The themes of technological innovation, entrepreneurship, and organizing
R&D Internationalization as Mechanism of Innovation in Global Enterprises: A Brazilian Case Study
Simone Vasconcelos Ribeiro Galina
University of Sao Paulo, Brazil
Internationalization of Research and Development (R&D) allows transnational companies (TNC) to access different and important resources overseas, which may lead to the improvement of their technological innovation. The literature in this field has been mostly createdfrom studies of TNCs coming from developed countries. This chapter presents some of the main topics the literature addresses on R&D internationalization, then it will explore and verify how companies in developing countries internationalize their R&D activities. In order to do so, a bibliographic review about strategies of internationalization of TNC operations, as well as motivating factors and management of R&D internationalization have been conducted. The chapterfinishes by presenting a case study about international R&D conducted in a Brazilian TNC. The results enabled to evidence that, like developed countries TNCs, developing countries ’ companies also seem to perform internationalization of R&D activities with very similar characteristics.
DOI: 10.4018/978-1-61350-165-8.ch033
Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
The success of technological innovation in enterprises depends on their competences in Research and Development (R&D), since it is one important source ofknowledge and innovation. When R&D is decentralized to worldwide subsidiaries, corporations are able to access knowledge and connect to local markets. Therefore, these corporations improve their competitiveness over firms whose innovations are generated on national basis only (Birkinshaw et al., 1998).
The spreading of global R&D has grown rapidly over the 1990’s (UNCTAD, 2005); phenomenon resulting from companies originating from advanced economies such as U SA, European countries, and Japan (von Zedwitz, 2005). However, “internationalization of R&D from developing countries is on the rise” (von Zedwitz, 2005, p. 127), because MNCs from emerging economies are investing in R&D abroad (UNCTAD, 2005).
Inevitably, “most previous research focused on the scenarios of developed economies, thus meaning the issue still needs to be studied from the perspective of developing countries” (Wu, 2007, p. 298). In this manner, this chapter aims at presenting an exploratory research from the Brazilian perspective. In order to do so, it is introduced a literature review addressing relevant aspects of R&D internationalization analyzed in a Brazilian company. This bibliographic review is conducted from two approaches: strategy and management. The first approach is based mainly on the strategies of companies to locate operations abroad by Foreign Direct Investments (FDI) and on the driving forces towards R&D Internationalization. The role of subsidiaries of transnational corporations is the linking topic for strategy and management, once distribution of units globally is strategically determined and the interaction among these global units has to be well managed in order to benefit the whole corporation.
The chapter finishes with a case study of Embraco, a Brazilian manufacturer of electric - electronic products for cooling solutions (hermetic compressors, condensers, evaporators and others). This is an innovative company whose manufacturing activities are located in three continents (America, Europe, Asia), also internationalizing product development function. This example allowed us not only to illustrate topics discussed on the literature section, but also to shed light on R&D internationalization by company from an emerging country.
STRATEGIES FOR ENTERPRISES INTERNATIONALIZATION
Internationalization of companies is quickly increasing as shown by United Nations Conference on Trade and Development [UNCTAD] (2009,
2005) . In 1990, the number of worldwide Transnational Enterprises was about 37,000 and with at least 170,000 foreign affiliates; in 2004 this number increased to 70,000 with at least 690,000 foreign affiliates; and in 2008 the number ofMNCs jumped to 82,000 with 810,000 foreign affiliates half ofthem being located in developing countries.
The internationalization of companies is not a recent scenario. In the 18th century, there are accounts of companies, especially European ones, which held business out of their country of origin. However, several aspects of globalization (financial, commercial, productive, economical, institutional) modified the behavior of companies worldwide, thus intensifying their migration. As it is presented, globalization is relatively recent and was originated amidst the significant growth of the post-World War II international business (Baumann, 1996; UNCTAD, 1994), and has consolidated especially due to the technological development of fundamental areas to base global institutional operation: information technology, communication and logistics.
