campos and Coricelli, 2002; Knell,
1992, 1996; Scholts, 1996) and the role of FDI in transition (Estrin et al.,
1997; Meyer, 1998), studies investigating knowledge-based activities in
CEE economies remain scant (Piech and Radosevic, 2006). Developments
New Europe s promise for life sciences

cal
trials (Babic and Kucerova, 2003; Natorff, 1998; Pal, 1997). Despite
seemingly widespread interest in the implication of the 2004 EU enlargement,
focus of many economic studies is still placed on old member states,
EU-15. Despite some exceptions (Damborsk et al., 2006; Sansom, 1999),
most studies in life sciences tend to focus on EU-15 (Mangematin, 2004;
Reiss et al., 2004).
The chapter is an explorative study that seeks to fill this gap in the literatur
e
by employing qualitative analysis and investigating operations of
several multinationals in the life sciences in the Czech Republic, one of the
regional leaders. Focusing on only one country allows us to have a deeper
and more detailed look, yet since many features of the Czech life sciences
sector are common to other countries in the CEE region, the study is
relevant for them too.
The chapter is organized as follows. The first section sets the stage by
providing insights into the life sciences sector. The second section presents
a qualitative analysis of strategies and operations of subsidiaries in the
life sciences sector of the Czech Republic. The last section concludes and
provides policy implications.
THE LIFE SCIENCES SECTOR, MULTINATIONALS
AND THE CEE COUNTRIES
Life sciences are a global innovative industry, widely regarded as one
of the most promising frontier technologies for the coming decades. It
has recently attracted increasing attention as an important tool that has
transformed the route for new drug discoveries and deliveries and can, in
general, improve the quality of life. Life sciences may be broadly defi ned as
including the scientific discipline of life and of living organisms. The term
is used as a collective name for the pharmaceutical and biotechnology
industries as well as medical technologies, clustered together due to their
interdependence and the fuzzy borders between them.
The interdependence between pharmaceuticals and biotechnology
emerged in the second half of the 1970s when several pharmaceutical multinationa
ls
started partnering with biotechnological start-ups to gain knowledge
(Roijakkers and Hagedoorn, 2006). Most biotechnology companies
are small, they account for the bulk of innovative activity and their business
model is based on the commercialization of university research that may
lead to major scientific and technological changes. In most cases, this commerci
alization
mainly depends on the involvement of large multinational

laboration
in R&D between pharmaceutical multinationals and biotechnology
companies has increased dramatically (Roijakkers and Hagedoorn,
2006). Moreover, pharmaceutical multinationals not only engage in partnering
with biotechnology start-ups, but they also acquire them, as a way to
withstand competitive pressure from generic drugs companies.
Different typologies have been designed to study the R&D-intensity
of industries (UNCTAD, 2005:108). According to the UK Department
of Trade and Industry, pharmaceuticals and health is the first and the
most R&D-intensive group, with R&D-intensity defined as direct R&D
expenditures as a percentage of production (gross output) (DTI, 2006).
It consists of pharmaceuticals and biotechnology (R&D-intensity: 14.9
per cent) and health care equipment and services (R&D-intensity: 6.4
per cent). Moreover, at the global level, the pharmaceutical sector is
characterized by the growth of R&D expenditures which is induced by a
number of factors, such as ageing of the population in developed countries
and market growth in developing ones. As for the biotechnology, it is a
relatively young area, but it has shown an impressive and eff ective development
over the past few years, pushing the boundaries of conventional
medicine into the fields of genomics, molecular biology, biomedicine,
bio-informatics and so forth.
The high level of R&D-intensity of the life sciences sector implies that
linkages between multinational R&D activities (including research and
clinical trial) and host-country science and research systems are very
important. In other words, strong links between public sector and industry
are crucial for the commercialization of products (Meyer-Krahmer and
Reger, 1999).
The life sciences sector is heavily concentrated on the leading spots of the
Triad, with the US taking the lead and surpassing Europe in the amount of
R&D investment and production. The global life sciences sector is set to
grow which, in turn, forces multinationals to search for new cost-eff ective
locations to remain competitive.
Life sciences in CEE
Owing to the increasing demand for innovative drugs and an increasing
patient base, CEE economies have good potential. The geographical
proximity to advanced Western European markets is a key advantage.
Moreover, the CEE economies have a reasonable environment for knowledge-based activities of multinational companies and development of life
sciences industry in particular, owing to a relatively strong scientifi c and
technological base and a critical mass of skilled human resources.

Many governments in the region have realized the potential of
the sector, hence designed and implemented respective public policies
(BioPolis Report, 2007). In the process of transition, the sector was largely
neglected and governments in the region have only recently declared the
sector a priority. The biggest challenge inherited from the past is the separati
on
between academic research and industry; not all CEE countries
have made progress in this area (BioPolis Report, 2007).
The pharmaceutical market in the CEE countries is relatively small in
comparison to Western Europe or the US. In 2006, it was estimated at
USD 9.2 billion and it is expected to reach around USD 14 billion by 2010,
still being around 5 per cent of global pharmaceuticals (Miriyam, 2007).
Although domestic pharmaceutical and biotechnology companies are
active in the life sciences sector in CEE countries, it is characterized by the
strong presence of subsidiaries of multinational companies, which have
been a driving force behind the growth in the sector.
Foreign direct investments in the CEE life sciences
Academic literature has extensively investigated drivers of FDI and has
distinguished four main motives (Dunning, 1993). Three of them (marketseeking, efficiency-seeking, strategic asset-seeking) help explain investment
behaviour of multinationals in the CEE life sciences sector.
Market-seeking FDI implies that a multinational company establishes
subsidiaries to serve host country markets. In the CEE region, rapid
economic growth and a largely under-served population have motivated
market-seeking FDI. Increased demand from both public and private
healthcare is to lead to growth in sales of both branded and generic drugs,
although generics dominate over the brands due to lower purchasing
power than in the West. Moreover, since the CEE economies became part
the EU, non-EU investors are attracted by the magnitude of the single
European market.
Efficiency-seeking FDI is carried out with the purposes of restructuring

This search for cost-effective destinations for R&D corresponds to
the type of the asset-seeking FDI, investments in strategic assets, such as
human capital and technology. The CEE countries have a strong technological
legacy that attracts FDI. Multinationals are attracted by the
presence of universities and research institutes involved in life sciences.
Although, performance of the CEE countries in terms of attracting FDI
in path-breaking research is very moderate, since the mid-1990s they have
emerged as advantageous locations for clinical trials. The decisive factors
are the availability of homogeneous, drug-naive patient base, high treatment
compliance rates of patients and high ratio of doctors per capita of
population. As the clinical trials must comply with the EU regulations,
more multinational pharmaceutical companies are focusing on the new
EU member states, which offer excellent location for such development
activities (Babic and Kucerova, 2003; Natorff, 1998; Pal, 1997). The quantity
of research conducted in these countries is increasing. The three largest
new EU member states . Czech Republic, Hungary and Poland . host up
to 1000 studies annually. New EU member states have lower clinical development
costs and less regulation as opposed to traditional locations in
Western Europe. The governments of new EU member states have incorporated
the European legislation into national law before the accession
to the Union, including Directive 65/65/EEC, the first and fundamental
pharmaceutical framework directive in the EU, and Directive 2001/20/EC
on the clinical trials.
Undoubtedly, the CEE region is not a homogeneous block. BioPolis
Report (2007) groups new EU member states in three clusters based on
the degree of advances in the life sciences. Cluster I includes the countries
closing the gap with the EU-27 . Czech Republic, Estonia, Hungary and
Slovenia. Cluster II consists of countries making progress . Poland and
Slovakia. Finally, cluster III unites weak performers . Bulgaria, Latvia,
Lithuania and Romania.
Foreign direct investments in the Czech life sciences
Czech Republic, belonging to cluster I, emerged as a dynamic economy.
During the transformation period, the country has greatly benefi ted from
a large amount of FDI, having recorded one of the highest FDI stock per

tion
of a transparent system of investment incentives in 1998. CzechInvest,
the Czech national investment promotion agency, has identified nine key
investment areas, including life sciences and medical devices and R&D.
Within R&D, six priority areas are defined, including molecular biology,
biomedicine and biotechnologies, as well as development of new materials
meant to advance life sciences. Pharmaceutical companies investing in
production activities in the Czech Republic are eligible for corporate tax
relief for up to ten years, job creation grants, training and retraining grants
and site support. Subsidies to business activity and training and retraining
are available for technology centres and applied R&D.
Essentially, three main groups of players can be identifi ed in the Czech
life sciences sector. These are research institutes and universities, domestic
companies and subsidiaries of foreign multinational companies. According
to the Czech Biotech Report (2007), at the beginning of 2007, there were
57 biotechnology companies and 308 biotechnology research entities in
the country. A substantial number of the Czech biotech companies cooperate
closely with big pharmaceutical players in the Czech market, operating
as either a supplier base of pharmaceutical substances or conducting
subsequent research and contractual work. US and European pharmaceutical
multinationals dominate the sector and their products are exported to
other European markets and to the rest of the world.
In such a knowledge-intensive sector as life sciences, research institutes
play a crucial role. The Czech Republic possesses a network of research
institutes spread across the country. It is no coincidence that biotechnology
clusters have emerged in university cities. For instance, Brno, the
second largest city in the Czech Republic, is becoming a hub of biotech
companies. Most of the research institutes in the area of life sciences
belong either to universities, to the Ministry of Health or the Academy of
Sciences of the Czech Republic. The Academy of Sciences is the national
centre of non-university basic and applied research. It unites 53 institutes
engaging in research in the natural, technical and social sciences and the
humanities. There are three biomedical institutes of the Czech Academy
of Sciences . Institute of Experimental Medicine, Institute of Physiology
and Institute of Microbiology. University professors and PhD researchers
become increasingly involved in research projects with industries.
For instance, the University of Veterinary and Pharmaceutical Sciences
in Brno is engaged in partnerships with companies such as Zentiva and
Spofa.
The International Clinical Research Centre is planned to become an
important player in the sectoral innovation system of the Czech life sciences.
This clinical-research-educational centre, established in 2006 in

tion
in medical research and education. The project is valued at USD 100
million and around 250 researchers are employed. The technology parks
provide infrastructure suitable for growth within the industry.
Several institutions perform the clinical testing of drugs in the Czech
Republic. The State Institute for Drug Control in Prague is the highest
authority supervising clinical trials. The company I.Q.A. founded as a
spin-off from the Research Institute of Pharmacy and Biochemistry is
engaged in the preclinical and clinical testing of drugs. Other companies
doing all phases of clinical trial are Zak-Pharma services (Brno), Cepha
(Prague), Clinst (Prague), Pharm Test (Hradec Krlov).
MULTINATIONAL COMPANIES IN THE CZECH
LIFE SCIENCES
Major US and European multinationals are important players in the
Czech economy and in the life sciences sector in particular. According to
the OcoMonitor database, from 2003 till August 2007 alone, the Czech
Republic recorded a total of four new investment projects in this sector,
representing 17 per cent of the CEE total (of 23 cases), compared to 9
per cent for Poland, 17 per cent for Russia and 22 per cent for Hungary.
The list of investors present in the Czech Republic include such names
as Lonza (Switzerland), Arrow International (US), Amgen (US), Eisai
(Japan), Molnlycke Health Care (Sweden), Covance (US), Olympus
(Japan), Paul Hartmann (Germany), Synthon (The Netherlands), Johnson
& Johnson (US). Moreover, many medical producers are present; inter
alia B Braun Medical (Germany), Carl Zeiss (Germany), Axel Johnson
International (Sweden), Philips Medical Systems (The Netherlands) and
Thermo LabSystems Corporation (USA).
Multinational companies may enter a market through a variety of
forms, such as green-field development, strategic alliances, joint ventures
and takeovers (Root, 1994). In the present analysis, we focus on two main
modes of entry . greenfield and acquisition.
Greenfield FDI denotes investment projects entailing establishment of
an entire new unity in a foreign country, while acquisition FDI implies
taking over an existing local unit in a foreign country. Acquisitions have
become a key mode of global FDI since the late 1980s (UNCTAD, 2000,
2006). This is explained by the fact that the acquisition of local fi rms by
foreign multinationals enable quick entry and facilitate access to resources

Takeovers in the Czech life sciences
In CEE countries as a whole, the cases of acquisition were widespread
during the transition period, especially linked to the privatization of stateowned organizations. The Czech life sciences were not an exception.
Galena, originally a state-owned company with 120 years of history
and a leader in the Czech pharmaceutical industry, was acquired by
the Ivax Corporation, headquartered in Miami, in 1994. After the deal,
Galena had its R&D department dedicated to biotechnology retained and
remained embedded in the Czech innovation system. In 1999, Lachema,
then privately owned but originally a state-owned enterprise privatized
in 1991, was acquired by the Croatian pharmaceutical company Pliva,
becoming Pliva-Lachema. At the end of the same year, Pliva-Lachema
was taken over by the US company Barr Pharmaceuticals. The stateowned Radioisotope Research and Application Institute based in Prague
was acquired in 1992 by the French company Immunotech. The focus of
the resulting subsidiary company was on R&D and production of diagnostic
kits for medical use. Since 1995, following a sequence of global
deals, Immunotech Czech Republic is a subsidiary of the US company
Beckman-Coulter, a leading producer of biomedical testing instrument
systems.
Although the privatization process ended mostly by the 2000s,
acquisition has remained a popular mode of FDI into the Czech life
sciences. In 2003 the Dutch company Zentiva, which main shareholder
is another multinational, the French Sanofi-Aventis, acquired the Czech
company Lciva. Lciva was a state-owned firm until 1998, when the
majority of its share was acquired by Warburg Pincus, a world-leading
private capital fund. In 2002, Baxter Corporation, a global provider
of medical products and services bought a site and unfi nished building
from Sevac, a state-owned enterprise, initially established as the
Institute of Sera and Vaccines. Since then, Baxter has invested around
almost USD 56 million to develop its Czech subsidiary, which now has
around 200 employees.

tries.
In the centrally planned economic system, the organizational structure
for research, development and innovation was highly fragmented.
There was a traditional separation between a network of branch R&D,
project design and product design organization on one side, and a network
of enterprises on the other (Hanson and Pavitt, 1987). This fragmentation
was an obstacle for innovation, but could be managed by the central planning
agencies. With the demise of the command economy, this traditional
fragmentation led to unpredictable developments. Demand for R&D from
manufacturing companies significantly decreased and many research institutes
found themselves on the verge of bankruptcy. In the light of these
developments, the decision made by the Czech government in the 1990s
to privatize some research institutes was not surprising. It meant that
state-owned research institutes were available for acquisition, not only for
domestic, but for foreign investors, too.
Acquisition of state-owned research institutes represents a typical
case of asset-seeking FDI, attracted by strategic assets available in a
host economy. As early as in 1991, the Research Institute for Biofactors
and Veterinary Drugs began co-operation with the Lonza Group, a
Swiss chemical and biotechnology company, which is one of the world s
leading suppliers to the pharmaceutical, healthcare and life science
industries. In 1992, Lonza acquired the institute, which became its Czech
subsidiary named Lonza Biotec. A noteworthy observation is that Lonza
entered the Czech market through acquisition of the most advanced corporate
function, R&D. Later, Lonza Biotec progressed to more downstream
functions as it started production of L-Carnitin. In 2002, Lonza
began considerably expanding its Czech facilities, and in 2004, Lonza
Biotec incorporated more downstream processing capacities. In 2006,
Lonza Biotec s R&D capabilities were strengthened by the opening in
Kourim of a new R&D centre, worth of USD 18 million and employing
50 people.
It could have been assumed that the potential for asset-seeking FDI
in the Czech life sciences sector has been fully exhausted after privatization
of state-owned research institutes in the 1990s. Nowadays, it
is private national R&D firms that remain the target of foreign multinational
pharmaceuticals. For example, in August 2007, the US-based
international clinical trial company Medpace announced acquisition
of Monax, a 500-employee Czech contract research organization. It is
indicative that with this deal, Medpace aims to strengthen its presence in
Europe, in addition to its existing offices in Belgium, Germany and the
Netherlands.

In the case of greenfield investments, a host country should be able to outcompete alternative locations short-listed by a multinational company in
terms of package of investment incentives, provision of infrastructure and
facilitation of entry.
Laminar Medica is illustrative in this respect. It is headquartered in
Tring, UK, and specializes in design, test, manufacture and validation
of transport systems for healthcare facilities. In 2003, Laminar Medica
started looking for a new location in CEE to match the demand of an
expanding consumer base, while taking into account the lower costs of
prospective locations. It considered the Czech Republic, Poland and, to a
lesser extent, Hungary and Austria, but finally chose the Czech Republic
thanks to its favourable conditions and the investment incentives off ered
by the Czech government. Hence, in 2005 Laminar Medica established its
production subsidiary in the Czech Republic as a greenfi eld investment
project. Another greenfield investment project, amounting to USD 21.9
million and creating 58 new jobs was implemented by the US company
Covance in 2006 with the opening of a clinical development offi ce in
Prague. This new office supports Covance s clinical trial operations in
the Czech Republic and Slovakia. It would complement the network of
existing clinical development offices, inter alia, in Warsaw and Budapest.
It is worth noting that many foreign multinational companies established
partnerships with domestic firms or research institutes before entering
the Czech economy through an acquisition or a greenfi eld investment.
An illustration of a joint venture between a domestic and a foreign-owned
company leading to a greenfield investment is given by the pharmaceutical
company Ferring. In 1993, this Swiss multinational entered in a
joint venture with the then state-owned Lciva. In 1997, Ferring started
construction of its own subsidiary in the Czech Republic, which was
completed in 1999. The Ferring whole-owned subsidiary is named Ferring
Lciva, which kept manufacturing contracts with Lciva, which was
already privatized by that time.
The entry of the US multinational biopharmaceutical company Gilead
Sciences in the Czech Republic resulted of its partnership with a Czech
research institute. In 1991, Gilead Sciences entered into license agreement
with the Institute of Organic Chemistry and Biochemistry (IOCB) of the
Czech Academy of Sciences. In 1992, the development of small molecule
antiviral therapeutics was ushered in with the licensing of nucleotide compounds
discovered by the IOCB and a research institute in Belgium. In July
2006, Gilead Sciences announced a donation to IOCB in order to establish
a Gilead Sciences Research Centre. Gilead pledged to provide USD 1.1

Multinationals
Czech subsidiaries
Overall, the multinationals that entered the Czech market in the 1990s
and invested in the development of their subsidiaries, are now key local
players. Several examples of global multinational companies entering the
Czech life sciences sector with different motivations and strategies provide
rich food for thought. The establishment of a subsidiary without any
R&D capacities corresponds to market- or efficiency-seeking FDI. In such
cases, a multinational establishes a subsidiary producing goods and products
already manufactured in the corporate network elsewhere. In the case
of pharmaceuticals, the costs of setting up a completely new production
facility are higher giving all the required certification of the manufacturing
processes. In an acquisition, a multinational would buy a fi rm possessing
manufacturing capacities and gain immediate access to the market. Both
modes of entry can be beneficial for the host economy since the acquisition
of existing firms integrates these manufacturing facilities into the global
corporate network, and in a greenfield investment the country receives
capital inflows and new jobs are created.
Subsidiaries combining manufacturing and R&D capacities may unite
market-, efficiency.and/or resource-seeking FDI. When this type of subsidiary
results from greenfield investments the benefit for the host economy
in terms of capital inflows, job creation and strengthening of the knowledge
base can be maximized, making this the most desirable type of FDI.
In the cases of acquisition, the impacts for the host economy are more
difficult to be evaluated. When an acquired domestic firm becomes part of
the global corporate network of the acquirer multinational, its production
capacities are likely to be retained, however it is questionable whether its
R&D facilities will be preserved and integrated into the global network of
the new owner.
A somewhat less frequent case is the entry to the host economy in the
form of stand-alone R&D unit, which results from the trend of corporate
R&D internationalization. It is typically an asset-seeking FDI. Investment
promotion agencies of many countries specifically target and compete
for a tiny share of the best FDI, that is, FDI in R&D. However, attraction
of R&D-related FDI is not an end in itself, integration of the R&D
subsidiary into the host innovation system is a key challenge.

ity,
as illustrated by the acquisition of state-owned research institutes by
multinational companies in the process of privatization in the 1990s. The
argument supporting such deals was that the privatization of the science
and technology sector would solve the problems inherent to the socialist
economy. The claim was that although the state was losing control over
R&D capabilities, particularly when the acquirer was a foreign multinational,
the research institutes would became effectively integrated into
the global economy. Moreover, the issue of ownership would not be relevant,
as the R&D facilities remained physically present in country. Yet,
there were opponents to such deals who considered the loss of national
control over R&D capabilities as the biggest disadvantage of the acquisition
of research institutes by foreign multinationals. Since the control
is transferred to the headquarters of a multinational company, the state
remains powerless and a multinational company can downsize or even
close down these R&D facilities.
CONCLUSIONS AND POLICY IMPLICATIONS
The life sciences sector emerged as a prospective area, being the twentyfirst century gold rush. On one hand, traditional pharmaceutical multinationals
explore new opportunities in the biotechnology worldwide and
seek to reinforce their positions in the global market. On the other hand,
national governments try to jump on the bandwagon and try to develop
the life sciences industry of their countries as they are afraid to be left out
of what is perceived as a source for high-end economic development.
Giving the fact that the life sciences sector (and pharmaceuticals in
particular) is highly globalized, promoting and targeting FDI has become
a natural way to develop this industry. However, unlike the gold rush in
California, which was driven by resource-seeking motives, the biotech gold
rush is driven by asset-seeking motives, meaning that life sciences multinationa
ls
invest in locations that offer a pool of educated labour force,
unique knowledge and expertise. Several CEE countries, new EU member
states and Czech Republic in particular, emerge as such locations.
The Czech Republic offers investment incentives for FDI projects in the
life sciences too, but the real motivation for multinationals to enter the
market is based on a different rationale. The country had a strong science
foundation in pharmaceuticals and natural sciences in the past. Successful
privatization of its pharmaceuticals industry provided a boost in the developmen
t
of the life sciences sector in the country. Hence, it is not surprising
that acquisition of state-owned enterprises was the most common way

The developments in the Czech life sciences sector should be regarded
through the country s membership in the EU, as it belongs to the
27-member block that fosters common market and enforces harmonious
regulatory environment. However, some reservation about EU membership
should be expressed. This competitive advantage is eroded as more
countries join the bloc. In this way, the current study, although focusing
on only one country is relevant for several other new EU member states.
Previous studies on public policies to promote pharmaceutical sector
suggest that policy shaping the local network and stimulating a demanding
competitive environment is more effective than protecting the local
market and de-linking it from the global market (Thomas, 1994). Most
CEE countries, and Czech Republic in particular, indeed chose the fi rst
course, trying to make domestic firms stronger and to attract new investors
and stimulate the evolution of multinational subsidiaries already in
place (Costa and Filippov, 2007).
The chapter points to the fact that the sourcing of knowledge by multinational
companies is taking place not only through formal acquisition
of domestic firms or research institutes, but more importantly, through
partnership, strategic alliances between foreign and locally-owned players.
This co-operation should be further promoted for the benefits of both
sides. Moreover, policies should stimulate universities and research institutes
to understand market issues and engage more in demand-driven
research.
NOTE
1.
The profiles of subsidiaries discussed in the paper are obtained from the offici
al
CzechInvest website unless otherwise is specifi ed.
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Gate2biotech: www.gate2biotech.com
OcoMonitor: www.ocomonitor.com
4.
Facing the trial of internationalizing
clinical research to developing
countries: evidence from Mexico
Fernando Santiago-Rodrguez
INTRODUCTION
Recent years witness trends towards outsourcing and internationalization
of clinical research by multinational pharmaceutical fi rms. Increasingly
clinical trials are run at numerous sites around the world. Several developing
countries are emerging as relevant investigative sites. Although India
and China appear as preferred destinations, good prospects to participate
are also available for other advanced developing economies, such as Brazil,
South Africa and, as discussed here, Mexico. In addition to large domestic
markets, such countries have consolidated major regional manufacturing
and export bases for foreign-owned subsidiaries as well as for some domestic
firms. Moreover, these emerging economies feature some country specific
conditions shaping their attractiveness as investigative sites.
This chapter analyses recent developments in the markets for clinical
trials in developing countries. It leans on the Mexican case to illustrate
some factors driving the dynamics and attractiveness of such countries as
investigative sites. It also points to some challenges developing countries
face to adjust and modernize their local regulatory environment governing
clinical trials. The chapter brings together scholarly literature on internation
alization
of R&D by multinationals and on ethical implications and
regulations of clinical trials.
The analysis in this chapter builds on both primary and secondary data
sources. Primary data were gathered through semi-structured interviews
carried out in Mexico between February and August 2007. Informants
included representatives from foreign-owned multinational subsidiaries
and Mexican pharmaceutical firms as well as representatives from the main
local trade organizations in this industry, CANIFARMA and AMIIF.
The chapter also benefits from interviews with representatives from the
Mexican regulatory agency, the COFEPRIS, and the coordinating body
58
Internationalizing clinical research

base
with information about the number, distribution and some general
characteristics of clinical trials carried out in the US and other 153 countries
.
This is one of the two most authorized publicly available sources of
information about clinical trials in the world.1 Registration of trials in this
dataset may be a pre-requisite for eventual publication of research results
in the specialized medical literature (De Angelis et al., 2005). Additional
data were obtained from the 11 January 2008 version of the Bioresearch
Monitoring Information System (BMIS), which provides information
submitted to the US Federal Drug Administration (FDA) about clinical
investigators, contract research organizations and institutional review
boards involved in conducting investigational new drug studies with
human investigational drugs.
The chapter is organized as follow. The first section characterizes
clinical trials within the broader innovatory process in the pharmaceutical
industry including some determinants of their internationalization and
location to developing countries. The second section looks at some regulatory
challenges in relation to clinical trials in Mexico. The third section
concludes the chapter.
CLINICAL TRIALS: INNOVATION AND MARKETS
The innovation process in the pharmaceutical industry comprises four
major stages (Achilladelis and Antonakis, 2001; Hara, 2003; McKelvey
and Orsenigo, 2002; Styhre and Sundgren, 2003). The first stage encompasses
discovery or basic research leading to identification of new molecular
targets, new chemical entities, and pre-clinical studies. The second
stage refers to development or clinical research comprising activities
pre- and post-marketing of new drugs. The third stage involves regulatory
processes of evaluation and eventual approval or rejection of development
and marketing of pharmaceutical products. The last stage concerns
manufacturing, marketing and product life cycle support. The length and
sequencing of each stage depends on legal, ethical, scientifi c and economic
factors (Gaudillire, 2004; Jungmittag, 2000). In general, 10 to 15 years
are required to pass through all four stages and bring a new drug into the
market. The largest share of this time involves clinical trials. In addition,
clinical trials account for a third or more of the USD 800.900 million estimated
as the investment required in the entire process of pharmaceutical
innovation (Boggs et al., 1999; Maiti and Raghavendra, 2007).

tory
requirements and so on. Phase I constitutes fi rst-time administration
of new chemical entities in humans, firstly on healthy volunteers. Then,
during Phase II the drug is administered to a small sample of volunteers
featuring the target medical condition. These two first phases inform
research questions, definition of analytical conditions and end-points2
for the subsequent more lengthy and massive studies in Phase III (Zivin,
2000). Phase IV consist of post-marketing studies informing about longterm
effects of the new drug, while exploring opportunities to develop
improved or new applications for existing products, extending their life
cycle. Speed, coordination, efficiency, accuracy and minimizing costs of
trials are critical to reduce time-to-market, increase profits and enhance
product quality. Each day saved in the process, particularly in Phase III,
brings substantial gains in expected revenues. On this regard, the outsourcing
and ultimate internationalization of clinical trials has been an
increasingly common strategy adopted by pharmaceutical fi rms.
What drives internationalization of clinical research?
The characteristics of pharmaceutical innovation allied with rapid technological
change, fierce competition and development of pockets of scientifi c
and technological excellence throughout the world compels multinationals
to continuously adjust and reorganize their R&D activities worldwide
(Gassmann and von Zedtwitz, 1999).
In general, the scholarly literature on R&D internationalization points
to many factors related to science and technology and R&D costs that
may drive multinationals to concentrate and/or spread out their innovation
activities (Cantwell and Kosmopoulou, 2001; Gassmann and von
Zedtwitz, 1999; Patel and Vega, 1999; Reddy, 1997; von Zedtwitz and
Gassmann, 2002). Studies on R&D internationalization have distinctly
observed trends or patterns of R&D internationalization depending on the
aspects they address, such as R&D-specific or external factors, motives,
host location characteristics, inter-temporal characteristics and degree of
cooperation between individual R&D units (Gassmann and von Zedtwitz,
1999; Kuemmerle, 1999; Reddy, 1997; von Zedtwitz and Gassmann, 2002).

tion
(Archibugi and Pietrobelli, 2002; Chen, 2006; Dunning, 1994; Le Bas
and Sierra, 2002; Milstien et al., 2007; Reddy, 1997).
The characteristics of the host countries, industries and fi rms matter
when identifying particular patterns of R&D internationalization. Yet, it
is problematic to set clear-cut distinctions between these dimensions, particula
rly
between countries and industries (Dunning, 1994; Kuemmerle,
1999; von Zedtwitz and Gassmann, 2002). Clearly however, multinationals
can split research (R) and at a larger extent, development (D), across
geographical locations (von Zedtwitz and Gassmann, 2002). In such a
way, multinationals may tap on scientific and technical capabilities and
other country-specific characteristics in relevant markets while protecting,
enhancing or complementing the core knowledge developed at corporate
level (Kuemmerle, 1999; Le Bas and Sierra, 2002; Patel and Vega, 1999).
Host countries may serve different roles for multinationals: they can be
a place to exploit knowledge and innovation produced at key locations
within the corporation, mainly at home or be part of complex global innovation
generating networks (Dias and Bresciani, 2006; Reddy, 1997).
The pharmaceutical industry is very illustrative of this process. It is one
of the more globalized industries and tends to show a more ample tendency
to outsourcing and offshoring research and development activities
(Kuemmerle, 1999; von Zedtwitz and Gassmann, 2002). Relevant for the
purpose of this chapter is the tendency of increasing internationalization
of the R&D activities related to clinical trials. This tendency has benefi ted
from regulatory changes taking place in relevant markets. For instance,
the US allows the inclusion of data from clinical trials performed abroad
in any application of new drug to the FDA (FDA, 2001; PhRMA, 2006b).
In such cases, a company may benefit from the flexibility in terms of
choosing clinical trials locations, such as reducing the related costs. Maiti
and Raghavendra (2007), for example report savings of 30 to 50 per cent in
India for comparable clinical trials carried out in Europe or the US. Other
advantages of internationalizing clinical trials are related to the countries
hosting such activities, particularly when they represent relevant potential
market themselves. For instance, a pharmaceutical company would
benefit from proximity and access to local organizations, notably drug
regulatory authorities, in terms of shaping demand for their products and/
or benefiting a subsidiary already in place in the host country, if that is the
case (Kuemmerle, 1999).
Many aspects are taken into account when comes to select a country,

tions
are among the factors that make a country attractive for hosting
clinical trials (DiMasi, 2001; Piachaud, 2002). The capacity of host countries
to comply with tough international standards on good clinical practices
(GCP) and good laboratory practices (GLP) respectively,3 is required
to ensure quality and integrity of data and more importantly, to safeguard
wellbeing of study subjects. Moreover, the number, quality and cost of
investigators and study subjects is critical (Zivin, 2000).
The global clinical trial market and the internationalization to
developing countries
There has been an expansion of clinical trials in developing countries (Maiti
and Raghavendra, 2007). This movement is partially explained by some
general features of those countries, such as heterogeneous and growing
populations, high prevalence of targeted diseases and lower research costs
.even for similar labour force quality and research conditions relative to
developed countries.
The size of the global market for clinical trials is diffi cult to defi ne; esti
mates
of annual investment in this area vary widely according to diff erent
sources: in 2006, the range was between USD 10 to 40 billion (Lamtech
Institute, 2007; LeadDiscovery, 2006). In this chapter, we look at the
distribution of trials among investigative sites throughout the world. To
do so, we rely on data about trials carried out in the US and another 153
countries, registered by the US Federal Drug Administration (FDA) .
NIH-NLM. We aggregated the data in order to distinguish between developed
and developing regions, following classifications by the World Bank,
the IMF and the OECD (Table 4.1).
By the end of February 2008, about 51 987 protocols had been or were
being carried out in the world since 1948. Considering that many of these
trials are performed in multiple sites at once, the actual number may add
up to 75 900.4 Global clinical trial activities record a tenfold increase since
the year 2000, with a strong dynamism in those performed outside the US.
Notably, whereas participant developing countries rose from 34 to 93 in
less than a decade, their share practically doubled over the same period. A
similar situation occurs with transition economies. A breakdown by main
developing country region shows that Latin America has the largest share.
Yet, driven by India and China, East and Southeast Asia show the strongest
dynamism. In their respective regions, Brazil, South Africa and Mexico
have a significant weight as investigative sites.

