R&D and innovation activities in companies across Global Value Chains

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1 R&D and innovation activities in companies across Global Value Chains 8th IRIMA workshop Corporate R&D & Innovation Value Chains: Implications for EU territorial policies Brussels, 8 March 2017

2 Objectives of the project General objective: to gain a better understanding of the geographical and organizational patterns of corporate R&D and innovation across GVCs interactions with home and host-countries economies and policy initiatives the drivers and barriers to improving the location of high-value creation and knowledge-intensive activities in Europe and the competitive position of EU industry in strategic GVCs 2

3 Approach 3

4 Functional fragmentation of R&D&I Functional description of R&D&I GVCs Technological Readiness Levels 4

5 R&D versus non-r&d RDI activities consists of R&D and non-r&d activities R&D: Creative work undertaken on systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications Non-R&D: Design, training, technology forecasting, innovation management 5

6 Drivers and impact of location decisions analytical framework 6

7 Propositions (1/2) 1. Industry-specific and value chain characteristics are key drivers for R&D&I location decisions and are becoming more important than country characteristics. 2. Location determinants and patterns are highly dependent on the type of R&D&I activity (TRL). 3. Corporate strategies are decisive in determining the location choices. 4. The extent to which R&D&I activities are collocated with production activities, strongly depends on the type of R&D&I activity involved. 5. The organization of R&D&I activities across GVCs is industry/sector specific. Industry differences are observed at the level of the location decision, the impact, the governance mode applied. Even within industry, differences can occur depending on the R&D&I activities (TRL scale) of the company. 6. Outsourcing and offshoring trends are highly industry-specific. The international fragmentation of R&D&I activities is highly dependent on the industry and R&D&I subfunctions/activities or tasks. Highly capital-intensive industries concentrate key R&D&I activities to a larger extent than less capital-intensive industries. 7

8 Propositions (2/2) 7. There are a broad range of corporate governance mechanisms and modes to sustain corporate R&D&I across GVCs. We expect these governance mechanisms/modes to be highly dependent on the type of R&D&I activity/task performed. A trend towards global R&D&I networks (originating due to alliances, collaboration and/ or subcontracting) can be observed, although they are often difficult to manage. The corporate strategy will however be determinant for the decision on the governance mechanism. 8. The impact of the offshoring of R&D&I activities on the home or host country mainly occurs via increased productivity and innovation performance. This is however highly dependent on a set of contingences related to the firm s embeddedness and technological capabilities. 9. The home-base augmenting R&D argument is increasingly important in the location decision of companies. Home-base augmenting R&D will have a stronger impact on the innovation performance than home-base exploiting R&D. 10. The government can play an important role in attracting/sustaining R&D&I investments, by focusing on improvements of the infrastructure, cost-related aspects and the legal and political (stability/continuity) environment. 11. The competitive environment of the host region can significantly alter a region s attractiveness. 12. Knowledge spillovers and technology transfers are mainly driven by the governance mode, TRL level and government stimuli. 13. The common fear that R&D&I internationalisation is hollowing out domestic innovation is unfounded. 8

9 Case studies Focus on companies in the three industries with the highest R&D expenditures in Europe for the case selection: Health (Pharmaceuticals & Biotechnology, Health Care Equipment), specified to pharmaceutical companies; Mobility (Automobiles & Parts, Airplanes, Public Transport), specified to automobile and aerospace companies; ICT (Technology Hardware & Equipment, Electronic & Electrical Equipment, Software & Computer Services, Fixed Line Telecommunication), specified to ICT manufacturing (not software).

10 Preliminary insights (1/3) Industry-specific and value chain characteristics are important drivers for R&D&I location decisions, but tend to be less important than country characteristics (PR 1 partly confirmed) Company A: Presence near to suppliers as well as research institutes and universities is important, but not more important than country-specific characteristics such as the availability of skilled workers and technological capabilities. Company A s R&D&I investments in the US mainly occurred through acquisitions: driven by firm-specific factors such as the availability of technological capabilities. Location determinants and patterns are highly dependent on the type of R&D&I activity performed (PR 2 confirmed) Company B: Activities at lower TRL levels are rather located in Europe/US, while higher TRLs are increasingly offshored to Asia. Activities at the lower TRL levels (fundamental/basic technological research) are driven towards regions endowed with strong technological capabilities; for activities at the higher TRL levels, market considerations are more important. 10

11 Preliminary insights (2/3) R&D&I activities in the semiconductor industry are often collocated with production activities (PR 4 confirmed) Company B: foreign R&D&I activities are often collocated with production activities due to the sensitive nature of semiconductors. Co-location stimulates further improvements in design and product development. R&D&I activities at the lower TRL levels often collocated with front-end manufacturing versus later TRLs that are rather collocated with back-end manufacturing. The home-base augmenting R&D motivation is important in explaining the firm s location decision and has a strong influence on the overall innovation performance of the firm. However, in recent years, it are mainly the home-base exploiting R&D facilities in Asia that are increasing (PR 9 partly confirmed) Company B: Most relevant knowledge is generated by home-base augmenting R&D activities in foreign countries, more than home-based exploiting R&D activities. Number of home-based exploiting activities is increasing strongly to support the ever growing market demand in Asia. 11

12 Preliminary insights (3/3) Government still plays an important role in attracting R&D&I investments (PR 10 confirmed) Company A: government can increase a country s attractiveness by improving the legal environment (e.g. IP rights), investing in education (and upgrading the quality of the local labour force), lowering the taxes, and by providing specific subsidies or installing extensive R&D supporting programmes. R&D&I internationalisation is not leading to an hollowing out of domestic innovation (PR 13 confirmed) Company A: foreign R&D&I operations perform a complementary role with domestic innovative activities. Mainly the home-base augmenting R&D activities are leading to domestic R&D increases. No job losses at the HQ or negative relocation effects due to the companies foreign operations can be observed (foreign R&D&I activities in the US are leading to increases in home country s operations). Difficult to obtain data on the geographical and functional fragmentation of non-r&d activities of semiconductor companies as this is often integrated in the R&D activities and not monitored separately. 12

13 Case study process 2 pilot cases

14 Policy toolbox Objective: To develop a concise policy tool box which moves beyond the current European, national, regional and sectoral policy instruments and mixes of policies Outcome Outline of options to adjust current mixes of EU industrial, R&D policies with regard to new GVCs and identification of regional R&D and innovation priorities Meaningful combination of policy instruments e.g. for appropriate development of human resources, meaningful tax incentives, efficient research Options on how public authorities can tackle new challenges by organizing collaborative opportunities for innovation and industrial actors 14

15 Contact IDEA Consult Kunstlaan 1-2 bus Brussel Dr. Vincent Duchêne Dr. Els van de Velde Dr. Annelies Wastyn Dr. Dieter Somers

16 Contact VDI Technologiezentrum GmbH VDI-Platz Düsseldorf Dr. Norbert Malanowski - malanowski@vdi.de Dr. Karsten Reuss reuss@vdi.be