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Table 1. Organizational characteristics of multinational, global, international, and transnational companies (Adapted from Bartlett & Ghoshal, 1989)
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From works of authors such as Dunning (1993), Bartlett and Ghoshal (1989), and others, it is possible to trace a timeline overview on the global actuation of companies since their first efforts of being overseas to their current globalization strategies. Companies which operate internationally present some important behavior changes. In the 1960’s, the major worldwide activity was related to export operations of output or components to the simplified assembly of products to national/ regional markets. From de 1970’s on, there was the building of manufacturing plants in strategic countries in order to improve the performance of local unities and products.
The fierce competition of the 1980’s put pressure on companies to a more emphatic internationalization of production, although not so adjusted as the one witnessed in the 1990’s, when productive activities were fully world-integrated, that is, companies “begin to be described as coordinators of an activity network inter-related to add value” (Dunning, 1994, p. 28).
Such history overview also influenced the classification of current global companies. There are a myriad of classifications for worldwide companies, that is, those which hold activities out of their home countries. One ofthe most renowned is Bartlett & Ghoshal’s (1989), which classify globally operating corporations as follow (Table 1):
Multinational Corporations (MNC) or Multidomestic: They work using the whole production chain in an overseas country, with independent unities, and mark strong local presence by means of sensitivity and receptivity regarding domestic differences.
Global: They are much more centralized in operational and strategic decisions than the MNCs. They have competitive advantage in terms of costs by means of operations centralized in global scale, dealing with the world market as a whole. International: They explore knowledge and resources from the headquarters by world diffusion and adaptation. The headquarters exert considerable influence and control, but less than in a global company. The domestic units are allowed to adapt products and ideas from the headquarters, although with less autonomy than the MNCs.
Transnational (TNC): They integrate processes in global scale, making them improved, rationalizing resources, eliminating redundancies, and operating world spread products. They seek for efficiency in order to achieve global competitiveness, understand local receptiveness as a tool to obtain flexibility in international opera-
tions, and see innovation as result of a process which comprises several members of the company.
The differences between these classes can be subtle, and a company may behave in similar manners in more than one of them. In order to make the comparison easier, Table 1 shows a sum up of the organizational characteristics of Multinational, Global, International, and Transactional corporations. “Development and knowledge spread” may be the most clearly distinct. The rest of them present less perceptive difference, for instance, “the role of the subsidiary overseas” of an MNC—to explore local opportunities—is also common to TNC and can also be fundamental to the survival of global and international companies.
Another approach to the International operation is of a Metanational company developed by Doz, Santos and Williamson (2001). The Metanational model focuses on companies coming from countries not among the traditional capital holders or leader industries, hence they can appear to be inappropriate environments to allow local companies to take part in global competition. However, according to the same authors, once the know-how the companies ofthese countries need to compete in a global level is not available in their home countries, they are led to develop competencies in market and technology knowledge in an international perspective. This is a learning opportunity to place them in an advantageous position.
Besides organizational characteristics, it is important to undestand the strategies which lead companies to locate units globally. There are manners for a company to enter the international market in terms of business involvement, implying different levels of risk and management complexity. They usually come by exports, contracts (association between company and institution in a foreign country with no assets investments) or by direct investments abroad (when a company installs subsidiaries in a different country than its original one). Business risks and complexity increase as there are more involvement and, consequently, dependence of the company on its foreign businesses. It results according to the means of entrance/operation listed as follows: export, contract, and investment.
There are several models/theories of company internationalization, that is, the strategies it adopts when enter international markets (related to entrance by investment), including Bartlett and Ghoshal (1989) presented above. Economic theories are basically related to currents which study firm internalization and the factors which lead corporations to internalize their operations in another country. One of the most notorious theories is Dunning’s eclectic paradigm (Dunning, 1988, 1993, 1994), which “avows that the greater the net benefits of internalizing cross-border intermediate product markets, the more likely a firm will prefer to engage in foreign production itself, rather than license the right to do so (e. g. by a technical service or franchise agreement) to a foreign firm” (Dunning, 2000, p.164).
The behavioral theories, whose most known approach is the Uppsala Model (Johanson & Vahlne, 1977), relate the incremental internationalization of a company to the level of its learning abroad. That means that a corporation would follow an established order due to the higher or lower level of know-how required: exports, sales unit, operations subsidiary, and Research and Development (R&D) activities engagement.