1948 2000 2001 2008 2008a 1948 2000 2001 2008 2008a
Region Per cent share of trials Participating countries
Worldb 6590 69274 75900 72 137 137
Developing 6.4 12.7 12.1 34 93 93
Transition 1.0 3.6 3.4 9 15 15
Developed 92.6 83.7 84.5 29 29 29
Region Per cent by main region By region
Africa 1.2 1.9 1.9 7 37 37
South Africa 0.9 1.0 0.9
Latin America 4.8 5.3 5.2 13 24 24
Brazil 0.2 1.1 1.0
Mexico 0.0 1.0 0.9
East, Southeast 0.3 4.9 4.5 9 19 19Asia and Pacifi c
Chinac 0.1 2.6 2.4
India 0.0 0.9 0.8
Europe 0.9 2.5 2.3 10 11 11
Middle East 0.1 0.3 0.3 3 11 11
North Asia 0.0 0.3 0.3 1 6 6
Developed 2.0 1.5 1.6 29 29 29
US 64.1 37.5 39.8
Europe 18.7 30.3 29.3 18 18 18
Japan 0.1 1.1 1.0
Notes:
(a) February, 28.
(b) Absolute numbers.
(c) Includes Taiwan and Hong Kong. Otherwise, the share would go down to 0.0, 0.
9 and
0.9, for each respective period. Our regional classifi cation differs from that
used in the
original source. We rearranged following World Bank, IMF and OECD classifi catio
ns.
Source: Author with information from NIH-NLM.
Availability of qualified human resources is critical for the adequate
performance of any system of innovation. On the same lines, growing
clinical trial activities would be hindered without the corresponding
development of a pool of specialized personnel. A positive response from
developing countries would be the rise in the number of applications for
clinical investigators to the FDA. Since 1997, the number of applications
of clinical investigators from the five countries mentioned above has
grown at an average 13.5 per cent a year. In 2007, applicants from these

coming
in developing countries. Concerns of future shortages of qualifi ed
people would be on the rise as current diffi culties to fi nd well-trained and
experienced personnel are compounded by rather slow responses from
local education systems (Singh, 2007).
CLINICAL RESEARCH IN MEXICO
Mexico is the world s ninth largest pharmaceutical market in the world
and the second in Latin America. According to the IMS (2006), strong
dynamism reflects in the growth rates of 6 to 8 per cent per annum in retail
sales in the private drug market growing. Mexico is a relevant manufacturing
and export base to tender Latin America and, at a lesser extent, the
US, Europe and Asia. With regard to clinical trials, there is growing local
activity as pharmaceutical related trials rose from 285 protocols in 2000
to 1360 protocols in 2007 (COFEPRIS, 2007). Data from Mexico-based
trials would support the registration of new products in the US and other
relevant markets. An illustrative example comes from one of the interviews
we carried out. The local personnel of a Mexican subsidiary of a European
pharmaceutical firm developed a multivitamin product for people with
diabetes. However, as locally performed trials suggested the product
would also have positive effects on some post-operation side eff ects for
cardiovascular disease, the company s headquarters decided to test for an
eventual new application of the product by performing clinical trials at a
more global scale. How can we explain this? A number of country specifi c
factors may be at stake.
According to the World Bank, Mexico is the 11th most populated
country in the world. Estimates for 2007 by the Sistema Nacional de
Informacin en Salud (SINAIS) set a total population at 108.6 million,
with about 43 million (nearly 39 per cent) aged 19 years or less. This
is a potential market for paediatric products, offering opportunities to
exploit well-reputed and specialized research infrastructure in the area
(Castellanos and Chiprut, 2002; Lamtech Institute, 2007). Moreover,
according to information from the National Institute of Statistics,
Geography and Informatics (INEGI), about 37.6 per cent of the
Mexican population agglomerates in Mexico City, her two largest neighbouring
states . Estado de Mexico and Puebla, and in the industrial
states of Jalisco and Nuevo Len. This agglomeration of the population
coincides with concentration of some of the country s largest public

a
Item 2000
2005
Diabetes mellitus 10.7 13.6
Ischemic and related heart diseases 10.1 10.8
Cirrhosis and other chronic affections of the liver 5.8 5.6
Brain vascular diseases 5.8 5.5
Malign tumours 5.5 5.3
Lung obstructive chronic disease 3.7 4.1
Diseases related to prenatal period 4.5 3.3
Acute low respiratory infections 3.3 3.0
Hypertension 2.2 2.6
Nefresie and related 2.3 2.3
Malnutrition 2.0 1.7
HIV/AIDS 1.0 0.9
Gastrointestinal infections 1.2 0.9
Note: (a) Percentage of total dead ratios per 100,000 inhabitants.
Source: SINAIS (2009).
health premises, many of the most modern health related education and
research facilities, and the location of the majority of local and foreign
pharmaceutical firms in the country (Dussel, 1999).
Local demographics and epidemics lead to a mix of diseases characteristic
of developing countries but also of more developed ones (Table 4.2).
Urbanization, augmented life-expectancy at birth and improved sanitary
conditions imply that although poverty related diseases such as gastrointestinal
and respiratory infections or malnutrition, are now in check or
slightly decreasing, they persist in being among the main causes of death,
particularly among children and in highly impoverished regions (SS,
2005). In contrast, chronic illnesses and those associated with metabolism
and age have gained prevalence. Nowadays, life-style diseases such as diabetes
and ischemia account for nearly a quarter of death rates per 100 000
people in Mexico; the country is expected to host one of the largest diabetic
populations by 2025 (Kuri et al., 2001). Shrinking birth rates, from
34.7/1000 in 1980 to 18.6/1000 in 2007, accompany a smooth demographic
transition with the share of elderly people (65 or more years old) increasing
from 4.3 per cent to 5.5 per cent over the same period (Caldern, 2007).
This raises expectations of growing, multiple and longer lasting future
drug intakes (Kuri et al., 2001; SS, 2005).
At least, compared to other Latin American countries, Mexico has a
strong public healthcare system that, next to large population coverage,

zations
include the national health institutes featuring ample capacity to
perform clinical and some basic research, together with highly specialized
health-assistance and training across 12 different therapeutic areas.
Complementing the sector are a number of public hospitals and universities
throughout the country. Linking to these public organizations saves fi rms
the need to create the specialized centres that are required by the Mexican
authorities to perform clinical trials. More importantly, they grant access
to huge and captive populations under standardized research conditions.
The institutional environment underpinning clinical trials
This second section of the chapter enquires about the extent to which
developing countries may be able to promote orderly developments in
their local markets for clinical trials. Available literature suggests such
goal is reliant on the countries ability to adopt proactive policy stances
towards the operation of multinational firms (Archibugi and Pietrobelli,
2003; Chen, 2007; Dunning, 1994). Following Dunning (1994), infl uences
from public policy on multinationals innovation activities may be either
direct . through funding and regulating of R&D activities; or indirect by
influencing the overall environment in which firms undertake innovation.
Regarding the latter, the current debate on the ethical implications
associated with clinical trials hints at, among others, two interrelated areas
relevant for policy intervention. While the first area is related to characteris
tics
of the regulatory environment, the second refers to the structure and
functioning of mechanisms responsible to evaluate and monitor clinical
trials (Castellanos and Chiprut, 2002; Drews, 2000; Zivin, 2000; Fleck,
2004; Kermani, 2006; Lombera, 2006; Maiti and Raghavendra, 2007;
PhRMA, 2006a; Valdez-Martinez et al., 2006). These areas highlight some
minimum conditions increasing the likelihood that local performance
of clinical trials meets international standards about protection of study
subjects,5 while promoting adequate interactions between local agents and
multinational fi rms.
Regulatory issues
Relative strength and compliance with regulatory frameworks and internationally
accepted standards condition the attractiveness of investigative

enize,
within a single government organization, regulation on sanitary and
related risks. Items under scrutiny include pharmaceutical products but
also basic sanitation, environmental risks, publicity on health, food and
related products and so on (Enrquez, 2006).
COFEPRIS is responsible to approve and monitor clinical trials according
to tight legal, safety, technical, ethical and other requirements set in
current legislations. The agency however, is only able to partially fulfi l the
task; gaps persist in monitoring work in progress. This is an issue of equal
concern in India, where despite improved regulation of the industry, weak
enforcement remains an issue (Singh, 2007). Regulatory agencies in both
countries suffer from a dearth of well-trained and experienced personnel,
financial resources and infrastructure to carry out monitoring. In Mexico,
according to information we gathered through interviews, poor remunerations
and salaries compound the picture. Mexican offi cers would lack full
awareness and hands-on experience of conducting clinical trials; learning
processes would run parallel to actual performance of supervisory duties.
Accordingly, COFEPRIS often has to lean on experts from hospitals,
research centres, universities and the industry itself to conform supervisory
and monitoring teams. Authorities would avoid conflicts of interest
or inappropriate behaviour by requesting blind evaluations, leaving the
actual decision-making to ethics committees. The extent that this practice
rules out conflicts of interest and other problems calls for further study as
major shortcomings remain in the operation of such committees. In any
case, disappointment with an agency expected to stand as tall as the FDA
but that instead, remains poorly empowered and financially endowed is
clear.
The governance of trials features shortcomings which are prone to hold
back their adequate development in the future (Enrquez, 2006; Lamtech
Institute, 2007). Pending in the agenda is the modernization of the regulatory
framework, notably in relation to research. The current framework
rests on the Ley General de Salud (General Health Act), and the associated
Reglamento de la Ley General de Salud en material de Investigacin (Bill
on Health Research), dating back to 1984 and 1987 respectively (SS, 1984
and 1987). These documents specify the steps and conditions necessary to
perform clinical trials in Mexico. However, both of them were conceived
when such activities were relatively limited in number in the country.
Consequently, current guidelines are rather general and less strict compared
to the current industry standard practices, such as the International
Conference on Harmonization (ICH); and somehow inadequate to tackle

tory
procedures throughout the country as well. Initiatives are thus taken
for a Mexican Norm on Clinical Research, so that procedures may meet
the highest standards agreed upon by all relevant parties. Perhaps more
progress is required in this department.
COFEPRIS has strengthened and increased transparency of the regulation
on clinical trials. Steps towards improving the regulatory framework
in Mexico include the recent creation of a permanent pharmacovigilance
program and enactment of a Mexican norm on the matter (Becerril, 2006).
Pharmacovigilance in Mexico is divided into two stages: (1) early pharmacovigila
nce,
mandatory by law, it requires watching for any sanitary risk
arising during the first two years of commercialization of a new drug; and
(2) intensive pharmacovigilance that considers specific tests of particular
features of a drug after commercialization, therefore requiring more active
stances by firms. Requests for specific studies are expected to give an early
warning of any sanitary risks associated with trials and consumption of
pharmaceutical products. In addition, and mirroring similar experiences in
India,6 the Mexican pharmacovigilance norm induces firms and research
organizations to agree on who takes responsibility to notify COFEPRIS
of any major sanitary risk occurring during clinical trials either at home or
abroad (Lamtech Institute, 2007).
The last important aspect relates to dissemination of detailed and
accurate information about clinical trials, this is critical to inform potential
volunteer study subjects about the pros and cons of taking part in a
given study; such is the essence of informed consent (PhRma, 2006a). In
Mexico, lack of data or at least readily available access to it, is regrettable
especially considering that strong regulatory agencies may induce fi rms to
provide some minimum information about their activities.7 Better understanding
of market dynamics would begin by solving this basic but critical
statistical gap. COFEPRIS is developing an ad hoc database containing all
research protocols in the country; the concrete impact of the initiative is
yet to be seen.
Ethics committees
According to internationally accepted standards, performance of clinical
trials is contingent on approval and close monitoring by ad hoc,
independent bodies known as ethics committees or institutional review
boards (IRBs).8 In Mexico, conformation and operation of IRBs, particularly
within large organizations, follows paradigms set by the FDA9
(Castellanos and Chiprut, 2002). However, practical evidence is rather

cols
ethically would often fall onto a key person . the dean of the teaching
program or the service head at the host organization, for example. To
the extent that such characters may frequently act as principal researchers
. those responsible to lead the research teams conducting a trial in
those host organizations, the risks of potential conflicts of interests, insuffi
cient
transparency and objectivity in decision-making seems high. This
is relevant as COFEPRIS lack of resources and expertise undermines its
capacity to ensure that protocols are evaluated and carried out according
to proper ethical and other relevant standards. Enforcement of existing
legislation is a challenge.
Deficient conformation of IRBs would slow evaluation of new protocol
applications too. Waiting times depend on the institution, type and number
of protocols. Bureaucratic procedures, lack of coordination, duplication of
responsibilities and even contradictory decisions taken, particularly within
large organizations, complicate operation of IRBs. Although approval
times would mirror that of developed countries in general, it may take up
to three months for IRBs to emit their judgement (Castellanos and Chiprut,
2002). Speeding up the evaluation processes, including ethical evaluations,
import licences for investigational drugs, customs paperwork and logistics
and so on, is critical for a timely performance of trials (Lamb and Setley,
2005). Overall waiting times for regulatory approval in Mexico may add-up
up to nine months. Similar processes may take about three months in most
Western European countries (BMI, 2006). Times for regulatory approval
in Mexico would be more competitive however, compared to China where
this may take up to one year (Lamb and Setley, 2005). Industry s proposals
for the creation of ad hoc independent evaluation committees to compensate
for the absence of IRBs in some Mexican organizations, fi nanced by
the industry and actively involving regulatory authorities are currently
under debate. The process seems to progress rather slowly, though.
CONCLUDING REMARKS
This chapter explored recent developments in the market for clinical
trials in Mexico and other developing countries. Hence, we illustrated
a series of country specific characteristics underpinning the attractiveness
of those countries as host locations for clinical trials: demographic,

lenges
facing developing countries such as Mexico. A relevant conclusion
is that a number of ethical and welfare considerations call for a more
proactive stance from developing countries vis--vis the activities of
multinational firms. More specifically, they need to address important
bottlenecks characterizing the overall institutional and regulatory environments
underpinning the local conduction of clinical research. Weak
enforcement of inadequate and out of date regulations, alternatively slow
or incomplete processes of reform and modernization of such frameworks
supports concerns about the extent that potential benefi ts may
outperform the inherent risks faced by local populations participating in
clinical trials. Creation of ad hoc regulatory agencies is insuffi cient if they
are not properly endowed and empowered. Tapping on local healthcare
providers and health related education and research organizations with
experience of conducting clinical trials sponsored by multinational fi rms
would assist to improve the structure and coordinating powers of regulatory
agencies. It may also contribute to ensure adequate flows of qualifi ed
and experienced labour force to meet demands from rising clinical trial
activities. Strong regulatory agencies in turn, seem instrumental to shape
and operate research systems meeting internationally accepted ethical
and related standards. At a more basic level, a stronger commitment of
regulatory agencies to gather and make information about trials taking
place in their circumscription publicaly available would help in improving
our understanding of factors related to the socioeconomic factors
driving internationalization of clinical trials and their corresponding
implications on developing countries.
NOTES
1.
The second source is the International Standard Randomized Controlled Trials Num
ber
(ISRCTN). We preferred ClinicalTrials.gov because of its more user-friendly feat
ures to
browse and locate trials. In addition, several of the records quoted by the ISRC
TN were
obtained precisely from the former dataset.
2.
End-points are unambiguous results that indicate exactly what the treatment can d
o ,
they signal changes in a patient s condition ranging from healing to reductions in
the
progression of disease or whether death rates have fallen (Zivin, 2000:73).
3.
Adoption of GCPs in the post-World War II period responded to the need to protec
t
integrity of subjects participating in clinical trials; key practices include in
formed consent
and observance of ethical aspects of tests in humans. GLPs in turn, refer to sys
tems of
management controls conditioning work in laboratories and research organizations
ensuring quality, consistency, validity and reliability of test data. (FDA)
4.
Double counting, particularly in breakdowns by region is evident in the source (

NIHNLM).

.
Until recently India banned the performance of clinical trials within its territ
ory before
similar trials had being carried out elsewhere already (Kermani, 2006).
6.
According to Maiti and Raghavendra (2007), amendments made in 2005 to the Schedu
le
Y of Drugs and Cosmetic Act 1945 in India, made reporting duties clearer and unam
biguous
for fi rms.
7.
We requested COFEPRIS official data about the market for clinical trials in Mexi
co.
COFEPRIS response was that such detailed information is nonexistent.
8.
Following US paradigms, institutional review board/independent ethics committees
(IRB/IEC) are a group of people formally designated to approve, monitor and revie
w
biomedical and behavioural research involving humans with the aim to protect the
rights
and welfare of study subjects (FDA, 2007).
9.
Ideally, a minimum of five persons should integrate the Committee, with at least
one
independent from the host organization and one a member of the civil society in
a nonscientific
area (usually from a religious community or minority group)
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Intermezzo I. Do multinationals
matter for emerging markets, or vice
versa?
Intermezzo I. Do multinationals
matter for emerging markets, or vice
versa?
It is undeniably the case that the subject of multinationals in emerging
markets has become a diverse subject. A volume such as this indicates that
much has changed in development studies over the last two decades and,
from my point of view, this change has been almost completely positive.
The study of multinationals has clearly evolved from a niche area to the
mainstream of the social sciences and I am delighted to see international
institutions, as well as politicians and policy makers at all levels, earnestly
discussing how to engage (positively) with the multinational fi rm.
The richness and diversity of perspectives that multinationals and
emerging markets are nowadays analysed from is well-illustrated by the
chapters in this book and, indeed, by the first four contributions that
precede this comment. The variety of the subject matter and the myriad
perspectives from which the activities of multinational firms is examined
confi rms for me that post-modernism is alive and well within academia.
Diversity is refreshing, not least because diversity is indicative of vigour,
and in a Darwinian sense, the means by which progress is made. The fi rst
four chapters of this book alone have addressed the outsourcing of clinical
trials, the challenges of cross-cultural management and the innovativeness
of multinational firms, covering countries as diverse as Thailand,
the Czech Republic, Mexico and China, to name but a few.
As recently as two decades ago, multinationals were regarded with
considerable suspicion. At one extreme, they were largely regarded as
a symbol of continued social, political and economic control by the
industrialized world over the developing countries, a new form of neoimperialism
.
Now the reverse is the case. Multinational activity is considered
to be largely a force for positive change and a means to promote
economic progress (Lall and Narula, 2004).
I wonder, however, if the pendulum has swung too far in the other
direction. On the other hand, I am also concerned that while the studies
75

moting
economic growth and technological change at the national level. I
do not exaggerate when I say that many studies seem to assume that multinational
s
are a sine qua non for development (Narula and Portelli, 2007).
The definition of the multinational firm and the mechanisms by which
it can exert influence on its host and home countries have been steadily
expanded to encompass such a large canvas that the some studies are in
danger of confirming a tautology.
How useful are the activities of multinationals in promoting economic
development, in and of themselves? Certainly, a note of caution needs to
be raised. Studies of the net benefits of multinational activity are . when
taken together . ambiguous regarding the extent to which multinationals
affect host economies significantly. Where they do indicate that this is
the case, this often reflects improvements in the domestic political, sociologic
al
and economic milieu as much as the presence of multinationals.
This might suggest . and this is not a large conjecture on my part . that
multinational activity is concatenated with host country growth, rather
than being responsible for such growth and change. In other words, multinational
activity may represent a placebo effect, indicative of improving
domestic activity rather than being the most important cause of it. The
results of Chapter 2 by Urem et al. would seem to be suggestive of such
results, as do several other chapters that follow.
This is not to say that multinational activity is to be discouraged nor
am I denigrating the value of work that does not examine the evolution of
the domestic milieu and its relationship with the multinational. There are
few economies which are primarily domestic in nature, dominated largely
by domestic firms and whose knowledge base is not largely integrated
with foreign knowledge sources and firms (Narula, 2003). Globalization
has caused considerable interdependencies of markets for knowledge,
resources and capital, and these cross-border flows are very much the
new reality. The implications of these developments and the challenges
that they create for cross-border management are not fully understood,
as Chapter 1 by Kwanjai and den Hertog would indicate and, indeed,
Chapter 5 by Saebi and Dong.
The immeasurable complexity of reality and its ever-changing nature
does not permit us easy answers, or even questions that remain the same.
Having said that, all enquiry adds incrementally to knowledge, and the
contributions included here move us forward.
Intermezzo I
Intermezzo I
Lall, S. and R. Narula (2004),
FDI and its role in economic development: do we
need a new agenda? , European Journal of Development Research, 16, 447.64.

Narula, R. (2003), Globalisation and Technology, Cambridge: Polity Press.
Narula, R. and B. Portelli (2007), Foreign direct investment and economic
development: opportunities and limitations from a developing country perspective .
in L. Piscitello and G. Santangelo (eds), Do Multinationals Feed Local
Development and Growth?, Amsterdam: Elsevier.
5.
Strategic motivations for
international alliances: the
Chinese perspective
Tina Saebi and Qinqin Dong
INTRODUCTION
Quite aware of the potential benefits of securing a competitive position
in the 1.3 billion-consumer market of China, an increasing number of
multinationals from the Triad countries . Western Europe, US and Japan
.are establishing alliances with local Chinese companies. Chinese alliance
partners can offer instant access to established customer and supplier bases
as well as to the complex Chinese distribution system. Triad partners can
further benefit from their local partners contacts, experience and credibility
hence gathering valuable opportunities for strategic learning (Jagersma,
2005). However, given that alliances with local Chinese firms have become
an important value-creating strategy for many Triad multinational companies,
it is striking how poor the performance of many alliances remain.
In general, one major cited reason for alliance failure is the incompatibility
of alliance partners objectives. Failing to establish and communicate compatible
objectives can lead to insuperable problems for the process and outcome
of the alliance (Dacin et al., 1997). Particularly, divergences in alliance
motives can lead to conflict situations, giving that alliance partners hold diff
erent
expectations about the goals of the alliance. Especially in cross-border
settings, alliance partners are likely to diff er in terms of strategic intentio
ns
and alliance objectives (Dacin et al., 1997; Demirbag et al., 1995; Slocum and
Lei, 1993; Tallman and Shenkar, 1990; Yan and Gray, 1994). Therefore, it is
imperative to investigate the strategic motives of potential alliance partners i
n
order to avoid premature and unfruitful termination of alliances.
In this regard, the common underlying strategic motives of Triad multinationals
to enter into alliances with Chinese companies have been wellresearched (Beamish, 1988; Glaister and Wang, 1993). However, with a few
notable exceptions, little is known about the underlying motives of Chinese
companies to enter into alliances with Triad partners (Dong and Glaister,
78
Strategic motivations for international alliances

By answering these questions this chapter addresses a main defi ciency in
the international alliance literature that has so far given little attention to
the perspective of local companies domiciled in emerging economies (Hitt
et al., 2004; Luo, 2002; Yan and Gray, 1994). We intentionally depart
from previous research in this field by providing a comprehensive analysis
of the strategic motives of local companies based upon an extensive
literature review of original Chinese research. We choose to focus on primarily
Chinese academic literature because it is reasonable to assume that
Chinese companies are less reluctant to provide information on their alliance
motives to Chinese scholars than to foreign researchers. Furthermore,
Chinese scholars are often closely networked with Chinese companies and
have a profound knowledge of the culture and ways of doing business in
China. Hence, we assume that Chinese studies are better able to provide us
with unique insights into the Chinese view on strategic alliance motives. In
order to validate our findings and fully grasp the underlying motivations
of international alliance formation we have also conducted interviews with
eight leading Chinese alliance companies.
The chapter is organized as follows. The first section reviews the
merits and challenges of establishing alliances in general, highlighting the
importance of partner motives compatibility in cross-national settings.
The second section provides an overview of the main motives of Triad
multinationals to enter China via alliances. The third section presents our
results on the main strategic motives of Chinese companies to enter into
alliances with Triad companies. This is followed by an extensive discussion
on why underlying strategic motives of Chinese and Triad alliance partners
differs. We conclude with the main findings and managerial implications
for both Chinese and Triad alliance partners.
STRATEGIC MOTIVATIONS AND COMPATIBILITY
OF ALLIANCE PARTNERS
Strategic alliances are increasingly vital to a company s competitive
survival (Das and Teng, 2000; Doz and Hamel, 1998; Gomes-Casseres,

bination
with a shortening of product and technology life cycles observed
have made it almost impossible for companies to develop technologies
on a stand-alone basis (Teece, 1987; Borys and Jemison, 1989; Erramilli
and Rao, 1990; Hamel, 1991, Eisenhard and Schoonhoven, 1996; Combs
and Ketchen, 1999; Das and Teng, 2000). As a single company has rarely
the full range of knowledge or expertise, companies use strategic alliances
increasingly to perform activities together that neither could perform
alone.
However, the potential synergy effects of alliances can be actualized
rarely; failure rates up to 70 per cent come as no surprise to many practitioner
s
(Bleeke and Ernst, 1993; Park and Ungson, 2001). As Dacin et
al., (1997) emphasize, the incompatibility of alliance partners is found
to be among the most important reasons for alliance failure. Diverging
alliance motives among partners lead to conflict situations, hindering
the successful implementation of an alliance. Especially in cross-border
settings, alliance partners are likely to differ in terms of strategic intention
s
and alliance objectives (Slocum and Lei 1993; Dacin et al., 1997;
Demirbag et al., 1995; Tallman and Shenkar, 1990; Yan and Gray,
1994).
Particularly, considerable heterogeneity in institutional environments
and asymmetry in resources and capabilities among alliance partners are
expected to affect the strategic alliance motives of firms (Peng and Heath,
1996; Hitt et al., 2000). This is especially important where diff erences in
culture, infrastructure, economic development and government policies
increase the complexity of the context in which alliances are embedded
(Slocum and Lei, 1993). The cultural heritage of a nation has been
suggested to strongly influence the strategic orientations of company
executives, resulting in different managerial ideologies that eventually
affect the strategic decision processes within organizations (Hitt et al.,
1997). Further, differences in levels of economic development are found
to impact the alliance motives of respective companies, where fi rms
from developed economies predominantly seek local partners for market
access, political connections and to fulfil local government s requirements
for foreign direct investments. Conversely, firms from developing
economies are found to seek access to technology, export opportunities
and to gain international alliance experience. Following this logic,
Beamish (1988) concludes that partners may diff er significantly by economic
development levels with respect to alliance motives and expected
benefits. In the same line, Hitt et al. (1997:7) suggest that diff erences in

