Multinational companies (MNCs) are using more ‘cost-effective’ locations not only for production but also to source the knowledge behind production. An EU supported-research project, INGINEUS, aims to identify how EU policy can enhance the position of European firms within the networks used by MNCs for outsourcing. Preliminary suggestions are that policy should aim to stimulate the mobility of skilled workers and develop a single European patent system.
For some time MNCs have been outsourcing production to low-cost locations around the globe, whilst keeping their R&D in house. However, recently, MNCs have begun outsourcing R&D and other knowledge assets to locations with the right mix of local skills and competences, so called Global Innovation Networks (GINs). MNCs based in both developed and developing economies have begun to establish GINs. For example an Indian engineering company Tooltech has a daughter company in Germany to develop its Computer-Aided-Design. The evolution of GINs will have an impact on EU firms who, along with the USA and Japan, are the traditional centres of knowledge-intensive activities.
The INGINEUS research project is currently studying the causes and implications of GINs, as well as the challenges they pose. Data from a survey of companies in a range of Western and emerging economies will be complemented by case studies of specific firms. The final report will be presented at the end of 2011 and a preliminary report on the company survey in September 2010.
A literature survey in this area has already indicated that firms are forming GINs to keep up with three main changing global conditions:
- Both the product life cycle and the business cycle are getting shorter and new knowledge is essential for survival. When firms do not have the time or resources to develop such knowledge they depend on other companies.
- Research activities are becoming more expensive. Cooperation at a global scale shares the burden and lowers the labour costs of highly-skilled workers.
- There is a need for firms to get closer to their markets, particularly with the new markets in emerging economies. Centralised knowledge from a distant headquarters is ineffective with diverse markets that are changing rapidly.
Data supplied by the UN Conference on Trade and Development (UNCTAD)1 indicate that the amount of investment in R&D abroad has almost doubled from US $ 12,852 billion to US $ 22,328 billion between 2000 and 2004. However, despite this shift there is little systematic data on these trends, not only in Europe but elsewhere. The research identified four trends in the outsourcing of R&D:
- There has been an increase in the outsourcing of R&D abroad that is associated with the opening of new markets and cost reductions.
- Europe has seen an increase in inward foreign investment in R&D during the same period.
- Most of the outsourcing of R&D is performed within the US, Japan and Europe but there is an important rise in outsourcing to other Asian countries and developing economies.
- There are important differences across industrial sectors.
These trends raise significant questions for European R&D and innovation policies as indicated below. The project suggests that Europe cannot afford to become a ‘European research and innovation fortress’ but instead must become a true global hub in knowledge-intensive activities. For this to happen there are three challenges that need to be addressed by national and European policy makers:
- Although there has been a stimulation of inward and outward mobility of workers, Europe still has a deficit in specific knowledge areas. Immigration laws are generally not open enough to make Europe an attractive working place. Many industrial associations report difficulties with regulatory frameworks in national immigration policies and the need for more flexibility and openness to employ highly specialised skills from outside Europe. Inspiration could come from the Silicon Valley which has a constant inward and outward flux of innovators, researchers and entrepreneurs.
- Despite efforts to harmonise the patent system in Europe, it is still fragmented. This makes it expensive to protect intellectual property in several Member States. The patent system is very complex, and several problems in the current system, such as high costs of patenting, limited value of patents, long pendency times and a lack of unified litigation practices, have been extensively reported. A clear, single and cost-effective regulatory framework is needed to reduce legal uncertainties and maximise returns on investment.
- Research has shown that a firm’s ability to absorb knowledge produced elsewhere is influenced by its own knowledge capabilities. This calls for a bold policy effort to enhance the knowledge assets of firms in Europe. The current availability of knowledge-related investments in the form of expenditure in R&D continues to be considerably lower in the EU than in the US and Japan (and China in the near future). This calls for more efforts encouraging greater financial investment in new areas of knowledge and technology, and strengthening research in universities.
INGINEUS - Impact of Networks, Globalisation, and their Interaction with EU Strategies (duration: 1/1/2009 – 30/6/2012) was a Specific Targeted Research Project funded under the 7th Framework Programme for Research of the European Union, Thematic Priority 1 – Growth, employment and competitiveness in a knowledge society.
Contact: Alireza Naghavi, email@example.com