Nevertheless, despite the relevance of this model and the countless works based on it, this sequence of operation abroad has been questioned by new theories and empirical evidence of corporations’ procedures. It is undebatable that many companie s do not follow the sequence determined by the level of knowledge resulting from their work abroad, that is, they do not follow Uppsala’s model presupposition. The network theory itself (Forsgren & Olsson, 1992), also considered a behavioral theory, is an approach showing that the need for insertion in a global value-added chain strongly interferes in the manner a company enters and operates on international markets, as well as in the role of each affiliated/subsidiary abroad.
Concluding, companies currently operate globally aiming to take competitive advantages in each region/country they locate, and from that on, their management process is substantially changed. An important change refers to technological innovation, approached by means of two trends: products and processes commercialized, developed and manufactured in global scale; and decentralization of their R&D. It modifies not only the management of R&D function itself, but also of other functions related to it such as operations, marketing, and sales.
One ofthe issues emerging from studies on internationalization management is the coordination of subsidiaries distribution and the role of each foreign unit (Bartlett & Ghoshal, 1992; Ferdows, 1997; UNCTAD, 1999). When focusing on R&D internationalization, this subject is highly relevant and it is presented here.
INTERNATIONALIZATION OF R&D ACTIVITIES
The roles ofTNCs’ subsidiaries out oftheir headquarters’ origin country are not restrained to the assistance of local market, but organized in integrated network so that they have the necessary conditions to explore capacities or know-how in each country not only in production terms, but also in technology development (Cantwell & Santangelo, 1999). Transnational companies locate their activities in sites where there is competitive advantage, and “besides related to production, these activities are related to distribution, marketing, and R&D” (Reddy, 2000, p. 10). TNCs are the main agents of productive globalization and consequently internationalization of R&D (Cantwell, 1994; Gerybadze & Reger, 1999).
Since the 1990’s, it is observed a strong growth of R&D internationalization within global companies. Several studies show that TNC investments in R&D are increasingly oriented toward subsidiaries located outside the home country (UNCTAD, 2005; Doz, et al., 2006). The exposure of a global company to a variety of environmental stimuli is a great advantage over a national company. Thus, there are several arguments pro-internationalization of R&D, not only to support local manufacturing activities, but also to create interfaces with local innovation systems (Ohmae, 1990).
There are different nature of studies related to the internationalization of R&D. Some of them discusses the subject under the point of view of TNC and their strategies to globalize R&D activities, taking advantage from local situations in favor of global development (Ronstadt, 1977; Terpstra, 1977; Hakanson, 1990; Bartlett & Ghoshal, 1989). Influencing these strategies are factors that orient the investment in R&D towards specific countries/ regions, and some other works under this approach were carried out (Cantwell, 1992; Reddy, 1997, 2000; Niosi, 1999; Gerybadze & Reger, 1999; UNCTAD, 2005; Cantwell & Santangelo, 1999; Kumar, 2001; Florida, 1997; Patel & Vega, 1999; Pearce, 1999).
Besides these, and yet considering the internationalization of R&D strategies, there are authors who work on market analysis, establishing products characteristics which can be standardized to worldwide markets or need to follow local market contingencies in the world perspective, which may or may not influence the R&D centralization or decentralization (Hult, Keillor, & Hightower, 2000).
Some works in this area refer to manners to manage R&D world centers and technologic development activities under different aspects (Chiesa, 2000; Gassmann & von Zedtwitz, 1999), especially on data/information group exchange management (for instance, type, costs, code and infrastructure for the global communication process) and on the organization of work teams around the world (for instance, organizational structures, leadership, and team formalization).
The literature in internalization of R&D also shows that this is not recent practice by companies. Vernon (1966) shows that in the 1960’s the enterprises exploited resources overseas, including to obtain technological know-how. In 1971, the amount that North American enterprises invested in R&D out of their country was 10% of the total invested in R&D (Terpstra, 1977). Reddy (1997) mentioned that the US Tariff Commission had declared in 1973 that North American companies carried R&D in foreign countries yet in the 1960’s. The main industries involved were in the areas of mechanics, electrics, and engineering (including automotive engineering). However, more evidence of this practice emerges only after some works were carried out in the 1970’s, with the famous classification of Ronstadt (1977). It distinguishes the different types of R&D world units, thus validating the practices of internationalization of TNCs development activities.