While it is unlikely that alliance partners may have complete agreement
on alliance objectives and expected benefits, a careful selection of alliance
partners can increase the likelihood of at least complementary alliance
motives. As Dacin et al. (1997:4) stress, the need to understand both
partners similarities and differences in alliance objectives and strategic
intentions is paramount in ensuring the success of alliances .
MAJOR DRIVERS OF SINO-TRIAD ALLIANCES: THE
TRIAD PERSPECTIVE
Extant literature on Sino-Triad alliances has examined the strategic
motives of Triad alliance companies in China extensively; indicating that
the main motives of Triad multinationals to enter into alliances with
Chinese partners include faster entry into the Chinese market (Beamish,
1988), facilitation of international expansion (Glaister and Wang, 1993),
conformation to host government policy, as well as low cost sourcing.
Particularly, access to the Chinese market is considered the most importance
alliance drivers for Triad companies. As the Chinese market is
expanding an increasing number of consumers are gaining purchasing
power. To tap into this market, Triad companies have long been required
to establish joint ventures with local Chinese firms. However, since China
entered the WTO in 2001, foreign companies are no longer required to
partner with local firms in order to invest in most high-tech industries.
Nevertheless, Triad companies still opt for alliances, as to get key access to
rising industries as well as to established customer, supplier and distribution
networks in the country (Jagersma, 2002). The merits of allying with
Chinese firms lies in the ability of the latter to provide country-specifi c
knowledge, contacts with regulatory authorities and management of the
local labour force (Inkpen and Beamish, 1997). In particular, alliances
where technology constitutes an important component, Triad fi rms are
able to leverage resources and capabilities from local partners and adapt
products to the local Chinese market (Wu and Callahan, 2005). Especially,
in comparison to setting up wholly-owned foreign subsidiaries in China,
allying with local fi rms offers the superior advantage of maintaining
flexibility in an unfamiliar and turbulent business environment. Chinese
alliance companies often have complementary skills, resources and more
easy access to Chinese markets and distribution systems, reducing the
initial start up investment required by Triad companies. Further, as the
government retains great influence in the Chinese market, allying with

ence
on these technical standards. In comparison to wholly-owned subsidiaries,
alliances with local Chinese firms facilitate the access to external
complementary skills and resources while retaining flexibility for the Triad
counterpart.
METHODOLOGY AND DATA: CHINESE SOURCES
AND ALLIANCE PORTFOLIO
To provide a comprehensive analysis of Chinese alliance motives this
chapter draws on both primary and secondary Chinese sources. A thorough
literature review on Chinese written alliance studies has been carried
out, complemented by structured interview with eight Chinese alliance
companies. All eight companies were selected on the presence of international
alliance experience. To ensure a balanced mix, we interviewed
local companies of different size and industries. The experts, native planning
or general managers were selected on the basis of their established
reputation in the field of alliances and ability to suffi ciently contribute
to the goal of the interviews. To facilitate the interviews, a questionnaire
was designed in Chinese and presented to the interviewees. The interviews
lasted between 30.60 minutes and contained questions about company
demographics (size, location and sales volumes) and strategic motives to
enter international alliances. Strategic alliances were defined to include
strategic supplier relationships, minority stakes, joint ventures, crosslicensing arrangements, joint marketing agreements and research consortia.
We excluded mergers, acquisitions, internal alliances, franchising,
simple licensing and non-strategic supplier relationships from our defi nition.
Specifically, our questions did not target individual alliances, but
respondents had to consider the entire alliance portfolio when answering
the questions. Shifting the level of analysis from individual alliances to the
alliance portfolio of companies is more likely to generate a comprehensive
overview of the company s alliance activities and experience. As the
average alliance portfolio of firms in our dataset consisted of 13 alliances,
the total dataset refers to 104 alliances. Only 25 per cent of the companies
in our sample had formed more than 20 alliances over the last fi ve years.
While the percentage of international alliances constitutes a relatively

rience
with international alliance partners. The responding companies
were selected from a variety of industries: 50 per cent of companies in our
sample operate in the automobile industry, while the remaining companies
are in the pharmaceutical, software, telecommunication and construction
industries. The majority of companies (75 per cent) in our sample are
large, with an employee base greater than 1000 people. Only 25 per cent
are small sized companies with a maximum employee base of 500 people.
Of the companies that we interviewed 50 per cent are located in the Wuhan
province; the remaining ones are based in Liuzhou (Guangxi province)
and Neimenggu.
Regarding the Chinese alliance literature, we present here the main
findings of an extensive review. He should be noted that, all sources we
reviewed agreed on the major motives of international alliance formation
for Chinese fi rms.
MAJOR DRIVERS OF SINO-TRIAD ALLIANCES: THE
CHINESE PERSPECTIVE
Chinese studies report that the key objective of Chinese companies entering
international alliances is to gain access to international markets (Gu,
2003; Liu, 2005; TiKan, 2003). In particular, Chinese studies report that
especially after the entry of China to WTO in 2003, local Chinese fi rms
have increasingly pursued alliance with international partners (Liu, 2005;
TiKan, 2003). Chinese companies report that allying with Triad partners
allow them to rely on their partners established distribution and marketing
channels in order to enter foreign markets (Chen and Wang, 2002; Liu,
2005). Similarly, Chinese partners aspire to learn from their Triad partners
about the dynamics and requirements of foreign markets Another important
strategic motive for Chinese companies is to gain access to advanced
technologies of the Triad partners (Chen and Wang, 2002; Liang, 2005;
Lin and Guo, 2005; Liu, 2005; TiKan, 2003; Wang, 2007; Zhou and Zhu,
2006). Particularly, in high-tech industries, the formation of international
alliances is considered a necessary strategy. Investigating the competitive
capability of local companies in high-tech industries, Lin and Guo (2005)
find that the average life span of local small and medium-sized companies

egy
to acquire not only advanced technologies but also to benefi t from
technological and R&D capabilities of their Triad partners (Fan, 2003).
Therefore technology-related learning constitutes a major international
alliance formation motive for Chinese companies (Chen and Wang, 2002;
Liang, 2005, Zhou and Zhu, 2006). Moreover, Chinese studies fi nd that
the managerial capabilities and decision-making processes of local Chinese
companies are not sufficiently developed in order to eff ectively compete
in an international environment (TiKan, 2003). Particularly, Luo (1999)
finds that many firms in China have inferior organizational and managerial
capabilities than their counterparts in advanced industrialized countries.
Hence, by allying with Triad companies, Chinese firms aspire to acquire
the advanced managerial know-how from their Triad counterparts.
In sum, for Chinese companies, access to complementary resources,
both tangible and intangible, presents a key alliance formation driver
(Liu, 2005). It is interesting to note that Chinese studies report that local
companies increasingly value intangible resources, such as reputational
capital or market experience, more strongly than partners capital (Wang
et al., 2003). Seeking complementary intangible resources has thus become
an important motive of international alliance formation for Chinese
companies.
DISCUSSION ON THE DIFFERENCES
Our interviews strongly indicate that learning-driven motives, technologyand management-related, constitute the most important drivers for
international alliance formation for Chinese companies. Similarly, gaining
access to international markets is another key alliance motive. Access to
capital was a less important motive for the responding fi rms. The main
motivations that arise from these interviews are described in Box 5.1.
Main finding 1: Access to international markets is a very important alliance
driver for Chinese companies

1
CHINESE STRATEGIC MOTIVES TO
ENTER INTERNATIONAL ALLIANCES
Chinese alliance motives: Western alliance motives
Access
Access
Access
Access
to
to
to
to
international market Access to Chinese market

technology Securing government relationships
management skills
complementary resources
Source: Author s own elaboration.

At first, Chinese and Triad companies appear not to diff er signifi cantly;
Chinese studies report that the key objective of Chinese companies entering
international alliances is to gain access to international markets (Liu,
2005; Ge et al., 2003; TiKan, 2003). Chinese companies are not fully
equipped in terms of technological and managerial know-how in order to
eff ectively compete in international markets (Peng, 2000), and hence aim
to avoid direct competition at all cost. Therefore, by allying with Triad
companies, Chinese firms aspire to acquire necessary capabilities and
knowledge without the need to face Triad competitors directly.
Main finding 2: Access to partner s technology and technological capabilities
is an important alliance formation driver for Chinese companies
One of the main deficiencies of local Chinese companies is a lack in
advanced technologies and technological capabilities (Hitt et al., 2004).
This significant technology gap is dividing China from the developed
market economies and consequently hinders local Chinese fi rms from
competing effectively in product technologies with firms from developed
countries (Svetlicic and Rojec, 1994). Particularly, Chinese companies
cannot develop or offer new and sophisticated products in suffi cient quantity
and quality to be competitive with firms from other countries (Hitt et
al., 2004). As a result, Chinese firms seek access to new technology in order
to develop products that can be competitive (Gillespie and Teegen, 1995).
As the access to advanced technologies is often only attainable by means
of foreign alliances (Oliver, 1997) the Chinese government soon realized
the merits of international alliances as a vehicle to overcome defi ciencies in
innovation and product development (Shenkar, 1990). Hence, with preferential
treatment policy, lower income taxes and favourable fi nancing terms,

ness
in global markets (Keister, 1998; Luo, 2002; Shenkar and Li, 1999).
As a result, one of the main concerns of local Chinese companies is to gain
access to current technology (Chen and Wang, 2002; Liang, 2005; Yu et al.,
2004; Wang et al., 2003; Zhou and Zhu, 2006; Fan, 2003). Consequently,
Chinese companies are likely to stress the access to advanced technologies
as a main alliance motive. In contrast, Triad alliance firms usually have
relatively sophisticated technologies that provide fi rm-specifi c technological
advantages and there rarely emphasize the technological capabilities of
local partners to be key drivers for alliance formation.
Main finding 3: Access to partners managerial capabilities is an important
alliance formation driver for Chinese companies
In our interviews, we found that access to advanced management skills is
a very important motive to engage in strategic alliances with Triad partners.
As many Chinese firms are formerly state-owned enterprises that
have been recently privatized, managers generally have little experience
with managing market-oriented and decentralized businesses (Lau, 1998;
McDonald, 1993). Management capabilities and decision-making processes
are often not well developed in local Chinese firms, as they have had
little exposure to modern management concepts, techniques and pro cesses
(Hitt et al., 2000; Lyles and Baird, 1994; Shama, 1993). Hence, the need to
compete in market-oriented economies with more managerially-sophisticated
competitors forces Chinese firms to seek Triad partners with strong
managerial capabilities. While Triad alliance partners would surely prefer
a Chinese partner who has effective managerial capabilities, Triad companies
generally have the capability to compensate for the local partners
deficiency in this area (Hitt et al., 2004).
Main finding 4: Access to partners intangible assets is more important
than tangible resources for Chinese companies
Chinese literature reports that Chinese companies increasingly consider
intangible assets to be more significant than tangible assets of partner
firms (Wang et al., 2003). Initial emphasis on tangible assets such as
partners capital can be explained by the poorly developed fi nancial and
capital market of China, where capital had been only attainable at a high
cost (Hitt et al., 2000; Svetlicic and Rojec, 1994). Hence, by allying with
Triad companies, Chinese companies could circumvent the capital market

ners
capital is likely to remain an important objective of Chinese alliance
companies. However, a more recent driving force for Chinese companies
to pursue alliances with Triad partners is to develop reputational capital.
As an increasing share of Chinese consumers grows an affi nity for name
brands, thereby declining inferior and counterfeit products, Chinese fi rms
prefer to ally with foreign firms having well-known products (Luo, 2002).
As Hitt et al., (2004:176) observe, legitimacy afforded by a firm with a
strong global reputation enhances the Chinese partner s ability to compete
in global markets, thereby allowing it to earn needed hard currency and
achieve growth . Consequently, Chinese companies are more likely to
select Triad partners with strong positive reputations to reduce the perceived
risk in the market. The opposite is not true. Intangible resources
such as reputation and legitimacy are more critical to the Chinese partner
as they enhance their access to other resources such as a customer base,
financial resources, and possible future alliance partners.
CONCLUSIONS AND IMPLICATION
With a few notable exceptions, extant Triad literature on Sino-Triad alliances
has so far failed to acknowledge the importance of investigating
the strategic motives of Chinese alliance companies and has subsequently
treated them as passive partners (Dong and Glaister, 2006; Hitt et al.,
2004; Luo, 1997). In this chapter, we therefore tried to fill this void by
investigating the key drivers of international alliance formation from the
perspective of Chinese companies. Our results indicate that initial defi ciencie
s
in the Chinese institutional environment have shaped the strategic
motives of local companies: accesses to international markets, technological
and managerial competences are the most important motives for
Chinese companies to enter into alliances with Triad companies.
We have further discussed how alliance motives differ among Triad
and Chinese companies. Apart from some protected sectors where
joint venture is a requirement, Triad companies are free to choose their
entry mode into the Chinese market. While local alliance partners may
provide local knowledge and distribution systems, Triad partners are
not completely dependent on their Chinese partner. Once a basic level of
local knowledge is gained and necessary local ties are established, Triad
partners can venture on by themselves. However, in the case of Chinese
companies, allying with Triad companies presents a far more urgent
strategy.

edge
is one of the main reasons for their Chinese counterparts to partner
with them, they can design a knowledge diffusion strategy that enables
knowledge transfer of those knowledge assets that can be shared and that
prevents unwanted knowledge spillovers to their Chinese partners. The
reluctance of Triad companies to share technology and knowledge with
their Chinese counterparts is very clearly reported in the Chinese literature
(Zhou and Zhu, 2006). This finding is confirmed in our interviews.
Understanding these differences is a necessity for both Triad and Chinese
partners. Acknowledging these differences allows both partner fi rms to
overcome initial differences in expectations, as they re-adjust their alliance
strategies to fit their own and their partners alliance motives.
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6.
Cross-border investment and
economic integration: the case of
Guangdong Province and Hong
Kong SAR
Naubahar Sharif and Can Huang
INTRODUCTION
Globalization . the integration of national economies into a global
system . entails, in part, the transfer of manufacturing sectors from the
developed world to developing countries. As Feenstra (1998) indicates,
measured by the merchandise trade relative to value added, the world
is much more integrated than in the past. However, this ongoing global
integration of industrial and trade activities brings with it the disintegration
of production or business processes whereby, to increase profi ts,
multinationals seek to outsource or directly invest either domestically
or abroad. The overseas relocation of manufacturing and services spurs
controversy and debate, not only in the advanced countries from which
the manufacturing sectors move but also in the developing countries that
receive them via foreign direct investment (FDI). Leaders of advanced
countries face political opposition to the unemployment that results from
the offshoring activities of their home-based multinationals (Rodrik,
1997; Schultze, 2004). For their part, observers in FDI-recipient countries
are concerned about the potentially negative effects of the domination
of the manufacturing sector by foreign-owned companies. Local
firms in recipient countries must weather fierce competition from their
foreign counterparts and face difficulties in upgrading their technological
competence from the low end of the global value chain. Motivated by
intense debate about these issues, this chapter undertakes a comparative
study of the performance of local and foreign competitors manufacturing
firms in one such FDI-recipient region . Guangdong Province,
China . and analyses the policy implications of the comparison for the
advanced, FDI-outflow region . Hong Kong Special Administrative
Region (HKSAR).
92
Cross-border investment and economic integration

ance
of Guangdong s local and foreign-funded manufacturing sectors.
By highlighting changes in productivity that vary with changes in manufacturing
firm ownership, we reveal that domestic firms have been catching
up with their foreign counterparts, including Hong Kong-based fi rms,
though foreign firms have successfully strengthened their dominating
position in Guangdong s manufacturing industry. Informed by the history
of Hong Kong s manufacturing industry, we discuss strategic options for
undertaking future industry and innovation policy coordination between
Guangdong and Hong Kong from an HKSAR-perspective.
THE ECONOMIC TIES BETWEEN HONG KONG AND
GUANGDONG AND THE INDUSTRY DYNAMICS IN
GUANGDONG
Among developing countries, China has indisputably attracted the most
FDI over the past two decades. Around one-third of FDI to China in
the period of 1985 and 2003 went to Guangdong Province (Figure 6.1).
Guangdong was able to attract 30 per cent of China s total FDI, because
of its geographical and cultural proximity to Hong Kong, Macau and
Taiwan, all three of which have invested heavily in China over the past 25
years. In 1985, 90 per cent of the FDI flows into Guangdong were invested
by entrepreneurs from Hong Kong. The ratio fluctuated in the second
half of the 1980s and decreased steadily after the mid-1990s, but in 2006,
approximately 47 per cent of FDI in Guangdong still came from Hong
Kong. During the period 1979.2001, cumulative FDI from Hong Kong
in Guangdong amounted to USD 79 billion, accounting for 71 per cent of
total cumulative FDI flows into Guangdong (Federation of Hong Kong
Industries, 2003). Nearly 70 per cent of the FDI into China or Guangdong
has been devoted to the manufacturing sectors, securing China s current
position as a world manufacturing centre.
From Hong Kong s perspective, Guangdong is the most important
investment destination in Mainland China. Since the mid-1990s, Hong
Kong-based entrepreneurs have allocated as much as half of their total
investments in China to Guangdong (Figure 6.1). Along with the transfer
of manufacturing sectors to Mainland China, economic activities in Hong
Kong have been reconfigured extensively. Indeed, since the opening of
China, Hong Kong has transformed itself from an industrial city into a
centre of manufacturing-related service activities (Chan, 2002; Tao and
Wong, 2002). China-related trade and investment have generated a signifi cant
proportion of Hong Kong s income. Sun and Wong (2000) estimate

19851987198919911993199519971999200120032005
Ratio of actually-used FDI
from Hong Kong to FDI
from Hong Kong, Macau
and Taiwan in Guangdong
Ratio of FDI from
Hong Kong to total
FDI in Guangdong
Ratio of FDI in
Guangdong
to FDI in China
Ratio of FDI in
manufacturing sector to
total FDI in Guangdong
Ratio of Hong Kong
FDI in Guangdong to
Hong Kong
FDI in China
Note: (a) When calculating the Ratio of Hong Kong FDI in Guangdong to Hong Kong
FDI in China for the period of 1994 1997, the authors adopt the FDI data, which inc
lude
data reflecting foreign loans and foreign non-direct investment.
Source: Guangdong Statistical Yearbook and China Statistical Yearbook.
Figure 6.1 Foreign direct investment in Guangdong, 1985 2006a
19851987198919911993199519971999200120032005
Ratio of actually-used FDI
from Hong Kong to FDI
from Hong Kong, Macau
and Taiwan in Guangdong
Ratio of FDI from
Hong Kong to total
FDI in Guangdong
Ratio of FDI in
Guangdong
to FDI in China
Ratio of FDI in
manufacturing sector to
total FDI in Guangdong
Ratio of Hong Kong
FDI in Guangdong to
Hong Kong
FDI in China
Note: (a) When calculating the Ratio of Hong Kong FDI in Guangdong to Hong Kong
FDI in China for the period of 1994 1997, the authors adopt the FDI data, which inc
lude
data reflecting foreign loans and foreign non-direct investment.
Source: Guangdong Statistical Yearbook and China Statistical Yearbook.
Figure 6.1 Foreign direct investment in Guangdong, 1985 2006a
Percentage
100
90
80
70
60
50
40
30
20
that the ratio of Hong Kong s China-related trade and investment to its
gross domestic product (GDP) reached 24.4 per cent in 1996.
Many scholars attempting to understand the extent of Hong Kong s
economic interdependence with Guangdong, have thus far either analysed
Hong Kong s economic transition in the context of manufacturing crossproduction in Guangdong (Eng, 1997; Hollows, 1999; Kwong, et al., 2000)
or focused on the two regions economic integration from a Hong Kong
perspective (Tuan and Ng, 1995; 2004). Few studies have examined the
changing nature of economic ties between Hong Kong and Guangdong
as a function of industry dynamics in Guangdong, especially studies that
discuss policy measures. Yeung s (2001; 2002) articles are exceptions in
linking industrial development in Guangdong to the Hong Kong factor,
but they consist almost entirely of qualitative analyses. We argue that the
closer ties being forged between Hong Kong and southern China over
the last three decades, particularly following the handover of Hong Kong
from Britain to the People s Republic of China in 1997, call for a study of
Guangdong s industry dynamics that not only contextualizes the nature of
its economic and technological ties with HKSAR but also does so with a
view towards policy measures in one of the two regions.
The process through which southern China has opened up to global economic
and cultural contacts (featuring Special Economic Zones) catalysed

By shifting parts of their operations to China, Hong Kong industrialists
vastly increased the scope of their companies. It is estimated that by
1997 Hong Kong manufacturing companies employed some fi ve million
people in their subsidiaries in Hong Kong and China . over five times the
labour force they employed in Hong Kong at the peak of manufacturing
in the territory in 1984 (Berger and Lester, 1997:10). By the end of 2001,
according to the Federation of Hong Kong Industries (2003) the fi gure
was estimated to have surpassed 11 million people. By 2003, manufacturing
production services accounted for around 50 per cent of Hong Kong s
GDP. Approximately 1.5 million jobs involving over 40 per cent of Hong
Kong s labour force were related to Hong Kong companies manufacturing
activities in Guangdong (Federation of Hong Kong Industries, 2003).
Hong Kong has therefore entered, particularly in the years following
1997, a period of warming economic, political, social and cultural ties with
Mainland China. Nowadays, Hong Kong companies, or investors operating
out of Hong Kong employ at least 14 to 15 million people and own
60,000 factories in Guangdong Province.
Thus, the migration of production units to Guangdong in many ways
has represented growth rather than decline in Hong Kong s engagement
in manufacturing; yet for political reasons such growth was categorized as
outside the territory, even if it was from a historical perspective a reintegrat
ion
into Guangdong markets. The effects on the service industries
have also brought economic benefits, as most of the migration spurred
further growth and increased sophistication in producer business services
(Tao and Wong, 2002).
In establishing and upgrading these networks, Hong Kong fi rms have
exploited their traditional strategies of imitation and followership while
emphasizing the development of organizational know-how rather than
formal R&D for new product development. Several surveys of fi rms from
Hong Kong s electronics sector have for example found that 60 to 70 per
cent of such firms have succeeded by copying or modifying other products
instead of initiating independent product design (Yu and Robertson,
2000). In fact, the bulk of R&D expenditure by private firms in Hong Kong

tries.
By learning extensively from their original equipment manufacturing
(OEM) contacts overseas, Hong Kong firms have been instrumental in
setting up and improving production facilities in Guangdong . transferring
innovative production technology and management organization
rather than product innovations.
These changing conditions underscore both the historical and contemporary
importance and interdependence of Hong Kong and Guangdong
Province. Yet an important question arises here: what is the nature of
the change that has been occurring in manufacturing in Hong Kong and
Guangdong? In particular, how have locally and foreign-invested fi rms,
including those based in Hong Kong with subsidiaries in Guangdong,
performed? What are the policy implications of these developments? Our
approach to answering these questions centres on total factor productivity
(TFP) and labour productivity growth in manufacturing in Guangdong
Province.
TECHNOLOGICAL CATCHING-UP OF
GUANGDONG: TOTAL FACTOR PRODUCTIVITY
AND LABOUR PRODUCTIVITY
The industry-level dataset used in this chapter is taken from various issues
of the Guangdong Statistical Yearbook. It covers 27 two-digit manufacturing
sectors in the period spanning 1997.2006.1 It embraces four
ownership groups: the three domestic ownership groups (state-owned
enterprises, collective enterprises and shareholding enterprises) and one
foreign ownership group (foreign enterprises).2
In 1997, Hong Kong FDI accounted for 72 per cent of total foreign
FDI in Guangdong. Although the ratio declined steadily thereafter as a
result of increasing investment inflows from the rest of the world, the share
was still over 50 per cent in 2004. Among the foreign direct investment in
Guangdong, 70 per cent was in manufacturing sectors across the observation
period of 1997.2006. Since there are no disaggregated data available
for Hong Kong-invested firms and only aggregated data for foreign fi rms
in general, we do not aim to precisely measure the performance of the
Hong Kong-invested fi rms vis--vis that of Guangdong domestic fi rms
in this section.3 Instead, we reveal the dynamics of manufacturing fi rms
with different ownership status in Guangdong province, highlighting the
productivity improvement occurring in the domestically owned fi rms.