Another work produced in the 1970’s (Behrman & Fischer, 1980) presents evidence of R&D unit allocation in developing countries such as Brazil and India, especially due to some of their characteristics: profitable subsidiaries, growing market, and structure suitable to Science and Technology. The maj or industries to internationalize R&D during this period were from chemical and food areas.
The distributed execution of R&D up to middle 1970’s was difficult, particularly due to some problems to supervise and control international activities. Such issue was minimized when new information technologies and communication were introduced.
Although internalization of R&D has begun in the 1970’s, it became a “phenomenon” only by the end ofthe 1980’s (Cantwell, 1995). Back then, foreign subsidiaries were involved not only in developing processes and products to both local and global markets, but also in basic research (Reddy, 1997). Those were trends introduced in the 1980’s that remains today, especially for companies from developed countries and their growing need for highly qualified manpower. Internationalization led the enterprises to search for new knowledge and technologies abroad. In the 1980’s, the main industries involved in globalization of R&D activities were from microelectronics, pharmacy, and civil aeronautics areas.
Adapted from Reddy (1997), Table 2 presents the background process of R&D globalization into enterprises. For each decade relevant to the internationalization of technological development in TNCs, the author shows driving factors, that is, those which leveraged and favored this internationalization, the sort of R&D carried out abroad, and the characteristics of R&D units.
As observed, internalization of R&D is a true fact. However, “the country of origin of TNC is usually the most important place to the technological development ofthe corporation” (Cantwell, 1995, p. 172), although there is solid evidence of the strong growth of R&D expenses in foreign subsidiaries. According to UNCTAD (2005), from 1993 to 2002, these costs rose from 10% to 16% ofthe whole investment in R&D. The same study shows these expenses were geographically concentrated. In 2002, for instance, the ten major economy investors in R&D represented 86% of the world sum, whereas eight of them are developed countries (China and South Korea, exceptionally).
Also according to UNCTAD (2005), the sort of R&D performed overseas may vary depending on the region, whereas Asia prevails with the most innovator R&D (particularly China, India, and Korea). Some new members ofthe European Community have attracted activities for technology innovation; Latin America and the Caribbean have little direct investment in intensive activities and focus on adaptation of technologies or products to the local market; some African countries (especially Morocco and South Africa) attract limited investments in R&D.
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Table 2. Background process of R&D globalization (adapted from Reddy [1997])
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Great part of the studies on R&D localization by foreign enterprises in Brazil (Dias & Salerno, 2009; Galina, Sbragia, & Plonski, 2005; Gomes,
2006) shows that R&D activities done in the country by local subsidiaries are focused on adaptation of products and processes. However, some TNC have considered this country as a guidance of more relevant investment in R&D (Galina, Camillo, & Consoni, 2010).
Considering early discussion, with the worldwide distribution of R&D, companies look for greater competitive advantage. It is known a myriad of arguments favorable to the internationalization of product development not only to support local production, but also to create interfaces of local innovation systems (Ohmae, 1990). In the next section the main reasons that underlie companies’ decision to internationalize R&D are debated.
DRIVING FORCES TO R&D INTERNATIONALIZATION
There are many reasons for R&D resources to be directed to countries other than the company headquarters’. Terpstra (1977) summarizes the most frequently found among TNCs: in response to the pressure applied by host countries; in order to improve international relationships; intending to access foreign skill and resources; to reduce development costs with cheap labor; to obtain advantage on local ideas and products; trying to accelerate development by means of parallel efforts of laboratories working simultaneously; in order to sustain development activities performed by companies acquired abroad; to obtain advantage from domestic laws of government incentive.
In general, the pertinent literature presents two major subjects to list the main reasons for R&D internationalization (Chiesa, 1995; Florida, 1997): marketing-related factors (necessity to access markets, responding to local needs and strengthening bonds to clients/consumers), and technology-related factors (qualified labor, outstanding technology). Chiesa (1995) states that factors related to technology and demand are the two main reasons to promote R&D internationalization. There is also factors regarding finance aspects, such as labor cost reduction and local incentive policies; and some other more subjective factors such as the connection between headquarters and subsidiaries in what concerns personal relationship of their respective executives.
The market-related factor is motivated to the adaptation of products to foreign markets and to production/operation technical support. When locating their units abroad, the TNCs look for a better service to their client, with more appropriated and faster adaptations of products, essentially.
When establishing development activities in sites next to the clients, the enterprises are better structured in order to understand and to provide local needs more efficiently, especially because in general TNCs have gigantic and extremely red tape organizational structures, thus complicating the decision-making process. The marketing factor is considered less relevant or more superficial, as quoted by Inzelt (2000): “skin-deep collaboration.”
The second factor, related to technology, is aimed at guaranteeing access to Science and Technology (S&T) and qualified human capital, and creating bonds with local science communities. Once more intrinsic to the development process, this factor is considered more relevant, since it establishes a deeper relation of dependence between the company and the regions where the subsidiaries are. It is what Inzelt (2000) calls “soul-deep collaboration.”
Yet regarding technological factors, Cantwell (1992) mentions two approaches as main reasons to the internationalization of R&D: to obtain advantage from distinct innovations characteristics in different domestic systems, thus gaining access to further technologies, and to have contact with new threads for technological innovation.
Despite considered more or less relevant, technological and marketing factors are paramount to attract local investors, thus enabling the transformation of less advanced countries in more advanced ones. It is also common to see companies which consider both factors when guiding their investments in R&D abroad.
The internationalization of R&D is often a result of actions non-related to company strategies such as govern requirements, acquisition of foreign units already owning R&D departments, etc. (Granstrand et al., 1992). For Terpstra (1977), governments of countries where MNCs have branches try to maximize the local technological development by means of receiving incentive or pressure. They are more successful with foreign enterprises which buy domestic companies and ensure continuity to R&D processes than pressuring these foreign companies to start new local R&D activities.
As for financial factors, despite less relevant, companies have shown they take them into account when spreading their development activities worldwide, especially when they choose developing countries. As mentioned by Reddy (1997), development costs in research centers based in developing countries (India, Brazil) are proportionally lower than in traditional centers.
In what concerns the factor of relation between headquarters and subsidiary, the most subjective of all, it is important to consider that if the company staff involved in strategic decision-making handles good relationship with the subsidiary’s executives, chances are for the local unity significantly involve in corporate technological development. For Birkinshaw and Hood (1998), a high quality relationship between headquarters and subsidiaries has a positive impact on “enterprising” subsidiaries, that is, those working for the development of local competencies.
Summarizing, factors (or driving forces) considered by companies to increase internationalization of R&D are many. They may be related to some companies’ internal aspects (such as internal competence, relationship among units, historical trajectory/path, etc.), to environmental aspects (such as market characteristics, level of wages or existence of competencies on local universities or research centers) or to public policies (direct incentives to internationalization). These factors are motivated mainly by marketing and/ or technological reasons.
MANAGEMENT OF INTERNATIONAL R&D Roles of Subsidiaries
As previously stated in this chapter, transnational organizations structure themselves in order to obtain most units abroad. To do so, subsidiaries are given strategic roles and responsibilities and are distributed all over the world so the resources of each country can be reasonably exploited. There are several classifications to the subsidiaries roles of global enterprises (Bartlet; Ghoshal, 1989; Birkinshaw, 1996; Ferdows, 1997; Gupta & Go - vindarajan, 1991, 1994; Pearce & Papanastassiou, 1996; Roth & Morrison, 1992; UNCTAD, 1999).
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Figure 1. Strategic roles of subsidiaries (Ferdows, 1997) |
The typology presented by Ferdows (1997) is based on a cross between local competencies (high and low) and three clusters of strategic reasons: low production costs, market proximity, and access to skills and knowledge. This combination lead to six subsidiary roles (Figure 1): Offshore (not innovative and abiding by corporate decisions); Source (autonomous with regard to certain manufacturing activities); Server (produces for the local market); Contributor (has its own process engineering and products for the local market); Outpost (monitors the local environment for the global corporation); and Lead (creates new processes, products and technologies for the entire organization).