Breaking down the industrial gross output value of Guangdong manufacturing
firms, we find that from 1997 to 2006 the share in industry gross output
taken by foreign-owned subsidiaries increased in 17 out of the total 27 manufact
uring
sectors. State-owned companies expanded their shares in six sectors.
The share taken by shareholding enterprises grew in 24 sectors; in contrast,
the share taken by collectively owned firms declined in all but one sector. The
growth in shares of output in manufacturing sectors taken by shareholding
companies, as well as the decrease in shares taken by state-owned enterprises,
stems mainly from the ownership reform that was taking place during our
observation period, over the course of which many state-owned companies
were transformed into shareholding companies and were publicly listed on
stock exchanges. In 2006, foreign-owned subsidiaries produced more than
60 per cent of the total industrial output in 14 sectors, further securing their
predominant sectoral positions in Guangdong s economy.
Even though foreign subsidiaries surpassed their domestic counterparts in
Guangdong in terms of output growth, domestic enterprises gained in labour
productivity, calculated as value added divided by labour input. In 1997,
foreign subsidiaries featured higher labour productivity than domestic fi rms
in 20 out of 27 sectors. In many of those sectors, foreign firms labour productiv
ity
in 1997 was two to three times that of local enterprises. However, it is
worth noting that within ten years domestic companies had gained the lead in
16 out of 27 sectors. From 1997 to 2006, pressured by fierce competition from
foreign-owned subsidiaries, domestic companies shrank in size while simultaneous
ly
achieving higher labour productivity growth rates and regaining
the advantage in over half of Guangdong s manufacturing sectors.
Total factor productivity in Guangdong
Li (1999) utilizes the translogarithmic production function to analyse a
panel of state factories in Guangdong province for the period 1980.7.
His research, based on firm-level data, reveals the rapid TFP growth that
Guangdong manufacturing firms achieved during the period in question.
Following Li (1999), we adopt the following translog function as a framework
for calculating TFP growth in Guangdong manufacturing sectors:4
q 5
exp c
a0 1
aklnk 1
allnl 1
att 1
1
bkk (lnk)2 1
bkl (lnk)(lnl)
2
11
1
bkt (lnk)t 1
bll (lnl)2 1
blt (lnl)t 1
bttt2 d (1)
22

.q is the deflated value added;
.k is the deflated capital input;
.l is the labour input;
.t is the time-trend variable.
Under the assumption of constant returns to scale, the parameters of
Function (1) satisfy the following conditions:
ak 1
al 5
1 and bkk 1
bkl 5
bll 1
bkl 5
bkt 1
blt 5
0 (2)
With reference to Jefferson et al. s (1992; 1996) variable defl ation methodology,
which is designed particularly for Chinese industrial statistics
data, we utilize the price deflators for gross industrial output reported in
the Chinese Statistical Yearbook to obtain the deflated variable of value
added.5 The variable of capital input is deflated by the price indices of
fixed-asset investment. The details pertaining to our variable defl ation are
elaborated in Box 6.1.
The ordinary least square (OLS) estimation of Function (1), with
standard deviation in parentheses, is as follows:
q 5
exp[0.022(0.093)
1
0.53(0.056)lnk 1
0.36(0.059)lnl 1
0.15(0.025)t
1
0.20(0.011)(lnk)2 2
0.0025(0.023)(lnk)(lnl)
2
0.027(0.054)(lnk)t
2
0.010(0.013)(lnl)2 2
0.010(0.0058)(lnl)t 2
0.0044(0.0021)t2 ], (3)
With:
. adjusted R-square = 0.913
. F(9,1092) = 1279.8
. N=1102
With the estimated coefficients of Equation (1) and Equations6 (4).(8),
we obtain the TFP growth of state-owned, collective, shareholding and
foreign manufacturing sectors in the period of 1997.2006.
Table 6.1 reveals the average annual TFP growth rates for enterprises
falling into the four above-mentioned ownership groups. In 25 out of 27
manufacturing sectors, at least one domestic ownership group achieved
faster TFP growth than did foreign firms (marked in bold text in Table

a
Variables Variables Defl ator or Defl ator data
entered in directly or calculation description
the function calculated from equation
(6) the statistical
yearbook
Defl ated Industrial value Defl ator of 1997 2000 2001 2006
value added added (100
million RMB at
current price)
value added
= ex-factory
price indices
of industrial
products
(2000 price
as 1)
Data cover
only 15
industry sectors.
The general
indices for all
sectors are
adopted for the
Data cover
37 two-digit
industry
sectors
industry sectors
that lack of data.
Defl ated Gross industrial Defl ator
gross
industrial
output value
output value
(100 million
RMB at
current price)
The data for
three ownership
groups i.e.
state-owned
collective
and foreign
enterprises
are collected
of gross
industrial
output value
= ex-factory
price indices
of industrial
products
(2000 price
as 1)
separately
Average
balance of net
Average
balance of
value of fixed next value
assets for of fixed
production assets for
production =
(1) average
balance of
1997 2000 2001 2006
Data cover only Data cover
15 industry 37 two-digit
sectors. The industry
general indices sectors
for all sectors are
adopted for the
industry sectors
that lack of data

Variables Defl ator or Defl ator data
the function calculated equation
(6) from the
statistical
yearbook
net value of
fi xed assets
* (2) ratio of
fi xed assets
for production
to total fixed
assets
Defl ated (1) Average Defl ator of Data are
capital balance of average balance available for
input net value of of net value of the period of
fi xed assets fixed assets = 1997 2006
(100 million price indices
RMB at of investment
current price) of fi xed assets
(2000 price
as 1)
1997 2000 2001 2003
and 2004
2006
(2) Ratio
of fixed
assets for
production
to total fixed
assets
Labour input
Annual
average
number of
Ratio of fixed Not available. Panel data cover
assets for The mean three ownership
production of the data in groups, i.e., stateto total fixed the period of owned, collective,
assets = fixed 2001 2003 is and foreign
assets for adopted for enterprises and
production this period 37 two-digit
(100 million industry sectors.
RMB without The capital
depreciation) defl ator of state/
total fixed owned enterprise
assets (100 is also applied
million RMB to shareholding
without enterprise
depreciation)

Variables Defl ator or Defl ator data
the function calculated equation
(6) from the
statistical
yearbook
employed
persons
(10,000
persons)
Defl ated Intermediate Defl ator of
intermediate
input
input = gross
industrial
intermediate
input =
output value purchasing
valueadded
price indices
of raw
of industry + materials
value-added
tax
fuels and
power (2000
price as 1)
1997 2000 2001 2006
Data cover Data cover 37
only 9 industry two-digit industry
sectors. sectors
The general
indices for all
sectors are
adopted for
the industry
sectors that
lack data
Note: (a) All variables and price deflators are taken from various issues of the
Guangdong
Statistical Yearbook except for Fixed Assets for Production and Total Fixed Asse
ts, which are
taken from various issues of China Industry Economy Statistical Yearbook.
Sources: Guangdong Statistical Yearbook; China Industry Economy Statistical Year
book.
6.1). In several sectors . garments, paper, chemical products, pharmaceutical
products, ferrous metals smelting, nonferrous metals, special
mechanical products, transportation equipment and instruments and
office machinery . all three domestic ownership groups achieved superior
levels of TFP growth as compared with foreign subsidiaries.
The above analysis of TFP growth based on assumptions typical of

neo-classical economic theory confi rms the result obtained by theory-free
labour productivity that productivity grew more rapidly in Guangdong
domestic firms than in their foreign counterparts in the observation period
of 1997.2006. Guangdong domestic firms caught up technologically in
comparison with their foreign counterparts, although foreign-owned subsidiaries
further secured their dominant position in manufacturing sectors
in Guangdong.

1
Average annual TFPa growth rate of state-owned, collective,
shareholding, and foreign enterprises in Guangdong Province
(percentage), 1997 2006
Sectors State-Owned Collective Shareholding Foreign
Enterprises Enterprises Enterprises Enterprises
Agri-food processing 15.30 20.88 9.77 3.15
Food 8.28 12.49 8.22 10.63
Beverage 12.50 3.70 19.50 11.39
Textile 12.51 12.84 5.12 7.75
Garments 21.30 11.33 9.49 6.21
Leather 18.55 9.29 28.83 18.57
Wood processing 24.25 5.38 29.64 7.16
Furniture 7.87 17.56 11.16 9.63
Paper 4.94 6.90 11.66 4.79
Printing 11.11 6.32 13.83 7.93
Educational and sports 4.97 12.32 8.73 6.94
products
Petroleum products 9.65 N.A. 22.39 10.03
Chemical products 10.62 8.19 11.98 4.49
Pharmaceutical products 8.77 12.24 11.49 5.28
Chemical fi ber 20.07 18.11 14.82 14.98
Rubber 7.34 3.93 3.76 6.33
Plastics 4.71 6.98 4.48 9.02
Nonmetal mineral 14.07 9.00 15.28 12.66
products
Ferrous metals smelting 10.04 17.21 9.10 6.80
Nonferrous metals 10.52 18.54 35.02 9.61
smelting
Metal products 11.19 10.52 9.18 9.81
General mechanical 11.14 9.30 11.57 9.01
products
Special mechanical 18.94 8.72 7.32 6.60
products
Transportation 27.11 13.96 16.16 12.02
equipment
Electrical equipment 21.10 5.48 2.96 13.72
Telecommunication and 14.25 6.36 22.82 8.44
computer
Instruments and office 17.30 22.04 26.61 12.07
machinery
Note: (a) The TFP growth rates of state-owned, collective, or shareholding firms
that are
higher than those of foreign firms are marked in italic text.

cal
results: (1) domestic firms in Guangdong have been catching up with
foreign firms in the province; but (2) foreign firms have increased their
output share in Guangdong s manufacturing sectors. We suggest two
complementary explanations. First, from 1997 through 2006, Guangdong
firms did not catch up with foreign firms at a conspicuously rapid pace. In
11 out of 27 sectors, these firms demonstrated inferior labour productivity
compared with that of foreign subsidiaries in 2006. In 17 out of 27 sectors,
at least one domestic ownership group had not caught up in terms of TFP
growth. While the catching up in productivity of Guangdong domestic
firms might have provided them with a favourable market position in
the future, this catching-up was not robust enough over our observation
period to reverse the trend that saw foreign fi rms expanding their
businesses in Guangdong.
The second factor that resolves the apparent paradox is that, since the
Chinese economy has begun opening up, many multinationals have been
attracted by low manufacturing costs and moved production activities
to China. A large number of such foreign subsidiaries located in China
are concentrated in the processing business, particularly in producing
and exporting labour-intensive products (Huang, 2003). They source
the raw materials from within China or import critical components, hire
local workers for processing and assembly and then export the fi nal products
to overseas markets.7 Lemoine and Unal-Kesenci (2004) and Fung
(2005) confirm that the recent expansion of China s exports in machinery,
electrical equipment and so on, is attributable to the processing trade.
According to a report by the Chinese Ministry of Commerce, processing
trade exports accounted for 55 per cent of China s total exports in 2004
(Xinhua Net, 2004).
Indeed, as the first province in China to welcome foreign investment,
Guangdong has attracted a large number of overseas investors, principally
from Hong Kong, to establish processing businesses in its territory.
According to the Guangdong Statistical Yearbook (2007), 74.9 per cent of
Guangdong s exports were due to the processing trade in 1995, a ratio that
has decreased but still remained as high as 65.6 per cent in 2006. In 2006,
76.5 per cent of exports from foreign subsidiaries located in Guangdong
were classified in the category of processing and assembling with import
materials whereas only 11.1 per cent of such exports were recorded under
general trade. Foreign firms that were engaged in the processing business
and targeted overseas markets would not compete directly with those
domestic firms in Guangdong that focused on the domestic market. The
expansion of foreign manufacturing subsidiaries in Guangdong was not
strongly influenced by the catching-up in productivity of domestic fi rms

ductivity
growth should have little direct impact on the activity of foreign
subsidiaries, at least in the short run.
FROM LOW-COST CROSS-BORDER PRODUCTION
TO INNOVATION-BASED COMPETITIVENESS
Hong Kong s manufacturing in history: low-tech and low-cost
Our finding that domestic manufacturing firms in Guangdong achieved
steady productivity gains in the period of 1997.2006 contrasts with the
overall decrease of TFP among Hong Kong s manufacturing companies
in the period of 1984.1993, as revealed by Kwong et al. (2000). The salient
features of the history of manufacturing development in Hong Kong
should serve as a point of departure in discussing such a sharp contrast
between the development trajectories of the manufacturing industries on
the two sides of the border.
From the early beginnings of manufacturing in Hong Kong, a period of
development that began in the 1950s and carried into the 1970s, technological
sophistication played almost no role in establishing Hong Kong s
industries. In fact, the roots of Hong Kong s manufacturing sector can
be associated with the opportunistic exploitation of a geographic land
space by Mainland Chinese immigrants, particularly textile barons from
Shanghai, who transferred start-up capital and managerial expertise to
the colony (Wong, 1988; Hollows, 1999). These Shanghai industrialists
concentrated on low-cost manufacturing in the labour-intensive textile
and clothing industries and turned to the British trading houses in Hong
Kong, which had established links with international export markets
(Tsui-Auch, 1998:9). Over time, however, as Hong Kong s manufacturers
faced limits to low-cost manufacturing, they found an escape route
for their manufacturing activities in the opening up of China from 1979
onwards.
This period of opening up enticed many of Hong Kong s manufacturers
to move their operations north of Hong Kong s border so that they could
exploit even cheaper land and labour resources for their production activities.
Unlike their counterparts in other newly industrialized East Asian
economies, Hong Kong s entrepreneurs could use their linguistic and cultural
familiarity to easily leverage the abundant labour and land resources
in Guangdong to their advantage. In this way, they were able to off set the
disadvantage of heightened labour costs without undertaking the more

ufacturing
firms did not pursue technological sophistication, as did their
counterparts in other Asian tigers. Automated processes and R&D activities
were limited (Eng, 1997). Similarly, in the early 1980s, Hong Kong
was not recognized as a major source of advanced technology in Mainland
China. The technology transferred through Hong Kong s FDI outfl ow
was likely to be either low-level or quite standardized (Kamath, 1990).
The idea that the growth and profitability of Hong Kong s manufacturing
companies was based on lowering their factor input costs is supported
by scholars in the field. For example, by conducting an empirical
analysis similar to ours Kwong et al. (2000) find that, during the period of
1984.1993, Hong Kong s manufacturing sector demonstrated an overall
decrease in TFP, although such a technological decline did not mean lower
profitability. It was during this period that Hong Kong s firms engaged in
a frenzy of manufacturing facility relocation to Guangdong. Because the
unfinished products shipped at low prices from Guangdong s manufacturing
units, Hong Kong s firms could enjoy high profitability even as technology
declined. Hence Kwong et al. conclude that Hong Kong has grown
mainly by utilizing the Mainland s cheaper resources, instead of through
technological advancement. They also argue that technology upgrading
might have seemed too daunting a task for Hong Kong s manufacturing
firms as compared to moving the production base to Guangdong in order
to maintain a competitive edge in global markets.
Tuan and Ng (1995) conducted a survey in the course of investigating
cross-border investment activity on the part of Hong Kong-invested fi rms
in Guangdong province. They find that Hong Kong firms moved their
manufacturing base to Guangdong mainly because of Guangdong s cheap
labour costs, low rents and geographical proximity, which complement the
arguments of Kwong et al. A higher return on investment, a shorter payback
period and factor-cost savings are strongly associated with the cross-border
operation of Hong Kong s manufacturing firms. Existing studies therefore
already provide historical and empirical evidence that helps explain our
findings related to productivity growth in Guangdong s manufacturing
sectors as well as the potential impact of Hong Kong-based fi rms.
Hong Kong s moves towards value added manufacturing and leveraging in
Guangdong
Partly because of their acknowledgement of the developments described
above and partly because of the Asian Financial Crisis of 1997, Hong
Kong began to reconsider the future of its economic growth engine. This

ties
for reducing factor input costs. A Commission on Innovation and
Technology (CIT) based its vision of Hong Kong s new role explicitly
on science, technology and innovation (CIT, 1999). Since the publication
of the Commission s two reports (CIT, 1998; 1999), Hong Kong has
launched a number of policy measures designed to help its move into a new
strategic posture that no longer relies primarily on lowering factor costs to
achieve and maintain its competitive advantage. Most notable among
these measures was the establishment of the Innovation and Technology
Fund (ITF) in 1999 with HKD 5 billion, earmarked to provide funding
support to projects that contribute to innovation and technology upgrading
in industry, as well as to projects essential to the upgrading and development
of new industries. The main purpose of the ITF was to counter
what scholars such as Kwong et al. (2000) and Tuan and Ng (1995) were
advocating: increasing competitiveness through higher value added goods
and services.
In evaluating measures designed to build competitiveness through
innovation and technology, it is difficult not to acknowledge how late the
policies have been in coming to fruition. Not until 1999 did Hong Kong
develop any kind of formal, coordinated technology policy and not until
late 2004 or early 2005 did it formally recognize the importance of the
Mainland and the relationship between the two systems. Against any
comparison benchmark . that of OECD countries, Asian Tiger economies,
or countries of a similar size, Hong Kong falls short in being among
the last to recognize the value of technology and the benefits of increasing
competitiveness through innovation. As such, the results of Hong Kong s
new technology measures are yet to be seen; in particular, the desire to
leverage the Mainland is only just now taking shape. However, we can
say with some confidence that Hong Kong s policy focus is at least facing
in the right direction.
CONCLUSION
In this chapter, we compare the performance of local and foreign competitors
manufacturing firms in one FDI-recipient region . Guangdong
Province, China . and analyse the policy implications of the comparison for
one advanced, FDI-outflow region . Hong Kong Special Administrative
Region. We characterize the context in which mutual economic interdependence
between Guangdong and Hong Kong has been growing and
indicate that in 1997.2006 Guangdong s domestic manufacturing fi rms

. dominated by Hong Kong-based companies. Our findings suggests that
domestic manufacturing firms in Guangdong achieved steady productivity
gains in the period of 1997.2006, standing in contrast against the overall
decrease in TFP of Hong Kong s manufacturing companies as illustrated
in the literature for the period of 1984.1993. To carry our understanding
of the sharp contrast in development trajectories that characterizes manufacturi
ng
on the two sides of the Guangdong.Hong Kong border into the
future, we must inform our research and discussion with a grasp of salient
features of the history of manufacturing development in Hong Kong.
NOTES
1.
In various issues of the Guangdong Statistical Yearbook, in addition to data on
the
27 manufacturing sectors, data on tobacco, coal mining, petroleum and natural ga
s
extraction, ferrous metal mining, nonferrous metal mining, non-metal minerals mi
ning,
electricity supply, gas supply and water supply are also consistently reported.
However,
private and foreign capital were denied entry in most of these industry sectors
in our
observation period; we therefore do not include these sectors in the analysis of
this
chapter. Moreover, in various issues of Guangdong Statistical Yearbook, besides
the data
on state-owned, collective, shareholding, and foreign enterprises, the data on e
mployee
shareholding cooperative enterprises are reported as well. However, due to their
minuscule
economic scale we do not include them in the analysis.
2.
The ownership status of a firm that operates in China is determined according to
Chinese legislative regulations that apply when the firm registers with agencies
of the
Administration for Industry and Commerce. In general, a fi rm is classifi ed as
a foreignfunded firm only if the foreign equity stake is at or above 25 per cent. More de
tailed
discussion of the classification of foreign-funded firms in China can be found i
n Huang
(2003:4 and 35).
3.
By using an econometric methodology prevalent in spillover literature and incorp
orating
additional detailed data, Huang and Sharif (2005) separated the Hong Kong-invest
ed
firms from general foreign firms in Guangdong industry sectors and rigorously es
timated
the impact of the Hong Kong-invested firms on Guangdong domestic fi rms.
4.
When obtained through the growth accounting method, total factor productivity (T
FP)
is traditionally utilized to explain technological change at the firm, industry,

and country
levels. Young s paper (1995) on East Asia s fast-growing economies (including Hong
Kong s) and Krugman s (1994) subsequent interpretation are based on TFP. Their
results have however received much criticism from scholars such as Chen (1997),
Felipe
(1999), Nelson and Pack (1999), Rodrigo (2000) and Felipe and McCombie (2003).
Critics argue that several assumptions underlying Young s TFP growth accounting
methodology, such as that technological progress is exogenous, disembodied, and
Hickneutral, are too far removed from reality. They call for policy attention to ent
repreneurship,
innovation, and learning in a country s effort to catch up technologically and
economically.
5.
According to the China Statistical Yearbook (2004:572), Industrial Value Added =
Gross
Industrial Output Value minus Intermediate Input plus Value Added Tax (VAT). Sin
ce
there is no specifi c value added defl ator published in the China Statistical Y
earbook, we
adopt the Ex-Factory Price Indices of Industrial Products as our value added def
l ator.
This methodology s differs from the one adopted by Jeff erson et al. (1992 and 1
996), who
estimate the production function as Gross Industrial Output Value = Capital Inpu
t plus

tion
function.
6.
The TFP growth across discrete time periods is:
TFPt21,t 5
(lnqt 2
lnqt21)
2
ak (lnkt 2
lnkt21)
2
bl (lnlt 2
lnlt21) (4)
where ak and bl denote the elasticity of output with respect to capital and lab
our input,
respectively, and:
ak 5
(ak,t 1
ak,t21)
/2
(5)
bk 5
(bk,l 1
bk,l21)
/2.
(6)
According to the defi nitions of ak and bl and the assumption of constant return
s to scale,
we obtain ak,t and bl,t through the following functions:
0lnq
ak,l 55
ak 1
bkk (lnkt)
1
bkl (lnlt)
1
bktt (7)
0lnk
bl,t 5
1 2
ak,t
(8)
7.
In Chinese foreign trade statistics, this type of processing of imports and expo
rts is
recorded in the categories of processing and assembling with customer materials,
processing and assembling with import materials, and compensation trade, which a
re
separate from general trade. In line with this classification standard, firms th
at are
engaged in processing trade are classified as foreign fi rms.
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Chan, R. (2002), Towards strategic planning and regional sustainability: Hong
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Chen, E.K.Y. (1997), The total factor productivity debate: determinants of econom
ic
growth in East Asia , Asian Pacific Economic Literature, 11(1), 18.38.
China Statistical Yearbook (2004), China Statistical Yearbook, Beijing: China
Statistics Press.
Commission of Innovation and Technology (CIT) (1998), Commission on
Innovation and Technology First Report, Hong Kong: CIT.
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Kong: CIT.
Eng, I. (1997), Flexible production in late industrialization: the case of Hong
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Federation of Hong Kong Industries (2003), Made in PRD: The Changing Face of
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Feenstra, R.C. (1998), Integration of trade and disintegration of production in t
he
global economy , Journal of Economic Perspective, 12(4), 31.50.
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Huang, C. and N. Sharif (2005), Manufacturing dynamics and technological
catching-up: the case of Guangdong Province and Hong Kong SAR ,
unpublished.
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ng
Kong firms and their China linkages , Creativity and Innovation Management,
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The myth of Asia s miracle , Foreign Aff airs, 73(6), 62.78.
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7.
The making of national giants:
the international expansion of oil
companies from Brazil and China
Flavia Carvalho and Andrea Goldstein
INTRODUCTION
This chapter analyses the international expansion of oil firms from two of
the largest emerging economies, Brazil and China. With high growth rates
(especially in China, to a lesser extent in Brazil) and rising FDI outfl ows,
Brazil and China are both interesting illustrations of the internationalization
of firms from the emerging world. Moreover, the oil sector itself is
interesting due to its strategic importance for most countries nowadays,
especially the high-growth ones. The oil industry has traditionally been
at the vanguard of globalization and it remains one of the largest and
most internationalized businesses worldwide. The sector is continuously
expanding; according to UNCTAD (2007), oil and gas drilling oper ations
have doubled since 2002. For over a century, a few giant companies, mostly
from developed economies, dominated this market. The high involvement
of the state is another distinguishing feature of the oil industry. In the
second half of the twentieth century, developing economies created their
own national oil companies (NOCs) in order to secure their access to one
of the main fuels of economic development. NOCs fi rst targeted domestic
reserves and then started to internationalize, becoming multinationals at
surprisingly fast rates, thus also attracting the attention of international
business scholars. In particular, the impressive expansion of Chinese state
oil companies has been attributed to geo-strategic motivations, while the
competitiveness of Petrobras, the Brazilian oil company has been seen
as the by-product of a long-term eff ort to build distinctive resources and
capabilities.
In this chapter, we analyse the emergence and evolution of oil fi rms from
China and Brazil, in order to understand the determinants of their foreign
investments, as well as their main competitive advantages. We found them
to be diverse due to: aspects inherent to the oil sector, the timing of their
111

The chapter is organized as follows. The first section introduces aspects
specific to the oil industry and presents the Brazilian and Chinese cases.
The second section discusses the role of innovation and technology. The
third section deals with the role of the state and the last section provides
some concluding remarks.
FOREIGN DIRECT INVESTMENTS IN THE OIL
SECTOR: BRAZIL AND CHINA
Oil is a unique commodity in terms of strategic importance . it is the
main source of energy and an essential input to industrial production. It
is also strategic because of a remarkable North-South divide: more than
80 per cent of world oil production takes place in developing countries,
while OECD countries consume around 54 per cent of the total produced
(Aykut and Goldstein, 2008). The industry has traditionally shown an
oligopolistic structure, driven by its technical characteristics: a) very high
investment requirements and corresponding scale economies in operation;
b) risky investments due to the uncertainty regarding exploration prospects
(Furtado and Muller, 1993).
In terms of ownership, private firms dominated until the 1960s: independence
in a number of producing countries, the emergence of the
Organization of the Petroleum Exporting Countries (OPEC) and the
increasing political and strategic importance of oil (along with its raising
prices) led to a wave of nationalization, shifting the bargaining scenario
(UNCTAD, 2007). Nowadays, in developing countries oil companies
are mostly state-owned, whereas in most developed countries they are
privately held (especially in the major consuming countries). Among the
50 top oil companies, 34 are state-owned, out of which 20 have 100 per
cent state ownership (UNCTAD, 2007). A group of emerging economies
NOCs is referred to as the new Seven Sisters: Saudi Aramco (Saudi
Arabia), Gazprom (Russia), CNPC (China), NIOC (Iran), Petrleos de
Venezuela (Venezuela), Petrobras (Brazil) and Petronas (Malaysia).
Firms have reacted to these features and to the instability of oil prices
through vertical integration, which makes them relatively less dependent
on the vagaries of individual markets and by-products. International
investments in the oil sector comprise most of the FDI motivations identified
in the international business literature: they can be resource-seeking,
The
making of
national giants
The making of
national giants
nology
through cross-border mergers and acquisitions. Foreign investments
can therefore be quite diverse in their objectives, according to the
strategic goals of firms and countries.
Oil companies from Brazil: Petrobras in frank international expansion
President Getulio Vargas established Petrobras (Petrleo Brasileiro) in
October 1953, afterwards Law 2004 established the government s monopoly
in all segments and activities of the Brazilian oil sector. The new stateowned company was allowed to undertake oil sector activities in Brazil on
behalf of the Union and inherited all the assets of the National Oil Council
(Conselho Nacional do Petrleo, CNP). In 2006, 53 years later, Petrobras
net revenues surpassed USD 77 billion, while its net profits were around
USD 2 billion. It is the largest Brazilian company in terms of market value
and revenues (Exame, 2007), while in terms of market capitalization it
was the world s sixth largest energy company in 2007 (PFC Energy, 2008).
Petrobras is also one of the top multinationals from Brazil with external
revenues of over USD 5 billion (Chevarria, 2006).
The foundation of Petrobras, along with other state-owned enterprises
in basic industries (such as Vale in iron ore and CSN in steel), was one
of the cornerstones of the import substitution industrialization strategy
carried out in Brazil, with the aim of reducing its external dependence in
basic inputs. The 1970s oil crises, however, showed that Brazil s energy
policy had failed to make it independent from foreign oil sources. In this
context, Petrobras increased its strategic importance and focused on the
development of specific technological capabilities for prospecting oil in
deep waters (due to this particular location of most Brazilian reserves) and
the search for alternative energy sources.
Petrobras international expansion started in 1972, with the creation of
the Braspetro Petrobras International. At the time, oil imports covered
more than 80 per cent of domestic demand and Petrobras international
branch had as its main purpose to guarantee supply security (Chevarria,
2006). The first investments were made in Latin America, particularly in
Colombia s Caribbean Sea, where oil was extracted from deep waters in
1972. Petrobras then expanded towards other areas where similar exploration
conditions existed . in Angola, Africa (1979), taking advantage of the

The opening of the domestic market has also put pressure on Petrobras
management to internationalize. Until 1997, Petrobras had the monopoly
of exploration in the Brazilian territory. However, technological and
investment pressures convinced the Cardoso government (as many others
around the world) to establish a competitive environment for oil exploration
(Aykut and Goldstein, 2008). The role of government has been
reshaped, from production and promotion of the sector to regulation and
surveillance. Since then, around 50 new companies from the oil sector
have established operations in Brazil (Estado de So Paulo, 2007). Nine
concession rounds have been conducted and 71 concessionaires (35 of
which foreign investors) are currently operating in Brazil.1 Petrobras production
has doubled since 1996, to reach 1.8 million barrels of oil per day
(Estado de So Paulo, 2007).
Chinese national oil corporations
While the first known use of the term for oil . shiyou . occurred during the
Song Dynasty (Kambara and Howe 2007), the rationalization of the oil
and gas industry started later in China than in Brazil: it was not before the
1980s that the first national oil company . China National Off shore Oil
Corporation (CNOOC), was set up in China. Chinese oil companies have
gone through an extensive process of restructuring, in order to reshape
ownership structures, to instil market mechanisms into state-owned fi rms
and to make them more similar to integrated international oil companies
elsewhere.2
The
making of
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The making of
national giants
centrated
in Southern regions (Houser, 2008). CNOOC is the other major
state sector firm, which handles offshore exploration and production and
accounts for roughly 15 per cent of domestic production.
Despite such a relatively short history as a quasi-market industry, the
oil sector is one of the most internationalized in the Chinese economy.
Even though the fi rst outflow of FDI only took place recently, in 1992
(Chorell and Nisson, 2006), by 2003 the oil sector was already the second
most important overseas investor (behind IT, computer and software
industry) and accounted for 18 per cent of Chinese outward FDI stock
(China Ministry of Commerce, 2004, in Giroud, 2005). Among the top ten
Chinese multinationals (in terms of foreign revenues) three are in the oil
business (Giroud, 2005).
The Chinese oil companies have rapidly gained in size and can now be
compared to global giants such as Exxon Mobil, Shell and BP. In terms
of oil output, for instance, CPNC and its affiliate PetroChina are close to
the world s leading companies, with oil production of 822.9 million barrels
and gas production of 1119.5 billion cubic feet in 2005 (OGJ, 2006), compared
with the production of BP of 935.1 million barrels for oil and 3074
billion cubic feet for gas, respectively. In terms of market capitalization,
PetroChina reached the top of the energy company s ranking in 2007,
while Sinopec is ranked fifth in the list. Chinese firms led the sector s share
price growth of 2007 (PFC Energy, 2008).
TECHNOLOGICAL ACCUMULATION AND
INTERNATIONAL EXPANSION
It is important to highlight that, since their emergence, multinationals
from developing countries are considered a different specimen in the
ecology of world business (Goldstein, 2007). While traditional foreign
direct investments from advanced economies could be explained mostly
in terms of access to superior technology and competitive resources,
those from the developing world tend to depend on government support.
This does not mean that technology has had no role in the internationalization
of firms from emerging economies . it simply has assumed diff erent
ones. In an early phase, some companies benefited from special

e
Indicator Petrobras PetroChina/ CNOOC Sinopec
CNPC
R&D expenditures
(USD millions, 2006)
Patents USPTO
399.74
187
396.64
5
49.86
1
278.46
88
(since 1976)
Production 749.6 1119.6 211 316.6
(million BOE, 2005)
Foreign production
(percentage)
Position in Top Oil
Companies Ranking
8.8
17
16.8
5
21.8
38
15.4
30
Sources: DTI (2006), OGJ (2006), UNCTAD (2007), USPTO (2007).
technological assets developed to adapt to the specific circumstances in
their home markets, such as small production runs and low-quality infrastructure
,
adapted technologies. The experience of Petrobras, however,
tells a diff erent story.
Table 7.1 summarizes the position that both Chinese fi rms and Petrobras
hold in terms of technological achievements. R&D and production numbers
show the remarkable achievements of both countries, and point out the
impressive catching up by Chinese oil companies.
Technology, new markets and new segments: Petrobras investing deep
Fast-paced technological alignment with leading oil firms and the development
of its own technology for deepwater extraction have been the cornerstones
of Petrobras international expansion since the 1970s. Petrobras
managed to go beyond localized technological change to develop a stateof-the-art set of techniques to explore specific features of Brazilian oil
reserves. Thanks to intensive R&D efforts, the accumulation of technological
capabilities by Petrobras evolved from an initial set of incremental
innovations from imported technologies to the development of its own
set of techniques (Neto and Dalla Costa, 2006). The possession of such
know-how is central to foreign expansion giving it its tacit character and
consequently making it difficult to be codified and disseminated.
Throughout its history, Petrobras accumulated strong capabilities in
deepwater extraction, for which it has received several industry awards,
such as the Distinguished Achievement from the Off shore Technology
The
making of
national giants
The making of
national giants
3 which demands special extracting expertise.
Petrobras made extensive investments in R&D in order to develop its
own technology, evolving from importer of third parties technologies to
the owner of its own technologies. The strategy has produced its benefi ts:
while in 1987 only 1.7 per cent of production came from the sea, in 2000
this amounted to 55 per cent (Bruni, 2002).
Petrobras has created several research centres, some of them acting in
cooperation with renowned Brazilian universities, such as the Federal
University of Rio de Janeiro (UFRJ) and the State University of
Campinas (Unicamp).4 The universities are important providers of highquality human resources to Petrobras . around 40 per cent have a college
degree, and around 4 per cent have a post-graduation degree (Petrobras,
2008). The outcomes of Petrobras technology and innovation strategy
have been quite impressive. It is the fifth-largest world oil company in
terms of R&D expenditures and also the leading innovative firm in Brazil,
with USD 399 million invested in R&D activities in 20065 (Petrobras,
2006; DTI, 2006). In terms of R&D, the outputs are similarly impressive.
Petrobras is the Brazilian company with most patent applications and
with more patents granted in the US Patents Office (USPTO). Until 2005,
Petrobras also held the largest number of patents from the Brazilian
Patents Office (INPI): 222 in the period 1990.2001. In 2006, it was surpassed
by Unicamp, but remains the leader in the business sector. On
average, Petrobras files 80 patent claims per year and has already fi led
more than 1000 patents.
The uncertainty of deepwater prospection makes it necessary to
invest huge sums in the development of appropriate technologies. On
this regard, the association of Petrobras with other oil firms in the early
1980s, for developing new technologies was quite peculiar (Furtado
and Freitas, 2000). The goal of these arrangements was not to passively
absorb external knowledge, but rather to build the basis for developing
new technologies, with Petrobras playing an active role in the
development process. As a respected technological leader in its specifi c
extraction techniques, Petrobras is now in the position to attract bigger
international oil companies as partners in more recent technological
endeavours.6 In addition, Petrobras is currently a world reference for
alternative energy sources, such as ethanol. Here again, foreign oil
companies are interested in creating partnerships with Petrobras and in
investing in R&D in Brazil.
The recent movements towards foreign markets have a strong orientation
to expand business along the industry chain and conquer new

7 In addition, the ethanol business shows a strong
potential for Petrobras s international expansion. With an expected export
capacity of 500 thousand cubic feet of ethanol for the year 2008, Petrobras
aims to grow its capacity in 45.5 per cent a year, reaching exports of 4.8
billion cubic feet by 2012. In addition to expanding exports from Brazilian
operations, Petrobras has plans to invest in research and ethanol production
in some African countries. In Mozambique, a memorandum has
already been signed with the local government, and Angola is another
prospective partner.
The national relevance of Petrobras technology has taken a new
dimension since the announcement that Brazil has become self-sufficient
in oil supply, in April 2006, after the opening of another platform for
deepwater exploration at the Bay of Campos. Nevertheless, it was the
discovery of the biggest deepwater oil fi eld off the Southeastern coast in
November 2007 that has the potential to transform Brazil into a global
energy powerhouse. Petrobras reckons that this field named as Tupi holds
some five to eight billion barrels of crude oil and natural gas, making it
the biggest in the world since a discovery in Kazakhstan in 2000. In the
next five years, it is conceivable that Brazil could move ahead of Mexico
and Canada in total oil reserves, becoming third only to Venezuela and
the United States in the energy pecking order of the Americas. To coax
the oil from Tupi field, Petrobras engineers will have to drill up to 4800
meters below the sea floor through salt and rocks, in water depths of up
to 3000 meters, an undertaking that is at the frontier of the industry s
technological ability.
In summary, Petrobras story shows the crucial importance of accumulating
technological capabilities to establish leading international position.
As Dantas and Bell (2006:9) stress, Petrobras s capabilities [. . .] evolved
from those of an imitative technology-user to those of a leading player
at the international innovation frontier . Strategic intent was the key.
Moreover, a change in the Brazilian regulatory scenario for oil investments
has fostered Petrobras further internationalization strategy, in
order to strengthen its competitive position. The investments in the Gulfs
of Mexico and Guinea, areas where only companies at the frontier of
deep-shore exploration can operate, provide evidence of the sophistication
of Petrobras offshore technologies (Chevarria, 2006).
The
making of
national giants
The making of
national giants
The role of technology in the expansion of Chinese oil firms has been
quite different from Petrobras expansion. CNPC, PetroChina, CNOOC
and Sinopec are relatively young, if compared to Petrobras and the big oil
companies. Moreover, they still lag behind the global giants in developing
world-class technologies. However, the Chinese NOCs have recently
caught up with some of the oil majors in several categories and are sparing
no efforts to fill the gap completely.
In 2006, PetroChina was ranked the sixth world oil company in terms
of R&D performance (DTI, 2006). Its performance in terms of patents
granted at the USPTO is also impressive (Table 7.1). The combined
R&D efforts of the major Chinese oil firms in 2000 was about 1.2 fi fths
of that spent by the three world biggest oil companies . Total,
ExxonMobil and Shell. In 2006, PetroChina and CNOOC together spent
one third of the amount spent by the leading three companies. However,
their combined patents production is still only a fraction of that of their
Triad competitors (Nolan and Zhang, 2002). Furthermore, despite all
efforts, Chinese oil firms still face great obstacles in purchasing the R&D
embedded in the products of specialist suppliers to the oil and petrochemical
industry. Chinese firms still need to bridge several technological
gaps. Extracting and treatment equipments are either imported or
only assembled in China, without domestic production. Key electronic
instruments and software for exploration and production are imported
as well. In spite of holding a refining capacity comparable to the world
oil majors, the Chinese NOCs suffer from poor technological capabilities
and high refining costs (China Petroleum, 1999; Chorell and Nisson,
2006).
Facing these constrains, most Chinese investments abroad seek technologies
that China needs to access oil reserves to satisfy its rocketing
demand . China consumes around 9 per cent of world oil and has only
1 per cent of the world s proven reserves (Houser, 2008). China s oil
output has remained relatively stable over the last five years and securing
an oil supply will be a major challenge for China in coming years.
China s willingness to own world-class energy companies, combined with
the scarcity of domestic reserves, leaves no other choice for Chinese oil
companies than seeking reserves overseas (Houser, 2008). PetroChina s
accelerating investments in exploration has so far only served to replace
previous production rather than expand its oil reserve base. PetroChina s
domestic oil portfolio looks increasingly mature; meeting government s
security-of-supply objectives will therefore become more onerous in
future years, further stimulating overseas expansion eff orts.

The focus of CNPC s strategy has been towards areas of high aboveground
risk and mature assets, therefore avoiding head on competition
with international oil companies. Its stated mission is to become a globally
competitive multinational. In particular, much debate has focused
on the extent to which CNPC s overseas expansion has been driven by
the Chinese government s strategic goal of securing energy supply or by
CNPC s desire to develop itself into a global energy player (Chorell and
Nisson, 2006). Overseas expansion, although headline grabbing, has been
on a relatively modest scale and CNPC s portfolio remains dominated by
conventional onshore oil production in China. In fact, CNPC has acted
in a way consistent with corporate development aims, rather than simple
resource capture. The problem stands in slow decision-making and a riskaverse outlook, which may have been factors in its apparently conservative
development moves.
In addition, if CNPC is to become a true international competitor it
must move to fill the strategic gaps in its portfolio. Areas in which CNPC
is currently entirely absent include deepwater exploration, major international
gas (including liquefied natural gas, LNG) and unconventional
oil. CNPC is also severely underweight compared to the major oil companies
in offshore areas and high impact international exploration. This
signalizes the need of further investments to improve capabilities, on top
of all.
In contrast to oil, the prospects for Chinese gas production are much
more promising. Several joint ventures have been carried out over recent
years in order to improve capabilities and production in this segment.
Such partnerships reinforce the strategy used by China to catch up and
gain market and resource access, deepening its international presence.
In short, on foreign markets Chinese oil firms are searching higher
capabilities and resources, and in these terms the role of technology in the
internationalization process is very different from the case of Petrobras.
In terms of its own technological capabilities, Chinese firms still have a
lot to evolve and learn from their foreign counterparts, especially if China
wants to explore its reserves of oil sand . whose technologies are still to be
mastered in order to make it affordable (Chorell and Nisson, 2006).
The
making of
national giants
The making of
national giants
The Brazilian government s intent to turn Petrobras into a strong, technologically

advanced player in the domestic (and later global) oil industry,
capable of keeping Brazil immune from the imbalances originated
from international oil crises, has been a key constant in Petrobras s
history. In this sense, the developmentalist government has played a
central role in the development of Petrobras competitive advantages.
The rationale is rather simple: Brazil has deepwater oil reserves that
require specific exploration technologies, which were largely absent
off-the-shelf and could not be transferred at arms length. This kind of
circumstance provided the ultimate technological push to Petrobras s
pursuit of its own techniques.
On the other hand, insofar as the internationalization of Petrobras is
concerned, there is very little evidence of a government push or of any
stimulus or support. It is only recently that the government has started
considering the internationalization of productive activities of Brazilian
firms as a way to boost export performance and improve the country s
overall competitiveness. Until recently, the predominant vision associated
foreign investment by domestic companies with the crowding out
of capital, investments and employment, and therefore saw the phenomenon
as very harmful to the Brazilian economy. The evidence now is that
in Brazil (as elsewhere) internationalized, multinational fi rms perform
better, possess better technologies and human resources and achieve better
export profitability due to these advantages (De Negri et al., 2005). As a
result some programs and policies have been introduced in order to foster
further international insertion of Brazilian firms (Iglesias and Veiga, 2002;
Prochnik et al., 2005; Alem and Cavalcanti, 2007; Almeida, 2007).
The trajectory of Chinese investments has been quite different on this
regard as well. China was making its first steps towards a market economy
when Brazil and other developing economies were already engaged in a
first wave of outward direct investments. Under the Chinese open door
policy, established in 1979, outward investments started to be stimulated,
but always with government surveillance. In fact, until 2003 Chinese
private firms were forbidden from investing abroad (Buckley et al., 2007).
Nowadays, the Chinese government s acts are the key driver of the go
global strategy, either facilitating investment processes or providing the
necessary financial support for Chinese overseas investments (Child and
Rodrigues, 2005). The direct participation of the state is another aspect
of the government s push to internationalization: in 2003, 43 per cent of
Chinese investors abroad were state firms (Chinese Ministry of Commerce,
2004 in Giroud, 2005). This places Chinese multinationals in a privileged

cal
controversy in other nations.
The extensive presence of the Chinese government in investments
reveals that political motivations have as important a role as economic
ones (Cai, 1999). Chinese state-owned enterprises support the authorities
long-term strategy to reinsert China in the global economy . as part of a
greater plan to accomplish successfully the economic transition. Securing
energy and other natural resources, along with strong international
positioning for Chinese firms . the national champions, are key motivations
behind the Chinese government s encouragement of outward direct
investments.
CONCLUDING REMARKS
This chapter looked at a specific industry with an advanced level of internation
alization
. oil. Our purpose was to understand the role of governments
and technology in the internationalization strategy of oil companies
from two emerging countries, Brazil and China. We found that the determinants
of the internationalization of the Brazilian Petrobras and of the
Chinese oil companies, CNPC/PetroChina, CNOOC and Sinopec have
relied on different resources and assets and followed diff erent objectives.
The case study reveals important aspects related to the policies pursued by
emerging economies to support the internationalization of their fi rms and
the making of national giants.
The success of Petrobras in its internationalization and growth strategy
is striking, although it unfortunately represents an exception and does not
reflect a national trend. Petrobras achieved its success due to a deep commitmen
t
to technological development, favoured by a series of political,
economic and geographic circumstances. Petrobras was one of the leading
companies in the first wave of multinationals from developing countries
and succeeded to develop technological assets beyond the scope of localized
technological change. Unfortunately, the case is an isolated one in
the Brazilian economy and is not part of a national plan towards internationaliz
ation
and the strengthening of the domestic industry by means
of outward direct investments. Until recently, no deliberate policies have
been carried out to promote stronger foreign insertion of Brazilian fi rms in
the global economy and recent initiatives are moving very slowly.
The rise of Chinese oil companies, on the other hand, is more recent. In
a competitive sector already dominated by giant players, their expansion
has been facilitated by the government s strong political will to achieve
fast-paced global insertion of the Chinese economy (Dunning et al., 1997;
The
making of
national giants
The making of
national giants
An important conclusion highlighted in this chapter is that governments

can play a decisive role in the process of internationalization of national
firms. They can either foster technological development within their countries,
which leads to stronger competitive assets to operate abroad, or use
subsidies to stimulate the foreign venture of firms so that they can leverage
key assets not available in the domestic environment. We have also
illustrated the changing role of technology in the evolution of emerging
economies multinationals and the increasing role of asset-seeking investments
undertaken by some emerging countries, like China.
The subject of the internationalization of firms from emerging economies
has a wide set of issues that need to be further investigated. This
chapter sought to start the discussion by highlighting the role of multinational
s
. in this case those of developing nations . in the process of
sustainable technological upgrading and economic development, which is
the broad subject of this book.
NOTES
1.
The list of concessionaires is available at the Brazilian Ministry of Energy s web
site:
http://www.brasil-rounds.gov.br/geral/ATIV_lista_de_concessionarios_R9.asp.
2.
CNPC separated out most of its high quality assets into a subsidiary called Petr
oChina
and carried out its IPO of a 15 per cent interest on both the Hong Kong and New
York
stock exchanges in April 2000. Sinopec also offered a 15 per cent stake in its O
ctober
2000 IPO on the Hong Kong and New York stock exchanges. In February 2001,
CNOOC held its IPO of a 27.5 per cent stake after an earlier attempt in Septembe
r 1999
was cancelled. Major multinationals seeking China market entry were the largest
subscribers:
BP bought 20 per cent of PetroChina s offered shares, 57 per cent of Sinopec s
shares were bought by ExxonMobil, BP, and Shell, and Shell purchased 20 per cent
of
CNOOC listed shares.
3.
Deep-shore extraction refers to reserves up to 1000 meters; ultra-deep extractio
n refers to
reserves with depth above 1000 meters.
4.
Cenpes, Petrobras most important research centre, is located within the UFRJ. It
has
been in operation since 1966, employs 1800 people (many of them holding PhD degr
ees)
and plays a key role in Petrobras corporate growth strategy. Cepetro is a researc
h and
training centre jointly ran with Unicamp, in which campus it is located. In 2006
, Cepetro
received USD 5.1 million from Petrobras for research projects.
5.
Corresponding to BRR 645 millions as announced in Petrobras website.

6.
Companies which associate with Petrobras for technological purposes are Repsol-Y
PF,
ExxonMobil, Shell, Chevron, Statoil and Total (Petrobras, 2008).
7.
Petrobras interest in expanding in the downstream sector was the main reason for
the
acquisition of 50 per cent of the Pasadena Refinery in Texas, in September 2006.

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Websites
CNOOC: www.cnooc.com.cn
CNPC: www.cnpc.com.cn
Sinopec: www.sinopec.com.cn
Petrobras: www.petrobras.com.br
USPTO: www.uspto.org
8.
Beyond the emission market:
Kyoto and the internationalization
of firms from the waste industry
Asel Doranova, Geert-Jan Eenhoorn and
Ionara Costa
INTRODUCTION
The Kyoto Protocol is generally recognized for its paramount aim to
reduce the global level of greenhouse gas (GHG) emissions and for the
global emission market it has created. The market-based approach is a key
aspect of the Protocol and follows recent trends from the environmental
policy domain to engage the private sector in the achievement of public
goals.
The Kyoto s emission market is pivoted on the splitting of the signatory
countries into two groups: developing countries with no emission
limits; and developed countries, the so-called Annex I countries with
bound targets to reduce their GHG emissions. Within the latter, the
national emission-reducing targets are allocated to local entities, business
firms mainly, according to the level of GHG emissions their activities
generate.
Three flexibility mechanisms put the Kyoto emission market
into motion: the Clean Development Mechanism (CDM), the Joint
Implementation (JI), and the Emissions Trading. Together these marketbased mechanisms allow flexibility to countries and business fi rms in
meeting their reduction targets, based on credits of GHG emission reduction
. the Certified Emission Reduction (CER). CERs can be generated
by CDM and JI projects hosted by respectively developing and transition
economies and be used to offset an actor s own emission liabilities,
or negotiated in the global emissions market. In principle, CDM and JI
projects have to involve the deployment of technologies leading to the
reduction or avoidance of GHG emissions in the host country. Business
firms often based on developed economies own the bulk of such technologies.
The possibility of obtaining CERs is assumed the key incentive
127

This chapter argues that the motivations of firms with no emission
liabilities to participate as technology providers in CDM and JI projects
go beyond the revenues they can obtain from selling the emission
credits earned from such projects. Instead, their motivations are based
on opportunities for exploiting their technologies and expertise and
(further) expanding their business internationally, particularly towards
untapped markets located in developing and transition economies. The
rationale of this argument is three fold. First, as a rule the core business
of such firms is directly associated with the environment, inasmuch as
their fi rm-specific advantages are based on environmentally-friendly
technologies and expertise. Secondly, given the imperfect nature of the
markets in which those firms operate, their emergence and sustainable
growth, as well as the generation and diffusion of relevant technologies
and expertise are intrinsically associated with government policy
intervention. Thirdly, looking at the previous aspects we might argue
that the expansion of firms in such green markets is geographically
bounded.
The objective of the chapter is to substantiate this argument by analysing
the participation in CDM and JI projects by three business fi rms
from the Dutch waste management industry, more specifically from the
segment of solid waste. The selection of Dutch firms from this segment for
the case studies was due to two main reasons. First, waste handling and
disposal represent an important technological area in terms of CDM and
JI: it accounts for 20.9 per cent of all CDM projects registered (UNFCCC)
and around 9 per cent in terms of JI (UNEP/RISOE, 2008). Second, the
development and consolidation of the waste management industry has
taken place within developed economies, resulting from the adoption of
market-enabling policy instruments as an alternative to the traditional
command-and-control policies. The Netherlands is a benchmark case of
how government policies have been crucial in creating and enabling the
business environment for this sector.
The chapter is organized as follows. The first section focuses on the role
of market-based policy instruments in stimulating the development of
firms and technologies in environmentally friendly sectors and discusses
the role of the Kyoto Protocol as market enabler. The second section
addresses the role of government policies and the development and structure
of the waste production chain. Then, the third section turns to the
Dutch waste management industry and the fourth section presents the
analyses of the case studies. The last section concludes the analysis and
suggests issues for further research.
Beyond the emission market

The use of market-based instruments strategically combined with strict
environmental regulations and political support have pushed the development
of clean technologies and adoption of practices that minimize
or avoid, among others, GHG emissions, even before the introduction
of the Kyoto Protocol (Jaffe and Palmers, 1996; Kemp, 2006; Newel,
1997). Since the 1980s, the traditional command-and-control approach to
environmental policies has been challenged by the emergence of alternative
policy instruments based on market incentives and flexibility, such as
producers and polluters charges and tradable emission permits (Stavins,
1998; Vo, 2007).
The adoption of this market-based approach, mainly by developed
economies, has led to the appearance and consolidation of business fi rms
specialized in various environmental technologies. Among examples are
renewable energy, energy efficiency, soil remediation, waste treatment and
so forth. The core business of firms from such green markets is directly
associated with the environment, inasmuch as their competitive advantages
are based on environmentally-friendly technologies and expertise.
This is in contrast to the case of firms from pollution-intensive industries,
where the adoption of environmentally sound business practices are
mainly to comply with environmental regulations; and green competences
are not part of firms core competitive advantages (Rugman and Verbeke,
1998).
Another important characteristic of green industries is the imperfect
nature of their markets. Hence, the emergence and sustainable growth
of business fi rms, as well as the generation and diffusion of relevant technolo
gies
and expertise are intrinsically associated with government policy
incentives (Jaffe and Palmers, 1996; Newell, 1997). However, the crucial
role played by government policies in creating market incentives to propel
environmentally-based industries, combined with the localized nature of
environmental issues may lead to geographical bounds to fi rms growth.
Hence, the exploitation of fi rm-specific advantages and market expansion
of green firms may be limited to the geographical reach of their government
policies, and the characteristics of their original environment.
Regional, international and multilateral policies can help to overcome
such local boundaries to the expansion of firms from green industries.
The European Union s environmental policies are emblematic examples
on this regard. In this line, it can be argued that the Kyoto Protocol can
also be considered as playing the role of market-enabler; opening market
opportunity to the expansion of green fi rms.

The Kyoto Protocol aims to mobilize business firms to apply their
resources, technologies and expertise for the avoidance and reduction
of GHG emissions. For this purpose, it applies market-based instruments
at the multilateral level, creating the economic incentives for
engaging business firms in the international effort to control GHG
emissions.
The direct and active participation of the business sector is crucial for
the functioning of the Kyoto Protocol. There are two reasons for this:
First, a substantial part of the national emissions targets is of the responsibi
lity
of local business companies, which are expected to seek the most
cost-effective and credible GHG emission reduction strategies to meet
their emissions targets. Second, business firms based in developed countries
control the lion s share of the technologies and expertise expected to
be transferred to developing and transition economies via CDM and JI
projects, respectively.
Business firms with and without emissions reduction targets can
participate in CDM and JI projects. Further, this participation can be
either direct (for example as project developers, technology providers,
equipment suppliers, consultants and environmental auditors) or indirect
(for example as emissions buyers, brokers, banks and some other
intermediary parties). The majority of studies on the participation of
business companies in the Kyoto Protocol s mechanisms are related to
the emissions market itself. The most studied cases are those of large
companies from developed countries with emissions reduction targets,
particularly of their strategies for emissions reduction (Hamilton and
Kenber, 2006; Kolk and Pinkse, 2005). However, the very fact is that
these companies are not always directly involved in the design and
implementation of CDM and JI projects and tend to be mainly buyers of
CERs in the emissions trading market, motivated by the need to off set
their own emissions liabilities. To the best of our knowledge, there is no
comprehensive study dealing with business companies that do not have
emission reduction targets to meet and yet have been directly involved
in the technical implementation of CDM and JI projects, due to their
knowledge and expertise on emissions reducing or avoiding technologies.
It seems reasonable to assume that the Protocol, by means of its
flexibility mechanisms represents opportunities for firms to exploit their
technologies and expertise and (further) expanding their business internationall
y,
particularly towards untapped markets located in developing
and transition economies.

The waste management industry offers many examples of successful
implementation of market-based policy instruments, specially in Western
Europe and of how the state and the business sector can work together to
address negative externalities, meeting both public and private interests.
Furthermore, the technologies and expertise associated with this industry
represent an important area under the Kyoto Protocol. They involve the
capture or avoidance of methane, a GHG 21 times stronger than carbon
gas generated from the decomposition of organic waste.
Waste, in its nature, does not seem to have much economic attractiveness.
The traditional, and most usual, way of dealing with waste is to
dump it in areas referred to as landfills. However, the disposal of waste
in landfills leads to many negative externalities, such as ground water
pollution, fire and explosion hazard, odour, soil pollution and so forth,
representing a threat to both the environment and human health. The
problems associated with landfills increases with the volume of waste.
With the rapid economic and population growth, increasing welfare and
consumption, the volume of waste is ever growing (Cointreau, 2007; The
Economist, 2007).
The 1990s represents a hallmark in government policies on solid waste
with the fi rst examples of adoption of market-based instruments, notably
in the United States and Western Europe. The use of market-based
approaches to address the negative externalities generated by waste, and
indeed to reduce the amount of waste at first place, has fostered the developmen
t
of an entire production chain and its related technologies that can
be referred to as the waste management industry. Nowadays, the waste
management industry is consolidated in many developed countries, and
comprises many technologies and schemes for collecting, sorting, treating,
reusing and recycling various materials.
Inputs: turning waste into a commodity
The core input in the waste management industry is waste itself. Thus,
the very first step in the waste production chain involves its collection
and transportation. A related activity refers to the separation of
waste according to its composition, such as organic waste, plastic,
glass, metal, paper and so forth. A basic step is the separation of the
organic waste at the household level. The sorting of non-organic waste
can be either combined with collection or performed as an individual
step, depending on the collection scheme adopted. The quality of the

ardous
waste, depends on how well collection and sorting schemes are
designed and implemented. As in any other industry, it will aff ect all
the following stages of the waste treatment and recycling production
chain. Government policies at different levels . municipal, national or
regional have been crucial in ensuring the availability and quality of
waste inputs. Market-based instruments such as pollution charges, payas-you-throw schemes, landfill fees and bans have been frequently used
with the purpose of making waste disposal in landfill more expensive
than alternative treatment and recycling; hence creating opportunities
and ensuring the supply of inputs for different segments of the waste
management industry.
Processing: turning waste commodities into valuable goods
There is a broad range of alternatives to treat and recycle waste, diff erentiat
ed
according to types of materials. The basic distinction is between
organic waste, recyclable waste (for example, glass, metals, paper and so
forth) and non-recyclable waste. It is largely accepted that biological treatmen
t
is by far a much better option to deal with organic waste than the traditional
landfilling. By means of processes such as aerobic decomposition,
commonly known as composting and anaerobic decomposition organic
waste can be turned into amendment for agriculture and gardening, avoiding
the generation of methane (Eenhoorn, 2007). Many countries have
banned the disposal of organic waste (among other materials) in landfi lls,
but the fact is that the dumping of waste in landfills is still in practice in
most of the countries all over the world. Although, it is important noticing
that there are differences in terms of regulations and standards imposed
on landfi lls and that the operation of landfi lls has become a sophisticated
engineering and managing activity. For instances, techniques to capture
and convert into energy the methane generated by landfi lled organic
material, also known as waste-to-energy, have been developed and widely
diffused among developed economies. In the case of recyclable waste, the
processes are as many are the materials composing it. For instances, glass
and metals can be re-melted indefinitely and initiate a new life cycle as raw
materials for many industries; paper can be turned into pulp and than used
to produce new paper (The Economist, 2007). As for the non-recyclable
waste, the two main alternatives are landfi lling and incineration, with the
latter being preferable to landfilling particularly when it involves energy
recovery (Kemp, 2006; Parto et al., 2006). In fact, the incineration of nonrecyclable waste, the so-called waste-to-energy, represents an increasingly
important source of renewable energy.

The output stage of the waste management chain refers to the diverse range
of products from the waste treatment and recycling processes. While it is
obvious that the output of the recycling of paper, plastic, glass and metal
are the same materials; the outputs from the treatment of organic waste
and non-recyclable waste diverges from its original composition, including
high quality compost, organic fertilisers, biogas, heat and power. The
prices of waste outputs serve as an economic viability factor for the entire
waste management scheme. It is important that recycled raw materials
and products can compete against virgin raw materials and other products
(Eenhoorn, 2007). In this regard, policy instruments that secure market
demand and prices ensuring economic return are crucial for the success
of the entire waste management industry. Examples of such supportive
instruments are the guaranteed procurement of electricity generated from
landfill and incinerators and the reduction of the market price of recycled
materials via tax exemption.
The waste players
The large variety of ways of processing and treating solid waste implies
the existence of different players. Hopstaken (2007) identifies three main
groups of waste firms, according to their business concepts: multi-utility
firms that encompass activities from sectors as diverse as waste, energy,
transport and water; vertically integrated fi rms that cover diff erent stages
of the waste production chain, from collection, recycling and treatment;
and niche player firms focussed on technology, concept, region or segment.
This group includes, for example, firms specialized in the recycling of specific
materials such as plastics, paper and metals. Producers of equipment
and machines, such as sorting machines can also be included in this group.
In terms of capital, the composition between public and privately owned
firms varies from country to country, and according to the stages of the
waste production chain.
Waste management industry: a national or international business?
The characteristics of the waste management industry differ from country
to country, and even among regions or municipalities within the same
countries. The policy approach adopted at different government levels is
crucial in defining the contours and dynamics of this market. Together
with the local nature of waste generation, the central role of government
policies implies that the advantages of waste firms tend to be locally

where
else, waste firms tend to have their expansion limited to their local
markets.
One of the international aspects of this industry is the movement and
trade of waste material across borders. There have been some examples
of developed countries, or municipalities within these countries, exporting
recyclable waste materials to recycling firms overseas, or simply for landfi ll
dumping. Nowadays, China is the largest market for recyclable raw materials
(The Economist, 2007). From the perspective of local waste fi rms, the
export of inputs, that is waste, may not be positive to their business. The
movement of waste for landfi ll dumping in foreign countries, or in diff erent
provinces within the same countries, is also a common practice that
involves many controversial issues (Parto et al., 2006). This practice has
been restricted as many countries and provinces in both the United States
and Europe introduce landfi ll bans.
In terms of firms international expansion, a process of increasing the
internationalization of the waste management industry has been observed
over the last decennia or so (Hopstaken, 2007; SenterNovem, 2006).
Regional or international regulations and standards, such as those defi ned
by the NAFTA or the European Union represent an important driving
force of this process. For example, the requirements for Eastern European
countries to meet the EU standards regarding local waste management
practices have opened up opportunities for waste firms from Western
Europe to operate and provide services in this region, enlarging the
geographical scope of their market.
In fact, the internationalization of the waste management industry
would be better regarded as regionalization, as it has been mainly
observed within regions, the European Union in particular. Europe is
still the stronghold of the largest European waste firms, with a consolidated
position in Western Europe and increasing participation in East
Europe. This process is associated with a strong concentration observed
in this industry (Hall, 2007). A small number of large waste management
firms account for a large share of the European waste market. The two
largest European waste firms are the French multi-utility Veolia/Onyx
and SUEZ/SITA (Hall, 2007; Hopstaken, 2007). These two France-based
fi rms retain a signifi cant leading position ahead of their counterparts and
are about twice the size of the third and fourth largest European waste
firms, respectively German Remondis/Retherman and the Spanish FCC
(Hall, 2007; Hopstaken, 2007). These two firms, in turn, are two or three
times larger than the following group of firms composed by Biff a (UK),
Urbaser and Cespa/Ferrovial (Spain), Alba (Germany) and the recently
merged AVR/van Gansewinkel1 (originally Dutch firms they are currently

It is intuitive that the limits for the expansion of waste firms are closely
related to the access to sources of waste, the industry raw material. The
generation of waste can be affected by efforts to avoid it in the fi rst place,
but the primary factor affecting the availability of waste inputs is population
size. Hence, the access to the untapped potential market in developing
and transition economies is recognized as an opportunity for waste fi rms,
specially for the small and medium ones, to exploit their technological
expertise and to growth. Indeed, the case of technologies associated with
the capture of and energy recovery from landfill is emblematic. In countries
where complete landfill ban is already in place, as in the Netherlands,
firms advantages in landfill gas tend to lose value in a not so far future.
THE WASTE MANAGEMENT INDUSTRY IN THE
NETHERLANDS
The Dutch waste management industry is one of the most advanced in the
world. Recycling, reuse and incineration cover around 97 per cent of the
total 60 million tonnes of municipal waste generated in the Netherlands
(Gerlagh, 2007). Only 3 per cent of the solid waste generated in the
country goes to landfills, while 84 per cent is recovered and 13 per cent
incinerated (Bartelings et al., 2005; Gerlagh, 2007; Hopstaken, 2007).
The number of operating landfill sites in the Netherlands fell from 1000
in 1976; to 39 in 2004 and to 22 in 2007 (Gerlagh, 2007). These fi gures are
followed by reduction of related negative externalities. For instance, the
emissions of methane from landfills decreased by 18 per cent during the
1990s (Environmental Expert, 1998; SenterNovem, 2006). Concomitantly
to the decrease of landfilling, the capacity for incineration with energy
recovery, that is waste-to-energy, has been increasing in the Netherlands
(Gerlagh, 2007).
The Dutch waste market is estimated at around EUR 5.35 billion when
considering the total turnover from the inputs, treatment, recycling and
outputs stages (Bartelings et al., 2005; Hopstaken, 2007). In line with

The implementation of the waste management in the Netherlands is
supported by institutional and organizational arrangements and involves
public and private parties (Eenhoorn, 2007). The main task of governments
is to design, implement and enforce adequate anti-dumping regulations.
For example, a landfill ban for different materials is combined with
a high landfill tax of EUR 115 per ton, the highest in the European Union
(SenterNovem, 2006). The municipal governments are responsible for
ensuring proper waste collection, either by contracting private companies
to collect and transport the waste to treatment plants or by establishing
their own companies. Moreover, incentive schemes encouraging sorting
activities at household level have been widely and successfully applied.
The multi-stream collection schemes adopted in the Netherlands have
achieved very high waste separation results at the household level.
The participation of private business firms in the treatment and recycling
of waste is very significant in the Netherlands. According to the
Vereniging Afvalbedrijven, the association of Dutch waste management
companies, over 40 companies located in different regions involved in
the various waste processing activities as well as a large number of small
firms involved in niche activities such as disassembling cars, electronics
and other equipment. According to Hopstaken (2007), the top 6.15 waste
firms account for 15 per cent of the Dutch market,2 while the top 16.25
waste firms account for another 6 per cent and the remaining smaller waste
firms contributed to 40 per cent of the market revenue.
On the output side, a market for recycled products has been quickly
maturing in the country. For a few types of waste recycling products,
the market demand has been created through direct public involvement.
An example of state-induced-demand comes from construction and
demolition waste. By requiring public biddings for road construction to
use mainly recycled construction and demolition waste instead of virgin
materials from riverbeds or quarries, a large and steady market was
created. Nowadays close to 100 per cent of waste from construction and
demolition is recycled in the Netherlands (Eenhoorn, 2007).
In sum, the well functioning of the waste management industry in the
Netherlands is the result of proper addressing of the input, processing and

EXPANSION OF DUTCH WASTE FIRMS UNDER
THE KYOTO
This section analyses the participation of three firms from the Dutch
waste management industry as providers of technologies and expertise
in CDM and/or JI projects. The analysis focuses on motivations, form of
participation and future strategies in relation to CDM and JI projects. The
cases are analysed against the conceptual framework of market enabling
governmental policies and the international expansion of fi rms possessing
unique resources and capabilities.
The selection of firms for this study was based on the CDM documentation
available at the website of the United Nations Framework Convention
on Climate Change (UNFCCC). Initially, five Dutch companies involved
in waste management projects were identified, Biogas Technology Group;
Arcadis; Van der Wiel/Ecair, VAR/WWR and Grontmij. The latter three
agreed to participate in this study.3 The analysis is based on in-depth intervie
ws
with these firms carried out in September and October 2007. It has
also benefited from an interview with a representative of the SenterNovem,
an agency of the Dutch Ministry of Economic Affairs that promotes the
environmental and innovation policies. Moreover, given this is an under
researched area, anecdotal evidences have been also considered, as well as
additional and updated information from the fi rms websites.
Van der Wiel Holding BV . VdW/Ecair
Van der Wiel Holding BV is a medium-sized privately owned fi rm, with
320 employees and a turnover of around EUR 85 million. It has been
working for half a century in the areas of transport, infrastructure and
environment. Landfill gas recovery and methane capture is one of its areas
of expertise. VdW directly implement or provide consultancy for projects
of biogas, landfill gas and CO2 reduction.

nels
for the further exploitation of its core advantages on landfi ll methane
capture and energy conversion (waste-to-energy). VdW participation in
CDM and JI is through its subsidiary Ecair. In terms of JI, Ecair has one
project in Romania, two projects in Poland and eight projects in Slovakia.
As for CDM, VdW/Ecair has three projects in Brazil, one in Argentina
and two in Malaysia.
The first largest CDM by VdW/Ecair is the Bandeirantes landfi ll project
in Brazil, which has generated over eight million tonnes worth of CERs.
The pattern followed by VdW/Ecair suggests that once it enters a certain
country or a region with CDM or JI project, it starts to consolidate its local
presence by looking vigorously for further possibilities for new projects in
the same country or the region. Further strategic plans defined by VdW/
Ecair, includes targeting at least 14 new countries, in addition to those
where the company has already projects, among them, Mexico, Chile,
China, Thailand, Vietnam, Indonesia, the Baltic states, Czech Republic,
Hungary and Bulgaria.
Veluwse Afval Recycling BV . VAR/World Wide Recycling . WWR
VAR BV is an integrated waste firm, with expertise in landfi ll management,
recycling of construction and demolition waste, sorting activities
and composting. It employs 148 people and has an annual turnover of
around EUR 50 million (VAR, 2006).
In order to expand VAR s activities towards developing economies, its
founder, Jan Boone established the World Wide Recycling BV in 2004.
WWR s mission is to implement and operate VAR s technologies in countries
around the world, by adapting it to meet specific local circumstances.
Along with landfill projects, World Wide Recycling has taken a very active
part in composting projects and in fact became a pioneer in developing
and getting approval for organic composting-related methodology for calculating
emission credits.4 Moreover, WWR is supporting the World Bank
with registering composting projects under CDM in the Middle East and
Asia. It is worth mentioning that previous to CDM and JI, VAR s international
activities were based on composting projects in Ireland, Belgium,
France and Russia.
VAR/WWR s first two CDM projects are under implementation in
Bangladesh and represent an important experience to VAR/WWR. First,
Bangladesh is one of the least developed economies in the world and is

ing
of the projects has been ensured by a partnership with the Bangladeshi
NGO Waste Concern Consultants (WCC) and extensive efforts on the
promotion of collaboration with local municipalities.
VAR/WWR is designing three JI projects in Eastern Europe and few
CDM projects in Asia and Latin America, particularly in Brazil, where it
has a subsidiary company.
Grontmij
Grontmij is a multinational firm headquartered in the Netherlands,
with units in five other European countries: Belgium, Denmark, United
Kingdom, Sweden and Ireland. It employs 6337 people and has net revenue
of around EUR 390 million (Grontmij, 2006).Western Europe is the source
of 90 per cent of its revenue, 70 per cent being from the Netherlands alone.
Grontmij is a consultancy and engineering firm in the areas of building,
transportation, environment, energy, water and other industries. Waste
management is one of the areas composing its environment division. Its
expertise in this area is related mainly to waste water purification and soil
remediation, with few activities related to solid waste.
Grontmij has a broad international experience and has been working
for around 15 years in many European countries, such as Hungary,
Poland, Czech Republic, Romania, Bulgaria, Croatia and Turkey.
Furthermore, it is one of the few companies with very early experience
with GHG emission cutting projects. In 1994.1997 under the so caller
Activities Implemented Jointly , which was a pilot program for CDM
and JI schemes, Grontmij successfully implemented two projects on landfi
ll gas capture in Russia.
Nevertheless, Grontmij has not been directly involved in CDM and
JI projects currently. It had two CDM projects but withdrew from
further participation before the technical implementation stage started.
This decision was due to potential risks in terms of profi t performance
related to changes in the regulations in the host countries. Yet,
Grontmij has been indirectly involved in CDM and JI by providing technical
consultancy services on technologies related to biogas, biomass,
energy efficiency, wind, waste to energy, digestion and combined heat
and power production and distribution. Moreover, it offers services to
project owners and investors in carbon resources, for instance in terms
of the approval and registration of projects by international and national
authorities.
Grontmij acknowledges that there are business opportunities related to
CDM and JI projects, but it does not consider them a priority area at this

Functions, parties and business model
Ecair and WWR participate in all stages of the project cycle, starting
from feasibility assessment and basic design to fi nal installation, startingup of the facilities and monitoring. Moreover, both companies ensured
initial financial investments. In all their projects, other companies have
been involved either as equal partners or on a short-contract basis. Local
counterparts are important elements for the success of the projects. In
general, the day-to-day operation of the facilities after the installation is
due to be done by local partners trained by Ecair and WWR. Furthermore,
the establishment of dialog with local municipal agencies in order to
ensure their legal (and if possible technical) support has been important in
all projects analysed.
In fact, the participation of local governments is crucial for the longterm
sustainability and escalation of the projects and for the development
of the entire waste management cycle, for example waste collection and
input, management of the landfill sites and so forth. The waste sector in
developing countries tends to lack regulatory incentive and legal enforcement
mechanisms in all stages of the waste production chain.
The case of waste-to-energy is illustrative. Often, the methane captured
in CDM and JI landfill projects is simply flared without energy recovery.
In general, national power grid prevailing in developing countries does
not favour the market for small-scale energy producers. The barriers
can be related to both technical and economic aspects. Power distributors
in many developing countries, usually state-owned or monopoly
companies, often have no procedures to connect small-scale power units
and purchase their electricity. Furthermore, the low purchasing prices do
not cover the cost of small-scale electricity production. There are some
exceptions, where local factors can play a positive role to the viability
of the projects. For instance, in the case of WWR s composting projects
in Bangladesh, the revenues from compost are important. Compared
to in the Netherlands, compost has a higher demand and price in the
Bangladeshi market. Nevertheless, the feasibility of the business models
adopted in these pioneering CDM and JI projects is mainly ensured by the
Kyoto s emission credits.
Both VdW/Ecair and VAR/WWR are very keen to expand their CDM
and JI businesses. All the three companies interviewed are rather optimistic
about the post Kyoto perspective, after 2012.

This chapter took up the challenge to shed light on an under researched
issue, the participation of firms without GHG emission liabilities as
technology providers in CDM and JI projects, the fl exibility mechanisms
of the Kyoto Protocol. It argues that the motivation for those fi rms to
engaging in CDM and JI projects is based on market stimuli beyond those
related to the emission market itself. Their motivations are largely associated
with search for new markets where their technological resources and
expertise can be exploited.
The cases studied in this chapter suggest that the Kyoto s mechanisms
compensate, to some extent, for the weakness of underdeveloped waste
management sectors in developing and transition economies. By ensuring
revenues from emission credits, CDM and JI reduce market imperfections
associated with the waste industry and hence the viability of the investments.
As a result, the Kyoto Protocol stimulates investments and plays
a similar role as the one played by government policy in the developed
countries.
The multilaterally ensured market created by the Kyoto Protocol has
represented an important factor for the international expansion of small
and medium business firms from the Dutch waste management industry.
By engaging in CDM and JI project these firms are able to access new
sources of inputs, exploit their technological expertise, establish their
brand names in the host countries and identify local partners, paving their
way to future international ventures, related or not to the Kyoto Protocol.
In other words, CDM and JI projects may have a multiplying eff ect and
serve as a reasonable way for business companies from the waste management
industry to enter and to try new markets in developing and transition
economies. This can be considered as an indication that the motivations
of firms with no emission liabilities to provider technology and expertise
for CDM and JI projects are strongly associated with the possibility to
entering untapped potential markets, with the emissions revenues being a
feasibility factor.
As usual, some caveats should be mentioned. First, a broader study
encompassing waste management firms from other countries would help
to make a stronger case for the argument put forward in this chapter.
Second, the extension of this analysis to other green industries would be
insightful. Last but not least, the Kyoto Protocol is still a new institution,
inasmuch as not many CDM and JI projects have been concluded so far.
Studies covering a longer time spam, including for instance scenarios for
the post-Kyoto activities of green fi rms in the emerging economies would
be welcoming.

1.
AVR, the largest waste fi rm in the Netherlands was acquired by KKR/CVC in Janua
ry
2006 from the Municipality of Rotterdam; while van Gansewinkel, the third in the
Dutch market in 2006 and originally privately owned, was bought in January 2007
(Hall,
2007).
2.
Within this group is VAR, which is one of the firms analysed in this chapter.
3.
The selection was made in July 2007. Information on participants in JI projects
are not
available in the UNFCCC website.
4.
See Avoided emissions from organic waste through alternative waste treatment proc
esses
. AM0025 , available at: http://cdm.unfccc.int/methodologies/PAmethodologies/
approved.html. Giving its experience, WWR is providing consulting for the World
Bank
on methodological issues of CDM projects in waste management.
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Bartelings, H., P. van Beukering, O. Kuik, V. Linderhof and F. Oosterhuis (2005)
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Jaffe, A.B. and K. Palmers (1996), Environmental regulation and innovation: a
panel data study , NBER Working Paper no. 5545, Cambridge, MA.
Kemp, R. (2007), An example of a managed transition: the transformation
of the waste management subsystem in the Netherlands , in M. LehmannWaff enschmidt (ed.), Innovations Towards Sustainability: Conditions and
Consequences, Heidelberg and New York: Physica-Verlag, pp. 87.94.
Kolk, A. and J. Pinkse (2005), Business responses to climate change: identifying
emergent strategies , California Management Review, 47(3), 6.20
Newell, R.G. (1997), Environmental policy and technological change: the eff ects
of economic incentives and direct regulation on energy-saving innovation , PhD
thesis, Harvard University, Cambridge, MA.
Parto, S., D. Loorbach, A. Lansink and R. Kemp (2007), Transitions and institutio
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Rugman, A.M. and A. Verbeke (1998), Corporate strategies and environmental
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SenterNovem (2006), The Dutch waste profile: 1990.2005 . Waste Managment
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economist.com/science/tq/displaystory.cfm?story_id=9249262.
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VAR (2006),
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Web sites
ECAIR: www.ecair.nl
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VDW: www.vanderwiel.nl
VAR: www.var.nl
UNFCCC: http://unfccc.int/2860.php
Grontmij: www.grontmij.com
emissions
Intermezzo II. Emerging knowledge

economies
Intermezzo II. Emerging knowledge
economies
The last two decades have witnessed the breaking away of a number of
less developed countries from decades of poor economic performance to
emerge and exert signifi cant influence on the global economic landscape.
Their appearance on the world-stage has coincided with a shift towards
domestic economic liberalization and openness to trade and foreign
investment . all of which have brought them closer to the rest of the world,
albeit at different rates. The rapid rise of these economies has attracted a
lot of interest in academia, business, media and policy circles, mainly for
two reasons: First, the speed of the economic transformation in many
countries, such as China and India, has been unprecedented; and second,
underlying this transformation has been an equally impressive transformation
of domestic enterprises. Long thrived in a domestic market cut
off from foreign competition, many of these firms have shown themselves
to withstand foreign competition domestically and, perhaps more significantly,
they have taken competition to the doorsteps of foreign fi rms
through internationalizing their operations.
The growth momentum has sustained and in many cases accelerated,
even after the world has moved into a stricter intellectual property
regime with the establishment of the world trade organization (WTO) in
1995. In the past such a strict regime would have disfavoured emerging
economies, lagging behind in knowledge development, but in a number
of different ways this has not happened. The reality of growth is now
a much more complex and often context specific one that warrants
in-depth analyses at various levels . country, industry and fi rm level;
development can be different from the one-dimensional, uni-directional
integration into the world economy that mainstream economic explanations
for the fast-paced growth of countries have provided. This is
important from the point of view of garnering insights for policy makers
in countries that have so far been excluded from the current wave of
industrialization. In this context the four preceding chapters assume
great significance. Chapters 5 and 6 focus on China, the largest of the
144
Intermezzo II 145
Intermezzo II 145
national
treaties, such as the Kyoto protocol, in filling the institutional
voids that inhibit the development of environment-centred industries in
less developed countries.
The opening up of the Chinese economy in 1979 presented local fi rms
with an opportunity to technologically catch up with foreign fi rms, as
well as to explore foreign markets. In this regard establishing alliances
with foreign firms has been an important first step. From the point of
view of foreign firms, alliances with Chinese firms helped them extend
their operations to the Chinese market. Until China s accession to WTO
in 2001, foreign fi rms wishing to operate in China were required to enter
into joint venture partnerships with local firms. While Sino-foreign alliances
might therefore appear as marriages of necessity, than of choice,
evidence points to an expansion of such alliances within China during the
2000s (e.g. Duysters et al., 2008). This suggests that both types of fi rms,
but especially Chinese firms whose international aspirations hinge signifi cantl
y
on such partnerships, bring vital complimentary assets to the alliance
relationship. Despite their apparent signifi cance, alliances are often
short-lived, especially those in high-technology industries. Explanations
for this based on environmental (cultural, economic, political and legal)
diversity have been found to be wanting. A major cause of alliancefailures seems to be the differences in the strategic objectives of alliance
partners (Shenkar, 1990). Studies undertaken by Chinese scholars have
uncovered these important differences . due to Chinese companies
apparently being more candid about their objectives for alliances when
speaking with Chinese researchers than with non-Chinese researchers. In
Chapter 5, Saebi and Dong conduct a review of the Chinese literature
in this area and back that evidence up with their own interviews with
Chinese firms. Their study brings out the strategic motivations driving
Chinese firms to undertake alliances with foreign firms. They observe
signifi cant differences in the objectives of Chinese and foreign alliancepartners. Understanding such differences is of great value to all partners
because that would help them take steps to accommodate at least some
of the major strategic motivations of the other partners and thus help
keep the partnership going.
Another less understood aspect in relation to China pertains to Hong
Kong-(mainland) China economic relationship. In regard to China s
rapid economic transformation Hong Kong s contribution is often highlighted
. as a source of investment, supplier of expert manpower and so
on. Chapter 6 by Sharif and Huang sheds light on the contribution of
China s Guangdong Province in the economic transformation of Hong

nated
by Hong Kongese fi rms) in Guangdong has increased substantially
during this period (accounting in 2006 for over 60 per cent of total output
in most 2-digit industries). Nevertheless, during 1997.2006 Chinese fi rms
in Guangdong have caught up with, and in many industries surpassed, the
productivity performance of foreign firms. An explanation for this apparent
paradox is that Hong Kong firms export the bulk of their fi nal output
and do not compete directly with Chinese fi rms in Guangdong. From the
outset of China s economic reforms since 1979 Hong Kong began transplanting
its low-cost manufacturing to China, particularly Guangdong,
and by the mid-1990s achieved its transition to a service-sector-oriented
economy (Imai, 2001). This transition, and the role played by Guangdong
in it, seems to provide some answers to the question as to why Hong
Kong did not move up the value chain in manufacturing, like other East
Asian tiger economies, such as Korea or Taiwan. At the same time,
it also raises question about the sustainability of the tradable-services
sector of Hong Kong connected to Guangdong. Finally, the spectacular
growth performance of Chinese firms, who in recent years appear to have
outsmarted their Hong Kong counterparts in Guangdong, calls for more
research.
Perhaps the subject that has raised the greatest interest in relation to
emerging economies in recent years is the rise of multinationals from these
economies. However, this remains a poorly understood area. The frameworks
developed to explain the growth of Western multinationals are not
adequate to explain the growth of emerging multinationals today. Such
an approach ends up comparing the strategies of late-stage multinationals
from developed countries with early-stage multinationals from less developed
countries (Ramamurti, forthcoming). It is therefore important to
gain insights from careful case studies that compare the strategies for, as
well as the circumstance of, growth of multinationals from less developed
countries themselves. Chapter 6 by Carvalho and Goldstein is an important
contribution in this respect. It examines multinationals from Brazil
and China operating in the oil industry. These firms are not only amongst
the top corporations in their home countries, they are also amongst the
biggest corporations in their industry. They share common characteristics,
such as being set up as state-owned enterprises to alleviate oil shortages
in their home countries. There are major differences between them as
well. While the Brazilian firm Petrobras was set up back in 1953, the fi rst
Intermezzo II 147
Intermezzo II 147
lenging
to bridge their technological gap with industry leaders. Carvalho
and Goldstein unpack the growth trajectories of Petrobras and Chinese
oil firms taking into account, among other things, local specifi cities (e.g.
resource endowments) that appear to have a bearing on the speed of and
the motives (e.g. resource seeking vs. market seeking vs. strategic asset
seeking) for internationalization.
Chapter 8 by Doranova, Eenhoorn and Costa points out what international
treaties can do to overcome, what they call, market imperfections
that stand in the way of the emergence and development of new
industries (e.g. waste management) in less developed countries. These
industries require a support structure in the form of regulations governing,
for example in the case of solid-waste management, proper collection
and sorting schemes of waste inputs, and land fill fees (to induce
recycling). Since the early 1990s developed nations have been developing
such support structures which have resulted in the emergence of fi rms
whose core business is environment-related. Thus the environmental
challenges paused by industrialization have been turned into economic
opportunities. What are the prospects of similar developments in less
developed countries? Not only do less developed countries have weak
support structures, they do not possess the necessary technologies (which
require a support structure to emerge in the first place and are being
developed in advanced economies). Doranova, Eenhoorn and Costa
show how Kyoto protocol has generated market incentives for Dutch
MNCs specializing in waste management to enter less developed countries.
Certified Emission Reduction, popularly known as carbon credits,
is central to the Kyoto protocol. It has motivated these MNCs to deploy
their technologies in less developed countries even in situations where
their final output (e.g. captured methane) does not find a ready market.
However, the study also suggests that entering less developed countries
has its challenges, which require adaptation of business strategies in tune
with domestic circumstances. Since environment-based industries require
support from local firms (e.g. in the collection of waste) multinationals
activities in these industries have the potential of triggering local business
interest (as well as transfer of expertise). This is good for not only the
environment, but also the subsequent emergence of indigenous capabilities
and industries.

Duysters, G., M. Cloodt, W. Schoenmakers and J. Jacob (2008), Internationalisatio
n
efforts of Chinese and Indian companies: an empirical perspective , mimeo,
UNU-Merit, Maastricht, Netherlands.
Imai, H. (2001), Structural transformation and economic growth in Hong Kong:
another look at Young s Hong Kong thesis , Journal of Comparative Economics,
29, 366.82.
Ramamurti, R. (forthcoming), What have we learned about emerging market
MNEs? , in R. Ramamurti and J.V. Singh (eds) Emerging Multinationals from
Emerging Markets, Cambridge University Press.
Shenkar, O. (1990), International joint ventures problems in China: risks and
remedies , Long Range Planning, 23(3), 82.90
9.
Changing confi guration of
alternative energy systems
Radhika Perrot
INTRODUCTION
The objective of this chapter is to look at how, over the years since the fi rst
oil
price shock of the 1970s, firms, the government and technologies interacted
with each other in both developed countries as well as in emerging economies.
Each actor reacted to changes in the other and, as a result of these interaction
s,
changes were observed in the market of alternative energy technologies.
With recent surging oil prices and mounting pressures to reduce toxic
gaseous emissions, both governments and fi rms interact with each other to
move towards alternative energy solutions. Firms respond to policy measures
implemented by the government, while the government on the other
hand ensures that their policies stimulate innovation. We will, in part, look
at the role played by firms and governments from emerging economies and
how through their interaction they are indeed driving the direction of growth
of these alternative energy technologies. Alternative energy technologies so
discussed here include energy technologies that optimize energy consumption,
cleaner energy technologies that reduce the amount of toxic gaseous
emissions and renewable energy that sources energy from renewable sources
like solar, hydro and wind. It will include renewable energy (energy from all
natural sources like wind, solar, water and so forth) and other alternative or
cleaner forms of energy like hydrogen and bio-fuels.
The formidable task is now on the government to transform the existing
fossil fuel energy system into a more sustainable form that consumes
less energy or that which sources energy from clean and renewable energy
technologies. Now whether it is possible to transform the existing system
to one of cleaner and greener technological systems will depend on the
economic and technical opportunities of new alternative technologies and
how firms react to them. While policies promoting the use of these new
technologies tend to make new technologies attractive to private investors,
regulatory changes tend to lead the direction of change by changing
the economic conditions of technologies. Firms respond to these market
149

ing
these new technologies and eventually creating new market conditions
for alternative energy technologies.
Firms will play an important role in bringing about desired changes that
will likely transform the energy system. The desired changes are eff orts
that seek to develop and use energy systems that are improved, made efficient
and cost effective, in addition to being sustainable. It is through technologica
l
innovations that designs are improved, costs and technologies
are made more effi cient and firms bring about necessary changes that will
help in the evolution of the current system into a newer one. Firms bring
about technological innovations through strategies, which give fi rm access
to technologies, knowledge, faster access to markets and helps them share
the high costs and uncertainties of new technologies, typical of alternative
energy technologies.
The chapter is organized as follows. The first section looks at the historical
and market context of firms and their external environment, observes
the changing configuration of the market, the development of technologies
and the type, innovation strategies and cross-sector participation of fi rms.
It has been observed that policies and firms in emerging economies only
appeared in the third and the fi nal period (mid-1990s.2000s). The second
section offers explanations for the inter-connection between fi rm strategies,
government regulations and technological innovations in general and
what the driving changes are in the configuration, even in emerging economies.
The final section is the conclusion drawn from the evidence of how
firms reacted to policies and technologies, even among fi rms in emerging
economies, although an early part of the technologically-driven changes
first came from firms and governments in countries like the US, Japan and
Denmark among others.
HISTORICAL ORIGINS
The history of the alternative energy market can be analysed as an evolutionary
process of adaptation involving selective pressures, uncertainties,
institutional changes and external shocks. This historical analysis will elicit
how the strategies of firms are intertwined with government policies and
the nature of technologies. The beginning of the analysis is traced starting
from the 1970s up to the 2000s and is divided into three major epochs. The
first period, roughly between the 1970s and mid-1980s, was one in which
the first major oil crisis struck and, coupled with air pollution concerns,
the government directed considerable effort towards the development of
alternative energy technologies like solar, wind, hydro-power, geothermal.
Changing alternative energy systems

tion
patterns seeking alternatives in non-fossil energy like renewable and
energy efficient technologies like CNG and co-generation processes.
Beginnings: 1970s to mid-1980s
In the first period between the 1970s and early 1980s, in response to the
first oil price shock, countries like Japan sought substitutes in alternative
energy technologies and in optimizing energy consumption through energy
efficient technologies. Alternative energy technologies that were primarily
explored during the 1970s were geo-thermal, biomass, hydropower (IEA,
2005) and solar and wind in addition to alternatives to produce oil and
gas through coal gasification and liquefaction techniques. Coupled with
energy security concerns and economic recessions the publication Limits to
Growth, by the Club of Rome in 1972, drew considerable public attention
to the predicament of scarce resource depletion like fossil fuels. During
the same time, air pollution concerns were taken seriously, especially in
the United States after the city of Los Angeles was found to be the most
pollutive city. Several studies then documented the harmful effects of toxic
air pollutants released mainly by industries and vehicles on human health
alongside reports of the occurrence of acid rains in several regions.
The above-mentioned factor led to changes in energy polices and/or to
the introduction of entirely new policies that sought to develop alternative
energy technologies. Japan, a country solely dependent on oil imports,
responded to the 1970 crisis by initiating a Sunshine Project in the year
1974. The purpose of the project was to develop new and alternative
energy technologies like solar, wind and coal gasification and liquefaction.
An Alternative Energy Act was enacted in 1980 that raised electricity
and coal taxes whose revenues were used to develop renewable and
alternative energy technologies. In response to air pollution concerns, the
Environmental Agency of Japan pushed for a legislation in 1972, similar
to the Muskie Act in the US, that forced automobile companies like
Toyota, Honda and Nissan to comply with emission reduction regulations
through technological innovations (Yarime et al., 2008).

During the same time, the US government responded to the oil crisis
of the 1970s by introducing federal and state tax credits for renewable
energy and energy efficient users and, in 1978, it passed the Public Utilities
Regulatory Policy Act (PURPA) to encourage efficient use of electric
utility resources. PURPA created a market for non-utilities, as it required
utilities to buy power from independent companies that could produce
power for less than what it would have cost for the utility to generate the
power, called the avoided cost. It established a Solar Energy Laboratory
in 1978 to further research in solar energy technologies. Today it is the
nation s largest research centre in renewable energy technologies called the
NREL. The US Federal Wind Energy Program was initiated to encourage
research in wind technologies entirely through federal tax credit. In
response to air pollution concerns, the Environment Protection of America
(EPA) enforced the Clean Air Act in 1970, an amendment to the Muskie
Act, a very stringent regulation, required the auto industry to reduce the
amount of emissions of CO2, hydrocarbons and N2O to one-tenth.
US automakers were successful in opposing the Clean Air Act in 1970,
which according to them was unrealistic and technically impossible at that
time to achieve and so, finally, in 1974 the mandatory emission requirements
were reduced. The automakers eased regulations for their own
benefit by avoiding investments in new and sustainable technologies and
resorted to catalytic converters instead, that did not require any change
to the IC engine. In the US solar industry, few small start-ups, spin-off s
from solar US government research labs and space application programs,
entered the PV production industry for terrestrial use. Solar Power
Corporation, Solarex Corporation, Spire Corporation, Solec International
and Solar Technology International were the few start-ups established in
the early 1970s. In addition to small firms, there was interest among large
oil and gas fi rms in developing solar cells. In 1979, ARCO Solar built the
biggest solar cells and photovoltaic systems production plant through its
own internal research and development efforts while British Petroleum
(BP) started it own solar cell production unit in 1973.
In response to the oil crisis, federal research and development activities
also resulted in the design, fabrication and testing of 13 diff erent
small wind turbine designs (ranging from 1 KW to 40 KW), fi ve large
(100 KW.3.2 MW) horizontal-axis turbine (HAWT) designs and several

Danish firms had an advantage in the US market, with its long history
in wind turbine design and development of the improved three-blades
Gedser mills. Their wind turbines were officially endorsed most reliable as
compared to other windmill manufacturers of that time. In 1979, the government
of Denmark offered an investment subsidy for up to 30 per cent
of the cost of wind turbines, biogas digesters and solar panels that spurted
interested among investors especially in the wind industry. Interests were
shown by three groups mainly: private and individual owners of turbines
who set-up a turbine in their back-yard or invested in shares in cooperatives
and power companies were forced to comply with new regulations
when the Parliament legislated a purchasing price of 85 per cent of the
retail price of electricity. Most started the development of wind turbines
but most were not commercially successful except for that of SEAS, which
helped finance the Gedser three-blade design (c) diversification of agricultural
equipment firms like Vestas, Nordex, Nordtank, Bonus and Micon
into wind turbine manufacturing. The companies are in the top-15 list of
manufacturers today. In addition, by 1986, the Danish wind turbine manufacturers
had 50 per cent of the US market share. Therefore, this period
saw four distinct firm characteristics respond to the external environment
of oil price shocks and policy support at that time:
. Independent solar PV start-ups
. Large electronics and semiconductor fi rms
. Oil and gas fi rms
. Agricultural equipment fi rms
Downside: mid-1980s . mid-1990s
Soon after, in the mid-1980s, when oil prices stabilized, interest in alternativ
es
fell. In the late 1980s, Japanese firms Hitachi, Toshiba and NEC
withdrew from PV business. For these firms growing markets of semiconductors
and computers were much more important than the unpromising
future market of PV according to Kimura and Suzuki (2006). During this

Such were the makeshift solutions or end-of-pipe solutions towards
which development led during this period. Emission norms, product
standards and bans and in some cases charges and subsidies were insufficient
measures that led to the development and use of cleaning technology
such as end-of-pipe instead of clean technology or cleaner production
processes (Kemp and Soete, 1992). The concept of the selection environment
explains why developments along the internal combustion (IC)
engine trajectory were not easily abandoned by the US automobile manufacturers.
According to Kemp (1994), moving to a new trajectory, will
require new skills, education and training and, hence, drop-in innovations
are easily adopted. It also explains why there are developments directed
towards finding CFC substitutes rather finding an alternative to the whole
refrigeration technology of today.
An incentives program in the form of capital grants for installation of
wind turbines was established in the late 1970s, but was abolished in 1989.
Moreover, when the California wind program ended in 1985.1986, a large
number of the 20-odd manufacturers went bankrupt, having few alternative
markets for their products. Incentives that were provided to home producers
of solar and wind energy under the US Energy Tax Act in response
to the oil crisis of the 1970s were phased out in the mid-1980s as a result
of new policies to leave energy conservation and renewable energy decisions
up to market conditions (gosolar.com). It has been documented that
between 1974.1981 the wind energy program in the US had been most efficient
and successful as it built 13 small systems and four large wind turbine
designs were developed and tested. Nevertheless, in the years between
1981.1988 despite millions of federal tax credits . only four new wind
turbine designs were developed in the United States (Murphy, 2004).
Upside: mid-1990s.2000s
A series of intergovernmental conferences focusing on climate change
began in the late 1980s, and went on into the early 1990s, in response to
a growing scientific understanding of climate change. The UN called for
the start of treaty negotiations wherein a Convention was started to build

The concerns and issues related to the environmental impact of growth and
technological advance have suddenly re-emerged in a context very diff erent
from that of the mid-1970s [. . .] the evidence on the environmental damage
in terms of air, water and soil pollution is by far more overwhelming [. . .] an
d
public perception of the environmental problems is far more acute. (Kemp and
Soete, 1992:454)
Such conferences urged several Western European countries to adopt
national targets of greenhouse gases emission reduction, for example,
the former Western Germany s 1987 target to reduce 30 per cent of its
emission by 2005 and France and Australia to reduce 20 per cent by 2005
(Kimura and Suzuki, 2006).
In the 1990s, Japanese regulatory barriers against the deployment of
distributed power generators were removed and simple procedures for
grid-connection was called for so as to expand renewable energy deployment.
The original target to supply 1.6 per cent of the total energy demand
from alternative energy in 1990 was raised up to 5 per cent in 1990 and 7
per cent in 1995. There was a strong commitment by the Japanese government
to introduce PV stimulated private investments (Watanabe, 1999).
Japanese firms like Kyocera, Sanyo and Sharp that continued PV developed
despite the downside in the late 1980s had by the late 1990s become
top-ranking PV producers.
In 1991, the US government broadened research areas to include
renewable and energy efficient other than solar. It renamed the Solar
Energy Research Institute to National Renewable Energy Laboratory to
advance several renewable energy technologies. In the 1990s, the Bush
Administration encouraged and resumed the funding of the under-funded
wind energy sector. The management of the federal wind program was
shifted to NREL. The California Air Resources Board (CARB) enacted
the Low Emissions Vehicle Regulation in 1990, which required seven large
automobile manufacturers, including Japanese cars, to include a small
percentage of their sales as zero emissions vehicles (ZEV). The targets for
the introduction of ZEVs were set at 2 per cent after 1998, 5 per cent after
2001 and 10 per cent after 2003.
There were several technological developments by Japanese carmakers
in response to the regulations implemented by the Environment Agency of
Japan and those set by CARB for ZEVs. According to Yarime et al. (2008),
the number of patents filed by Toyota, Nissan, Honda, Mazda, Mitsubishi

cal
glitches in battery performance and cruising range and were therefore
abandoned. Besides, Japanese carmakers began to file for fuel cell vehicle
patents in the middle of 1990s, the number increased sharply in the 2000s,
reflecting the changes in regulations influencing the research focus in
the auto industry. The Californian Fuel Cell Partnership was started in
1998 that began development of fuel cell vehicles between CARB, automobile
manufacturers (DaimlerChrystler, Ford, GM, Honda, Nissan,
Toyota, Volkswagen and Hyundai), oil companies (Shell Hydrogen,
BP, ChevronTexaco, Exxon Mobil) and fuel cell producers (Ballard and
UTC). Partnerships of this form has the advantage of developing fuel
cells through shared costs and uncertainties and a faster move towards
standards creation for early stage-technologies.
It was in this period that governments from emerging economics like
China and India started responding to their huge energy security needs.
The energy demand needs of these countries had been increasing partly to
their fast growing economies and partly to their fast growing population.
In fact, developing countries already contribute 74 per cent of the increase
in global primary energy use. And China and India alone account for
45 per cent of the increase. The energy needs of both these countries are
expected to quadruple by 2030 and which could most likely create a supply
crunch as early as 2015. So the challenge is on these emerging economies
to reduce their energy needs, without harming their economic growth and
development.
So a solution out would be for governments to devise policy mechanisms
that promote alternative energy technologies in these economies.
Renewable policy interventions in countries like India and China has
given economic and technical opportunities to local firms to rise and
develop these technologies. So starting from the mid-1990s, many new
wind development firms sprung up in India and China in response to their
policy environment. The Eighth Five-Year Plan of India, in the 1990s,
gave tax exemptions to imports of wind turbines and a tax holiday for
five years for those who developed and manufactured renewable energy
technologies. In a short time, the conducive policy environment in India
drove Suzlon to emerge as one of the fifth largest wind manufacturers in
the world and strategically compete against technologically advanced and
competent firms from Germany and Spain.
Initially a compact-disc manufacturer, Moser Baer, has emerged as one
of the world s largest solar PV manufacturers. Renewable energy policies
and incentives, coupled with changes in the semiconductor polices of
India, Moser Baer had been able exploiting its existing expertise in laser

Like India, China had put its policies for renewable energy in place since
the mid-1990s. In 1994, it issued a regulation that required power companies
to give priority to wind-generated electricity. In 1999, the government
set a new rule for wind power pricing at a level that became lucrative for
investors and which at the same time did not dis-advantage consumers.
Because of these policies, the wind capacity in China grew from 4MW to
567 MW in 2003. Today there are more than 40 wind farms operating in
mainland China.
The Ninth Five-Year Plan (1996.2000) of China required that any
wind-turbine equipment purchased for wind must contain 40 per cent
of locally made components. And according to NREL, to capitalize on
this, many Chinese companies formed joint-ventures with international
companies and thus acquired the necessary technological competencies.
Also during the same five-year period, the government funded research
to develop technologies for 600KW turbines, and which actually helped
built a prototype. On its basis, many professional component manufacturers
then began producing key components like blades, gearboxes and
generators around the 600KW turbines.
In the biofuels industry, most advancements and interests fi rst came
from Brazil. Although small efforts were made in biofuels in the 1930s,
the actual implementation took off in the 1970s, soon after the fi rst major
oil embargo. Low price of sugar in the international market coupled with
strong political pressure from sugar cane producers, Brazil implementedthe Brazi
lian Program of Alcohol (PROLCOOL) (Teixera et al., 2008).
In the mid-1980s, with oil prices stabilizing, interest in biofuels cooled off
and many technological advances made during this period were discrete
and not harmonized. However, the industry received much buoyancy in
the 1990s, when international oil prices rose and climate change and pollution
policies became mandatory particularly in Europe. A bio-diesel
program was mandated.
The mid-1990.2000s are witnessing several and more diversifi ed characteristic
of firms enter the alternative energy market, as opposed to that
witnessed in the 1970s:
.
.
.
.
.
Large electronics and semiconductor

Oil and gas fi rms
Automobile manufacturers
Agricultural export fi rms
Biotechnology fi rms

New start-ups in solar, wind, bio fuels
. Flat screen manufacturers
. Laser CD manufacturers
. Glass manufacturers
EXPLANATION FOR THE CHANGING
CONFIGURATION SINCE THE 1970s
The factors that are causing the energy market to change over time are
understood when one observes the interrelation and interplay between
firms, technology and the government. Therefore, in essence, the explanation
for the changing configuration is given to a) the nature of the technologies
b) the nature of competition between firms c) and the nature of
government support and incentives.
The nature of the technologies
The nature of technologies allows for the inclusion and combination
of different science-based technologies like nanotechnology, laser and
optical fiber technology and genetics. The combinatorial nature of the
technology is characteristic of new wave technologies, which has three
defining features: their science base, patent activity and system embeddedness
(Mytelka, 2004). We observed the combinatorial nature of
technologies in the convergence between IT and telecommunications and
between pharmaceuticals and biotechnology in the late 1980s and early
1990s. The extent to which these technologies can be cross-applied or
applied in other areas depends on the technical and economic opportunities
or on the technological paradigm (Dosi, 1982) or scientifi c paradigm
(Khun, 1962) so defined by the parameters of science. In fact, it is the
nature of technologies themselves that will determine the range within
which products and processes can adjust to the changing economic conditions
(Kemp and Soete, 1992) and adjust to the changing nature of
technologies themselves. Each technology emerged within the paradigm
of the earlier mechanically base and now are beginning to incorporate
nano-level technologies, and new wave technologies are developed
through a combination of several distinct trajectories with signifi cantly
diff erent scientific roots (Mytelka, 2004). The combinatorial nature of
technologies requires both a wide range of different knowledge inputs
and a strong science and engineering base. Hence, the establishment of
a dominant design in such new wave technologies depends upon innovations
from across sectors. The combinatorial nature of technologies is

tion,
bio-fuels and hydrogen fuels. The solar cell technology is developing
along its own technological trajectory but whose advancement
and movement is strongly integrated with the development path of the
semiconductors and optical laser trajectories.
The combinatorial nature of technologies and their integration into the
products and processes of other technological systems opens the way for
larger firms to play a more prominent role in shaping the technological
trajectory and the speed with which new technologies are incorporated
into the production processes than in the past (Mytelka, 2004). Large
firms like Shell, Royal Dutch and BP are being transformed into energy
companies and their presence in the renewable energy market will mark
the evolution of alternative energy technological systems because of their
enormous size, huge investment abilities and vested interests. The path of
the microprocessors, laser, audio/visual and more recently the application
of biotechnology in pharmaceutical has been shaped by only a handful
of large firms like Sharp, Moser Baer and Du Pont. Thus, in brief we see
that the nature of competition between them is leading to an increase in
the cross-sectoral participation of firms and in the engagement of large
established firms from other sectors.
The nature of competition and market entry
Firms in this industry have adopted various innovative strategies to
extract value from new technologies and maintain their competitive
advantage. The sudden need to change in response to rising oil prices and
climate change concerns, have forced firms to reconsider the organization
and management of their internal research and development and their
strategies of capturing knowledge, technologies and products from external
innovators. The way in which this industry is evolving especially in
terms of the nature of technologies involved is also changing the way fi rms
are strategizing in response. Rapid development of alternative energy
technologies and the combinational nature of the technologies has created
and shaped inter-fi rm relationships between pure-play alternative energy,
established oil and gas firms, large agricultural and electrical firm and new
and small entrants. So the changing nature of the technologies is seeing a
corresponding change in the strategies of firms . it is giving rise to a diff er
ent
type of strategy which is not only that of internal research and development
but that of external activities with other fi rms that maybe upstream
input firms, downstream users and infrastructure and other kinds of fi rms
that constitute a new energy system.

ment
is leading firms to strategic partnering of two kinds: a) competition
through the creation of consortiums amongst a group of rival fi rms
b) two-way partnerships with a focus on knowledge production and
sharing rather than a one-way transfer of technology. Both these modes
of knowledge-based competition are resorted to as a means to reduce
production costs and technological risks. These modes of competition are
affecting market competition as they act as entry barriers to new entrants
and have given firms, particularly large firms, access to new technologies
and markets. In fact modes of competition of this nature determine
the speed with which a dominant design emerges, costs are reduced and
systemic constraints are removed (Delapierre and Mytelka, 1998).
The research and development intensive nature of the new technologies
is forcing firms to share the initial high costs of research and product
development and thus reduce uncertainty. The creation of consortiums
or group alliances is a form of new competition that is speeding up the
process of innovation and shaping the development path of a trajectory
rather than resort to internal research and development is associated with
high costs, market risks and uncertainties. An example of such a consortium
is the California Fuel Cell Partnership, which is a technical collaboration
of 31 members like automobile manufacturers, energy providers,
government agencies and fuel cell system firms that jointly develop and
commercialize hydrogen fuel cell vehicles. Members are Ballard Power
Systems, Daimler Chrysler, Ford Motor Company, BP, Shell Hydrogen
and Chevron Texaco that formed the partnership in 1999.
For a long time, internal research and development was considered
to be the only source of knowledge for innovation (Mowery, 1983 and
Griliches, 1979 in Arora and Gamberdella, 1990). Up to the 1970s, most
technological innovations introduced by large firms were from in-house
research and development investments but in the past two decades, fi rms
were unable to internalize all their resources to produce and commercialize
technologies (Arora and Gamberdella, 1990). Now fi rms develop
technological know-how through their competitors, suppliers and other
organizations through contractual arrangements like licences, research
and development agreements and joint ventures (Pisano, 1990). The
ability to exploit external knowledge becomes critical to fi rm innovation
(Chesborough, 2003; Cohen and Levinthal, 1990; Teece et al., 1997; von
Hippel, 1982). Firms thus became aware of the necessity to cooperate with
other firms and organizations in order to obtain expertise which otherwise

Firms that are trying to keep up with rapid and costly technological
progress engage in partnerships (Dussauge, 1992). Especially in high tech
industries, high costs of research and development, steep learning curves
and shortening of product and technology life cycles urge firms to share
development costs and thus reduce lead times for their innovative products
(Duysters, 2001). Empirically, it has been shown that high tech fi rms
that cooperate with others tend to be more innovative than firms that do
not (Kotabe and Swan, 1995). Also considering the uncertainties about
the profitability and stability of these new emerging technologies, it makes
sense for private investors to share the initial costs of risk venturing like
costly and time-consuming basic research.
Thus in brief we see that the nature of competition and nature of entry
coupled with the nature of technologies is leading to a) knowledge-based
modes of competition and b) rise of alliances and joint ventures.
Nature of government support and incentives
Wider and intensive research support from governments is making technologies
attractive for private firms because the market by itself will not
generate a move from the dominant and inferior technology in which it is
locked-in as exemplified in the example of Cowan and Gunby (1996) of the
difficulty of farmers to switch to a better IPM system from a dominant and
inferior chemical spraying method of pest control. The market is locked
into a comfort zone of localized learning, uncertainty and unpredictable
pay-offs associated with new technologies. In addition, the existence of
interrelated technological trajectories or systems (Rosenberg, 1990) or the
embeddedness of the combinatorial nature of the technologies (Mytelka,
2004) is making the switch to a new technology even more diffi cult. New
technologies face major barriers because the positive externalities involved
develops over time and are prevented from doing so by the existing dominant
technological trajectory (Kemp and Soete, 1992). Government subsidies
and incentives can help direct resources away from these dominant
and less superior technologies.
There has been an increase in government spending in alternative energy
technologies in terms of research funding and infrastructure building and
in the availability of subsidies like tax incentives and feed-in tariff s and
of stringent regulations that support utilities that make use of renewable
energy through on-grid connections. However, with such uncertainties
about the stability and profitability of these new markets private investors

tives
and research subsidies as well as being involved in accelerating the
development of new renewable technologies until the market becomes
stable for firms to make profits. So to share the initial risks associated
with research and development investments and to gain a fi rst mover
advantage, many firms are found to collaborate with other fi rms, research
organizations and governments to develop these technologies.
Because of the nature of technologies and their system embeddedness,
the role of government funding and policy support are important constituents
in transforming the current fossil fuel based energy system to one
towards cleaner and greener forms of energy source.
CONCLUSIONS
We saw that over the years the configuration of the alternative energy
market has been changing, to include more and more firms, the types
of firms have changed and the number of technologies considered has
increased manifold. The expertise and experience of the firms entering this
market are playing a major role in advancing these new energy technologies.
We have also seen that many firms in emerging countries are playing a
major role in both developing and diffusing these technologies. With such
a diverse knowledge base it becomes increasingly important, particularly
by policy makers, to recognize ways in which knowledge is appropriated in
this market, particularly in emerging economies where there is a huge need
for energy. In the period between 1970s and 1980s, we saw fi rms respond
to policy changes and make technological changes, namely by resorting to
end-of-pipe solutions and catalytic converters, rather than actually innovate
in new and clean energy technologies. But soon with changes in the
nature of technologies, like the advent of biotechnology, nanotechnologies
and the systemic nature of information technology, the way in which fi rms
responded changed. In fact, the complexity of the nature of technologies
has opened up possibilities for firms, particularly large ones with fi nancial,
organizational and knowledge edge over smaller firms from across sectors
to become involved in the alternative energy market. Their sheer ability
and strategic efforts have allowed them to easily integrate new external
capabilities and compete in the alternative energy market despite several
uncertainties and risks. As for smaller firms, it was possible to integrate
their research and technological capability with larger firms, so as to share
the initial high development costs and market uncertainties. The way in
which firms are competing to innovate and responding to policies, and the

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10. 10. :
rethinking multinational
corporations strategies
Shuan SadreGhazi and Geert Duysters
INTRODUCTION
There is an ongoing debate in the academic literature about the role and
impact of multinational corporations in developing countries. Some of the
views are very sceptical and consider multinationals activities in developing
countries as a new way of exploitation (Porritt, 2005:253), while others
view multinational corporations as giant engines of economic growth
that can become the new wellsprings of prosperity to developing economies
(Hart, 2005; Prahalad, 2005). Alongside these discussions, we see an
ongoing trend in which many multinationals try to build a positive image
by engaging in philanthropic and corporate social responsibility projects.
Recently, a new debate is emerging about market-based approaches to
addressing low-income markets in developing countries and the main motivations
that drive these approaches. These approaches are diverse and can
range from poverty alleviation to pure profit driven attempts. Highlighting
the characteristics of low-income markets, this chapter analyses challenges
and opportunities that multinational corporations face in entering them.
Higher-income markets have been the most attractive marketplace
for large corporations, despite their smaller population in a global comparison
to low-income markets. Consequently, a large share of the world
population with low-income levels has been ignored as an attractive
market by both multinationals and large domestic companies. It is not the
size of the market that made them relatively unattractive. The general lack
of purchasing power from these markets and infrastructure issues were
commonly considered as major problems that made it very unattractive
for companies to invest heavily in them. However, the fact is that more
than two thirds of the world s population resides in the lower-income tier
of the world economic pyramid (also known as the Base/Bottom of the
Pyramid . BOP). Despite the fact that the size of these markets is much
166
Serving low-income markets

It is widely argued that a large share of the world population, those
who live in the low-income communities of developing countries, are not
adequately included in the global economy and have limited access to
products, markets and opportunities to develop themselves (Hammond
et al., 2007; Prahalad, 2005). Similarly, their lack of resources discourages
companies from providing the basic goods and services that would
empower them and would improve their lives. Those who encourage
market-based approaches argue that finding appropriate ways to satisfy
the unmet needs of low-income communities can bring enhanced opportunities
for these communities, in terms of access to better products as well
as in terms of employment. On the other hand, businesses firms can benefi t
from the opportunities that have the potential to foster their long-term
growth (Grayson and Hodges, 2004; Hammond et al. 2007; Hart, 2005;
Prahalad, 2005; Rangan et al., 2007; UNDP, 2007).
Although the importance of international aid for serving unmet needs
is not ruled out, aid and philanthropy approaches face some limitations
in terms of scale and sustainability. Furthermore, donors and non-profi t
organizations are also seeking more effective approaches to their aid
efforts and some look for alternative ways to help out underserved communities,
for instance by joining forces with the private sector (Brugmann
and Prahalad, 2007).
Because of the limited economic opportunities, so far low-income communities
have often been unable to contribute to or benefi t from growing
market economies. Furthermore, even when such opportunities do occur,
the poor are generally unable to take advantage of these opportunities
because they often lack good health, education and credit. If market-based
approaches are going to contribute to their development and make a difference,
there is a need for a deeper understanding about the characteristics
of these communities and their dynamics.
WHAT IS IN THE BASE OF THE PYRAMID?
Recently the idea of market approach to address low-income communities,
known as the bottom or base of the pyramid, has gathered increased
momentum, both in theory and practice. Early works have focused on
articulating the logic for pursuing business strategies aimed at low-income
communities (Hammond and Prahalad, 2004; Hart and Christensen,
2002; Hart and Milstein, 1999).

This is a time for multinational corporations to look at globalization strategie
s
through a new lens of inclusive capitalism. For companies with the resources
and persistence to compete at the bottom of the world economic pyramid, the
prospective rewards include growth, profits, and incalculable contributions
to humankind. Countries that still do not have the modern infrastructure or
products to meet basic human needs are an ideal testing ground for developing
environmentally sustainable technologies and products for the entire world
(Prahalad and Hart, 2002:1).
In the base of the pyramid approach, the global population is divided into
segments based on purchasing power parity. There is still no consensus
about the proper way to define base of the pyramid population. Diff erent
authors on low-income markets have articulated different PPP lines .
ranging from USD 1500.USD 3000 per annum to USD 1 . USD 2 per day,
depending on the way they define low-income and bottom of the income
pyramid (Hammond et al. 2007; Prahalad, 2005; Prahalad and Hart,
2002). This inconsistency in measuring the base of the income pyramid
has received some criticism (Karnani, 2007). More recently, the World
Resource Institute (Hammond et al., 2007) conducted a study to analyse
the size and aggregate purchasing of the base of the pyramid (Table 10.1).
Although there have been some attempts by multinational corporations
to serve those in extreme and moderate poverty (for instance, P&G s lowcost water purification devices and Philips energy effi cient wood stoves),
the majority of initiatives fit the conditions of lower middle-income and
upper low-income customers. In line with such an approach, that does not
yet include those in extreme poverty; some use the label the next billion
rather than talking about the whole base of the pyramid. There seems to
be a growing consensus that the potential of serving the whole base of
the pyramid community has not been fulfilled and that most attention
of global corporations is on serving lower middle and upper low-income
customers.
Market-based approach to serving low-income communities
Markets are not the only solution to the problems of low-income communities,
but market-based approaches have some benefits that, if properly
addressed, have the potential to contribute to both human development
and business growth (UNDP, 2007). Proponents of market inclusion
argue that consumers in low-income communities can enjoy a better life

1
BOP BOP share of BOP income BOP share of
population total population (PPP, 2005 total income
(millions) (%) USD) (%)
Africa 486 95.1 429 000 70.5
Asia 2858 83.4 3 470 000 41.7
Eastern Europe 254 63.8 458 000 36
Latin America and 360 69.9 509 000 28.2
Carribbean
Total 3958 4 866 000
Note: 1 Calculated based on selected representative countries.
Source: Adapted form World Resources Institute (2007).
if the business community offers them the ability to fulfil their basic needs
for nutrition, health, education, housing and sanitation.
A market-based approach starts from the idea that having a low income
does not eliminate market processes: almost all poor households trade
cash or labour to meet their basic needs. A market-based approach to lowincome markets considers local people as both consumers and agents that
can be part of the business process, for example as producers, distributors,
promoters and so forth. Such an approach can lead to creative solutions
that can make markets more efficient and competitive and thus more beneficial
for the people who live in low-income communities (UNDP, 2007).
It is not always evident that large corporations have real advantages
over small, local organizations. Multinational corporations may never
be able to beat the cost or responsiveness of local entrepreneurs. In fact,
empowering local entrepreneurs and enterprises seems to be a key to
developing solutions for poor communities. Still, there are some reasons
why multinationals can play a role in serving low-income markets.
Prahalad and Hart (2002) point to three capabilities of multinationals that
give them the potential to play a positive role in addressing low-income
markets: resources, leverage and bridging.
Resources
Building a complex commercial infrastructure for the base of the pyramid
is a resource-intensive activity. Developing products and services for
the base of the pyramid requires significant research. Furthermore, distribution
channels and communication networks are costly to develop
and maintain. Not many local entrepreneurs have the managerial or
technological resources to create such an infrastructure.

Multinationals can serve as agents that transfer knowledge from one
market to another and scale-up solutions. Although practices and products
have to be customized to serve local needs, multinationals, with their
global knowledge base, have an advantage that is not easily accessible to
local entrepreneurs.
Bridging
Multinationals can facilitate building the commercial infrastructure and
providing access to knowledge and financial resources. They can act as
catalysts to cooperate with non-government organizations (NGOs), communities,
local governments, entrepreneurs and multilateral organizations
in their attempts to bring development to underserved communities.
Because of the size and specific nature of the base of the pyramid, the
scale and sustainability of the solutions seem to be of paramount importance
in such a market-based approach. A single sector approach, focusing
on either government, aid agencies, non-profits or the private sector,
is not likely to achieve the goal of serving the large scale of underserved
communities alone. Therefore, a partnership among various sectors seems
necessary to unlock and share the full potential. The private sector can
potentially act as an integrator of the various sectors and make a positive
contribution in development by taking an orchestration role in development
initiatives. The strength of the private sector can potentially aid local
entrepreneurs, firms and communities in getting involved in innovation
and investment, and help them to create jobs. The flows of income and
the creative energy that they are able to generate may facilitate productive
capacity and may provide a basis for mutual long-term development.
Opportunities in low-income markets
The opportunities associated with low-income markets are becoming
gradually more apparent to multinational corporations (London and
Hart, 2004). The majority of the population in these markets is primarily
in the large but informal economies that are not counted in offi cial statistics
.
It has been estimated that the informal sector around the world
includes more than USD 9 trillion in unregistered assets. This amount is
close to the total value of all companies listed on the main stock exchanges
of the 20 most developed countries (de Soto, 2000:35). In addition to
assets, the value of economic transactions in the informal markets might
be even higher than what is recorded in the formal economic sectors in
developing countries (Henderson, 1999). It is also argued that by getting
engaged in base of the pyramid markets, multinationals can learn about

A report by the World Resources Institute (Hammond et al., 2007) indicates
that the Asian base of the pyramid market has the largest size, with
2.86 billion people and a total income of USD 3.47 trillion. It constitutes
83 per cent of the region s total population and 42 per cent of its aggregate
purchasing power. Eastern Europe s USD 458 billion base of the pyramid
market includes 254 million people, 64 per cent of the region s population,
with 36 per cent of aggregate purchasing power. In Latin America,
the base of the pyramid market of USD 509 billion includes 360 million
people, representing 70 per cent of the region s population but only 28 per
cent of aggregate purchasing power, a smaller share than in other developing
regions. In Africa, the base of the pyramid market is USD 429 billion,
but it represents 71 per cent of aggregate purchasing power in this region.
The African BOP includes 486 million people, 95 per cent of the region s
surveyed population.
The World Resources Institute s report also characterizes the base of
the pyramid markets by sector (Hammond et al., 2007). This report suggests
that the BOP markets range from relatively small sectors . such as
water (USD 20 billion) and information and communication technologies
(USD 51 billion), to medium-scale sectors . such as health (USD 158
billion), transportation (USD 179 billion), housing (USD 332 billion) and
energy (USD 433 billion), to very large sectors . such as the food market
(USD 2895 billion).
These low-income markets have different levels of sophistication and
risk. Some regions might face more challenges than others might and those
at the very bottom of the pyramid in extreme poverty might not directly
benefit from the solutions offered to other low-income communities. Still,
the aggregate market potential is higher than what can be expected from
the conventional multinational corporations advanced markets.
MULTINATIONALS
COUNTRIES
ACTIVITIES IN DEVELOPING
Private sector firms are continually searching for new business opportunities.
The growth of developed world markets is showing signs of slow down
while shareholders and investors typically demanding double digit returns.
Few organizations are likely to enjoy such level of growth in the long term.
Furthermore, with the arrival of new competitors and new technologies,
these already saturated markets are becoming more and more competitive

ity
and philanthropic activities of multinational in the developing world
and are expected to translate into economic returns for the company.
From a historical perspective, at times operations of multinational corporations
have faced hostility and resentment in developing countries. This
is partly rooted in colonial domination times and clashes with host countries
national interests (Caves, 2007:253). However, this hostility, which
was dominant during 1970s, has largely faded and an increasing number of
countries in the developing world are actively encouraging foreign direct
investment. Since mid-1990s, foreign direct investment through multinational
corporations has become the main source of foreign capital for
developing countries (Ramamurti, 2004).
Typically, the operations of multinationals in developing countries fall
into three main categories: export of natural resources; export of manufactured
goods and supplying the host market (Caves, 2007:254). Although
the first two categories have a longer history, the idea of serving local
markets of developing countries has picked up additional steam during the
1990s. Many multinationals rushed into the larger developing countries
first, eagerly trying to fill the demands of the (potential) billions of new
consumers. In fact, the companies only addressed a tiny share of highincome consumers in emerging markets who have global preferences and
purchasing power similar to advanced markets. It has been suggested that
it did not suffice to take a global approach to developing markets. Recently,
some companies are beginning to realize that they must delve deeper into
the local consumer base in order to deliver on the promise of tapping into
the billion-consumer markets. However, this calls for a shift in emphasis
from fitting the available products and practices to a new approach that
acknowledges the realities of the low-income communities. Products and
programs transplanted from advanced markets into emerging markets
only appeal to the affluent elite, which in emerging markets are no more
than 5 per cent of the population (Dawar and Chattopadhyay, 2002).
It is argued that one of the reasons why the so-called pro-poor innovations,
formerly known as appropriate technologies, did not manage to
diffuse in underserved communities is associated with the so-called scalability
issue. Non-profit organizations that usually promote such innovations
do not have the required resources to scale-up their solutions. In view

tions
would be the way to create the economies of scale necessary to justify
production for low-income markets. This requires a specifi c understanding
of the distinct conditions of low-income markets, which are signifi cantly
different from mainstream markets of multinational corporations.
UNDERSTANDING THE CHARACTERISTICS OF
LOW-INCOME MARKETS
The first step in addressing the low-income markets in the developing
world is to understand existing markets and their associated challenges
and opportunities. In this part of the chapter, we highlight the most
important characteristics of low-income markets and provide examples
where companies have tried to overcome the limitations of such markets.
Low disposable income
The most eminent characteristic of the communities at the base of the
pyramid is their lower level of disposable income. This issue has other conseque
nces
that further complicate the use of multinationals mainstream
business models in such a context. The problem of low disposable income
manifests itself in two main ways (1) low purchasing power and (2) lack of
access to credit.
The majority of the low-income communities have fl uctuating daily
rather than constant monthly income, which makes it difficult for them to
have high one-off payments to buy goods and services. In higher-income
regions, consumers have the choice of getting access to credit and buying
expensive items. However, banks usually do not provide such credits to
those who do not have a constant monthly income. As a result, in many
low-income communities people have to pay very high interest rates to the
informal moneylenders to overcome the credibility problem.
Often low-income communities even have to pay a higher price for
many of their basic goods and services . a phenomenon called poverty
penalty. High-income consumers spend a much smaller percentage of
their resources on basic necessities of life, leaving them enough money to
purchase life enhancing items. While in most low-income markets at least
50 per cent of the income is spent just on food.
Individuals limited access to or use of formal banking services pervades
many emerging markets. In China and India, for instance, just one-third

coming
such a financial exclusion. Some non-financial industries are also
employing specific business models in order to adapt to the conditions of
low-income markets (Box 10.1).
BOX 10.1
OVERCOMING THE LOW
PURCHASING POWER BARRIER
Casas Bahia, a retail chain in Brazil, tried to target the lowincome market in Brazil by overcoming the credit problem in such
markets. For example, 70 per cent of its customers don t have a
formal or consistent income. By providing a passbook scheme
Casas Bahia enabled those without formal financial credit to
make small instalment payments for the goods. The salespeople
also educated consumers to buy according to their budget. They
benefited from addressing a large customer base while the lowincome communities got the chance to buy appliances that they
could not afford to buy without having credit.
Source: Prahalad (2005).
Low-purchasing power is a well-known issue in developing studies.
Since the purchasing power is far less than the top of the pyramid market,
price reduction strategies that are common in high-income markets and
serve as a promotion strategy might not fit low-income markets.
Some companies have actively used innovative business models to overcome
the price issue. A model based on shared access is one of the most
well known models. Instead of charging the individual user for a good or
service, this model provides the option of sharing the cost amongst the
user community. For instance, instead of charging individual households
for water services, Manila Water Company provides local communities
the option of having collective installation for 3.4 households or a bulk of
40.50. This allows low-income communities to use the water service while
sharing the costs among themselves to make it affordable for all.
Furthermore, low purchasing power customers may expect diff erent
functions from a product than the traditional high purchasing power
customers. It is therefore important to identify the required functionalities
instead of focusing on the product. For example, Unilever in India realized
that in rural areas soaps are also used for washing hair, so they tried

cated
R&D team in order to understand the expectations of the rural user
and accommodate them in their product (Box 10.2).
BOX 10.2 UNDERSTANDING AND
ACCOMMODATING EXPECTED
FUNCTIONS
In the mid-1990s Haier Group, a leading home appliance manufacturer
in China, found out that many rural consumers used their
washing machines not only to launder clothes, but to do other
tasks such as washing vegetables. Haier dedicated an R&D
team to incorporate this matter. They modified the product by
installing wider pipes that would not clog with vegetable peels.
They also added instructions on the modified washers, with easy
to understand directions on how to clean potatoes and other
vegetables using the machine. They continued getting feedback
from observing their rural customers and developed a modified
washing machine to make cheese from milk. Strategies like these
increased the acceptability of washing machines and helped
Haier to gain a high market share in the competitive market of
home appliances.
Source: Paine and Crewford (1998).
Dispersed locations
Compared to the tip of the pyramid, the base of the pyramid represents
a more diverse cultural variety and geography. In the majority of lowincome markets, the availability of logistics infrastructure cannot be taken
for granted. That makes delivery, distribution and service of products
more difficult. In addition, limited access to media makes common ways
of media advertisement less eff ective.
In order to access and educate consumers at low-income markets, a
variety of approaches are needed: from simple method of billboards on
walls and truck-mounted demonstrations to the use of local communities
for spreading the word by way of mouth advertising (Box 10.3).
Currently there are more than three billion mobile phone users and

Realizing the limitations of traditional marketing methods in lowincome markets, Smart, a mobile company in Philippines, promoted
a kind of viral marketing by using local entrepreneurs. It
proved an effective marketing strategy that popularized Smart s
service and raised awareness about the service in a social way
through friends, family and members of the entrepreneurs local
community. In addition, the entrepreneurs adopted the advertising
method to the local conditions by putting advertising stickers
on the local transportation, such as carts.
Source: Anderson and Billou (2007).
obviously not all of them are rich. It is interesting to see how mobile
usage has diffused among the rural communities and to see how new
technologies can help people who could not utilize an older technology
(that is, fixed line telephones) leapfrog and use a more sophisticated device
which offers more value. As the use of mobile phones became much more
common in low-income countries, the number of services based on mobile
communication is growing and they are used widely.
Lower skill and knowledge
It is generally known that higher user-friendliness of a product leads to
higher acceptance rates of that product. There have been many cases where
a new product that has been widely acclaimed by its producers has failed to
diffuse in the market because consumers find the product very complicated
to use. Sometimes engineers in R&D departments get too much involved
in the technical aspects that they tend to undermine the usability aspects.
It is important to take into account the context in which the product is
going to be used. Although this is not unique to a certain type of market,
it seems to have vital implications in the base of the pyramid.
A considerable share of the low-income population is illiterate, almost
one fifth of adults around the world are functionally illiterate. In addition,
they have less experience working with technology-intensive products
or devices that require some level of prior skill or knowledge to operate.
Hence, it is important to redesign the user interface and product functions
in order to make it acceptable and easy to use for those who lack the skill or
knowledge to use the product. To serve such customers, some companies

Educating the end-user is another way to overcome the problem. In the
event of a lack of traditional channels for educating users some companies
have teamed up with NGOs and local groups to do this task. For instance,
CEMEX, a leading global building solutions company based in Mexico,
offered not only affordable housing solutions through tailored business
models, but also established a local network of trusted distributors to
provide quality material and education on how to build houses. Others,
like Nokia have created a consumer education program in low-income
markets (Box 10.4).
BOX 10.4
EDUCATING USERS AND
OVERCOMING LACK OF AWARENESS
In India, where lack of awareness and skill was considered as a
major barrier for marketing products, Nokia started a consumer
education program called Connect . The idea of this program
was to educate consumers about the different facets of mobile
technology. Nokia planned to make it simple for consumers to use
the different features and applications available on its phones. As
part of the Connect program, Nokia educated users about functionalities
such as SMS and Bluetooth. Despite many features in
handsets, there is still a general lack of awareness among users.
By providing them a user-friendly guide, Nokia s Connect initiative
helped consumers across the country to improve their mobile
experience.
Source: Nokia India, Press Release, 27 January 2006, available at: http://www.
india-cellular.com/Press-Releases/Nokia-27-1-06.html
Other challenges of low-income markets
In addition to the afore-mentioned issues, low-income markets have other
characteristics that challenge the business practices developed in advanced
markets. Many countries in low-income markets face political instability,
volatile exchange rates and an underdeveloped physical infrastructure that
makes business even more difficult.

tion
services together with limited transportation and logistics put some
major restrictions on the use of usual distribution models. Furthermore,
institutional factors pose another challenge; instable political system,
different institutional structure, weak legal enforcement and intellectual
property issues pose new rules of the game, which many multinational
companies are not familiar with.
The wide and scattered nature of low-income markets also requires
extensive distribution networks that are viable at low volumes and low
prices. The creation of such networks in low-income markets requires
new partnerships and alliances that are not common in advanced
markets. Partnerships of companies with financial institutions, NGOs
and other international organizations and their involvement in multistakeholder development projects are already taking place. Yet, there is
not much knowledge about the appropriate ways to create those networks
eff ectively.
THE IMPACT OF LOW-INCOME MARKET
CHARACTERISTICS ON MULTINATIONALS
STRATEGY
When entering new markets, companies have to leverage their resources
and develop certain capabilities to be able to operate in the new environment.
As discussed above, low-income markets have specifi c features
which most of the multinational companies are unfamiliar with. Box 10.5
summarizes the main characteristics of low-income markets and the way
in which core activities of multinationals in terms of R&D, production and
distribution/promotion have to be adapted in order to meet the challenges
of those specifi c markets.
As to overcome the problem of low-purchasing power, some companies
have put more attention on the improvement of the price-performance
ratio and have started to focus on functionality in terms of off ering a
product that simply does the job without extra bells and whistles. In
terms of production, considering the abundance of labour in low-income
markets, creating conditions for employing local labour in production can
rise their income (hence their consumption power) while reducing the unit

5
EFFECT OF LOW-INCOME
MARKET CHARACTERISTICS ON
MULTINATIONALS ACTIVITIES
R&D Production
Distribution/
promotion
Low Focusing on Smaller Combining financial
purchasing functionality, packages/ services with the
power improving price/ sachets, using product, collective
performance local producers payment option
and local labour
Dispersed Developing scaleable Partnering with Partnering with civil
locations solutions, using local local producers, communities and
entrepreneurs modular design NGOs
Lower skill/ Acknowledging Robust Customer education
knowledge endogenous production to programs, viral
solutions, proper user work in hostile marketing
interface environments
Weak Building local Build local Creating dedicated
infrastructure, research laboratories, production distribution network,
etc turning infrastructure capacity adapting to existing
constraints to sources means of transport
for innovation
Source: Authors own elaboration based on literature review.
costs. For products like consumer goods, the low disposable income has
been tackled by offering smaller packages of the good; while in terms of
promoting the product, some companies have embedded fi nancial services
in their product offering to overcome the credit problem of these markets.
To facilitate R&D for dispersed locations, some companies have identified
local entrepreneurs that act as local researchers with a better sense
of local conditions. Setting up production units or partnering with local
producers has been another solution to scale up operations. Moreover,
since the main challenge in terms of distribution is the fact that often
distribution channels are not available, a solution has been found in identifyin
g
and using local options and in some cases by setting up a dedicated
distribution network. Furthermore, a number of companies have started
to work with local communities or NGOs.

edge.
Instead of pushing a new proprietary product into the market, such
locally-based approaches help to design products with which consumers
are familiar. It makes it easier for consumers to adapt when they make
the shift to use the product. Since lack of education is another issue in
such markets, some firms have tried to use specific user interfaces for their
products and services that acknowledges this fact. Instead of using usual
advertisement and marketing methods, some companies set up teams that
go into the communities and offer education and awareness about the benefits
and use of the products. However, the eff ectiveness and appropriate
ways for such awareness programs needs to be studied further.
In most cases, companies are engaged in activities that they have not
done before, something that is quite different from their conventional
business models in mainstream markets. By using creative solutions, they
have tried to respond to the limitations of low-income markets and turn
the challenges to opportunities. It is interesting to see how companies try
to understand the requirements and needs of this different context. In most
of the solutions, multinationals have engaged in new partnerships, for
example with local producers, suppliers and NGOs.
CONCLUSION AND IMPLICATIONS
In line with the ongoing debate about the specific role of companies in
low-income markets, the base of the pyramid literature argues that once
companies figure out how to serve low-income consumers in developing
countries profitably, everyone might benefit: the underserved communities
gain access to products and services that the private sector is best
positioned to deliver, while companies benefit from tapping into vast
new markets. On top of that, when core sectors of the economy . such as
banking, electricity and telecommunications . progress, they might transform
consumers into producers, thereby enhancing economic development
(Beshouri, 2006).
Nevertheless, there seems to be a long road ahead to eventually reach
this goal. Multinational corporations have a long history of dramatic failures
in low-income markets. Practicing business as usual in low-income
markets has proven to be a recipe for failure. Therefore, in this chapter
we argue that corporate strategies need to be redefined when it comes to
addressing low-income markets. Various limitations and constraints of

Establishing new partnerships and networks for serving low-income
markets is another piece of puzzle. Many companies are pursuing ways to
increase social impact in their profit-making business mandates (Brugmann
and Prahalad, 2007). Some NGOs, on the other hand, are joining forces
with the private sector to foster socio-economic development. The intention
is to share competencies, networks, infrastructure and know-how
required to operate in low-income markets. Such partnerships are new for
both sides and hence both sides face difficulties in adapting to it. Capacity
for partnerships with many different stakeholders (governments, NGOs,
social organizations, banks and so forth), with diverse ways of working
and interests is a challenging task that has yet to be addressed.
Overall, we can claim that low-income markets provide companies with
many new business opportunities. However, the specific characteristics of
these markets increasingly challenge existing practices of multinational
corporations. Successful companies have therefore embraced a completely
new way of organizing themselves for low-income markets based on
embracing local practices, local innovation, local distribution systems and
local production/sales systems. In order to access these local resources,
collaboration with both the local community as well as with NGOs seems
to be crucial for corporate success and base of the pyramid development.
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Index
Academy of Sciences, Czech Republic
47
acquisition FDI 48.9
Czech life sciences 49.50
Alternative Energy Act, Japan 151
alternative energy systems 149.63
firm strategies 159.61
government support 161.2
market developments 150.58
reasons for market changes 158.62
asset exploitation motive for
innovation 26
asset-seeking FDI, CEE life sciences
sector 46
asset-seeking motive for innovation 26
Base of the Pyramid 166.7, 167.71
Baxter Corporation 49
Beamish, P.W. 80
Bell, M. 118
biofuels industry 157
Bottom of the Pyramid 166.7,
167.71
Brazil
biofuels industry 157
government role in oil industry 121
oil industry 113.14, 116.18, 121,
122, 146.7
bridging, multinationals and lowincome markets 170
California Fuel Cell Partnership 160
cars, alternative fuel technology 155.6
Casas Bahia 174
Central and Eastern European (CEE)
countries, life science industry
42.54
Czech Republic 46.54
FDI 45.8
Certified Emission Reduction (CER)
127
China
energy needs and alternative
technologies 156.7
FDI from Hong Kong 92.107

government role in oil industry
121.2
innovativeness of foreign fi rms 24.5,
28.37, 31.4
motivations for international
alliances 78.88, 145
oil industry 114.15, 119.20, 121.2,
122.3, 146.7
circles of Thailand 13.14
Clean Air Act 152
Clean Development Mechanism
(CDM) 127
climate change conferences 154.5
clinical research
Czech Republic 47.8
in developing countries 58.70
Mexico 64.9
CNPC (China National Petroleum
Corporation) 115, 120
COFEPRIS 67
competition, alternative energy
industry 159.61
consortiums, alternative energy
industry 160
cooperation, alternative energy
industry 160.61
Cowan, R. 161
Crawford, R.J. 175
cross-border investment see FDI
cross-cultural intelligence 11.12
cultural intelligence 10.12
cultural onion model 11
cultural units 11
cultural webs 11.12
culture and multinationals 6.20
attitudes to deadlines 7.8, 16
attitudes to mistakes 8.10, 17.18
183

Dachs, B. 23
Dacin, M.T. 80, 81
Dantas, E. 118
deadlines, cultural differences 7.8, 16
Denmark, alternative energy fi rms 153
developing countries
clinical trials 58.70
low income markets 166.81
and multinationals 171.3
dispersed locations, low-income
markets 175.6
disposable income, low income markets
173.5
Dutch culture
and deadlines 7.8, 16
and mistakes 8.10, 17.18
view of environment 15
view of others 14
view of self 12.13
Ecair 138, 140
education and low-income markets
176.7
efficiency-seeking FDI, CEE life
sciences sector 45.6
egalitarianism as Dutch trait 12.13
emerging economies 2.3
energy industry
see alternative energy systems; oil
industry
environment, cultural interpretations
15.16
ethics committees and clinical trials,
Mexico 68.9
European Union
accession, effects on life sciences,
CEE countries 45
waste management industry 134.5
FDI (foreign direct investment)
CEE life sciences sector 45.6
Czech life sciences 46.8
Guangdong 93, 96, 146
oil sector 112.15
Feenstra, R.C. 92
Ferring-Lciva 51
foreign direct investment see FDI
foreign ownership and innovation
23.37
Frenz, M. 23
Fung, K. 103
Galena 49
Gilead Sciences 51.2
government policies and waste

management industry 131.5
government role
alternative energy industry 161.2
oil industry 121.2
greenfield FDI 48.9
Czech Republic 51
Grontmij 139.40
Guandong 92.107
economic relations with Hong Kong
93.6, 145.6
Hong Kong FDI 93, 96, 146
labour productivity 97
technological catching-up through
FDI 96.103
total factor productivity 97.103
Gunby, P. 161
Guo, W.X. 83.4
Haier Group 175
Hart, S.L 168
healthcare system, Mexico 65.6
Hirschman, A.O. 3
Hitt, M.A. 80.81
Hofstede individualism index 12, 13
Holmes, H. 13
Hong Kong 92.6, 104.7
economic relations with Guangdong
93.6, 145.6
FDI in Guangdong 93, 96, 146
history of manufacturing
development 104.6
Hopstaken, F. 133
human resources and clinical trial
market 63.4
Ietto-Gillies, G. 23
Immunotech Czech Republic 49
Index 185
Index 185
Japan
alternative energy developments
151.2
alternative fuel vehicles 155.6
Jiangsu Province, China 28.37
innovation and foreign fi rms 31.4
Joint Implementation (Kyoto Protocol)
127
Kemp, R. 154, 155
Klausner, W.J. 15
knowledge-based competition,
alternative energy industry 160
knowledge-based theory and
knowledge transfer 27
Komin, S. 13
Kwong, K. 104, 105, 106
Kyoto Protocol and waste industry
127.41
and Dutch waste fi rms 137.40,
147
and firms international expansion
130
labour productivity, Guangdong 97
Lachema 49
Laminar Medica 51
Lciva 49, 51
Lemoine, F. 103
leverage
Hong Kong 105.6
multinationals and low-income
markets 170
Li, H.G. 97
life science industry 41.54
CEE countries 44.5
FDI 45.8
Lin, X.L. 83.4
locational conditions and impact of
innovation 26.7
Lonza 50
low-income markets 166.81
characteristics 173.8
market opportunities 170.71
and multinationals strategy 178.80
Luo, Y.D. 84
Maiti, R. 61
managerial capability motive for SinoTriad alliances 86
manufacturing development, Hong
Kong 104.5
market access as motive for Sino-Triad
alliances 84.5
market size, low-income markets
170.71
market-based approaches to lowincome markets 168.70
market-based instruments and waste
management fi rms 129.30

sector 45
Mexico, clinical research 64.9
mistakes, cultural diff erences in
attitudes 8.10, 17.18
Moser Baer 156.7
motivations, Sino-Triad alliances 78.88
Chinese perspectives 82.7
Triad perspectives 81.2, 84.7
multinationals 1.2
Czech life sciences sector 48.53
in developing countries 171.3
and innovation in host countries
25.37
and low-income markets 178.80
as multicultural units 18.19
R&D expenditure 41.2
National Renewable Energy
Laboratory (NREL) 155
Netherlands
culture see Dutch culture
waste firms and Kyoto Protocol
137.40
waste management industry 135.7
Ng, L.F. 105, 106
Nokia, consumer education program
177
oil industry 111.23
Brazil 113.14, 116.18
China 114.15, 119.20
FDI 112.15
role of governments 121.2
others, cultural interpretations 14.15
outputs, waste management industry
133
Paine, S. 175
partnerships
alternative energy industry 161
life sciences sector, Czech Republic
51.2
Petrobras (Petrleo Brasileiro) 113.14,
116.18
PetroChina 119.20
pharmaceutical industry
and biotechnology companies 43.4
innovation process 59.60
see also clinical research
Pliva-Lachema 49
Prahalad, C.K. 168, 174
private firms, waste management
industry 136
product innovation novelty 29.30
pro-poor innovations 172.3
propensity indicator of innovation 24,
30, 31, 34
public healthcare system, Mexico
65.6
Public Utilities Regulatory Policy Act,
US 152
purchasing power, low-income markets
174
R&D see research and development
Raghavendra, M. 61
regulatory issues and clinical trials,
Mexico 66.8
reputational capital as motive for SinoTriad alliances 87
research and development (R&D)
CEE countries 42
Chinese oil fi rms 119
expenditure, multinationals 41.2
life sciences sector 43.4
research and development unit
acquisition as FDI 50, 53
research institutes, Czech Republic
47
acquisition 50
Robson, M. 30
Root, F. 42
Sadowsky, B.M. 23
Sadowsky-Rasters, G. 23
scalability, pro-poor innovations
172.3
self, cultural interpretations 12.14
Sino-Triad alliances 78.88
skill levels, low-income markets 176.7
social circles, Thailand 13.14
Soete, L. 155
Solar Energy Laboratory, US 152

solar industry, US 152
strategic motivations for international
alliances 78.88
Sun, Y. 93.4
sustainability 4
Index 187
Index 187
Unal-Kesenci, D. 103
United States, alternative energy
developments 152.3, 155
Valdez-Martinez, E. 69
value added manufacturing, Hong
Kong 105.6
van der Horst, H. 12.13
Van der Wiel Holding BV 137.8
Veluwse Afval Recycling BV 138.9
waste as commodity 131.2
waste industry 127.41
government policies 131.5
internationalization 133.5
Kyoto Protocol and fi rms
international expansion 130
Netherlands 135.40
internationalization 137.40
waste processing 132
waste-to-energy 140
webs of culture 11.12
wind energy 152.3, 156, 157
Wong, K. 93.4
World Wide Recycling BV 138.9, 140
Yeung, G. 94
Zentiva 49

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