In every one of the subsidiary role classifications (models) mentioned, there are company units in charge of generating technology for the subsidiary itself or even for the entire corporation. Ronstadt (1977) shows different types of units which perform overseas R&D (out of the origin country of the company) by TNCs:
• Technology Transfer Units (TTUs):
Enable technology to be transferred from headquarters to subsidiary and provide local technical services.
• Indigenous Technology Units (ITUs): Develop new products to local market using local technology.
• Global Technology Units (GTUs): Develop new products and processes to major world markets.
• Corporate Technology Units (CTUs): Generate basic long-lasting exploratory technology to be used by the headquarters.
Adding to this typology developed by Ronstadt, Reddy (1997) offers, and quite appropriately so, another class of global R&D units as “certain regional clusters are also becoming stronger despite market integration around standards and technologies” (Reddy, 1997, p. 1822):
• Regional Technology Units (RTUs):
Develop products and processes for regional markets.
Ronstadt’s classification is a way to understand that subsidiaries play important roles in innovation. Terpstra (1977) suggests that the more a company is engaged in international business, the more significant its businesses are, as well as its R&D activities.
Related to the debate on classifications relating transfer of technology/knowledge to corporation strategies, there is a seminal work by Gupta and Govidarajan (1991, 1994), focused on the subsidiary roles in the company structure. It identifies four generic roles for TNCs’ abroad units:
• Global Innovator: The subsidiary acts as a leader in the development and knowledge to other unities of a product group particular technology.
• Integrated Player: The subsidiary is as a
source of technology creation as a key user of a technology developed by other unity.
• Implementer: There is little engagement
of the subsidiary to build know-how, and it is strongly dependent of technological transfer from other TNC units.
• Local Innovator: The subsidiary is re
sponsible for developing technology to key functional areas, although almost totally of local use, there is, the knowledge developed by itself is too idiosyncratic to be used in other countries.
This typology was tested by the authors in North American, European and Japanese companies, and the model was then validated. However, they found internal differences in organizations in what concerns the role of know-how and its flow to the subsidiary. Thus, it shows that the role of technology to TNCs unities does not vary only according to their nationality and industry sector, but also depends on the characteristics of the each enterprise. It indicates that this situation is highly complex and that attempting to create a systematic strategic and practical pattern or model in the transfer and allocation of technology may be very troublesome (Howells, 2000).
In short, independently from the typology of subsidiaries roles, a TNC is aimed at coordinating a global network in order to take the best advantage from spatial assets, and once they are specialized and interdependent, the subsidiaries make differentiated contributions to integrated world operations (Blarttlet & Ghoshal, 1989). This logic of the role of operational subsidiaries comprises the development and propagation of knowledge in the world corporation, which is jointly developed by different domestic units and shared all over the world. Since it is important to analyze, that is the subject to be discussed in the next section.
Structure for International R&D
In basic, Hakason (1990) suggests that the structure TNCs use to perform world R&D has three basic stages: centralized, decentralized, and integrated. Gammelgaard (1999) presents a model to the work division of international R&D which initially establishes the difference between centralization and decentralization, besides the specification in case the company chooses a decentralized development. In this case, it is necessary to establish whether the company will operate in top - to-bottom strategy, when the tasks are assigned by the headquarters, or in bottom-to-top strategy, when there is a greater autonomy of the branches, developing products on the subsidiary (bottom) and sending to the headquarters (top), then to the whole organization.
In a little wider view, Bartlett & Ghoshal (1990) present four different structure s to the management of innovation processes:
• Central-for-Global Innovations: The development of new products and processes is promoted in the home country and transferred to global markets.
• Local-for-Local Innovation: Independent development of new products and processes occurred in each R&D unit, with worldwide distribution and oriented to the subsidiary local market.
• Locally-Leveraged Innovations: The development of new products and processes is made in the subsidiaries and distributed to the company as a whole.
• Globally-Linked Innovations: The development is promoted in collaboration with R&D units located in different countries for operating profits of global markets.
Each ofthese management modalities presents advantages and disadvantages, and is applied according to the company strategies and its business characteristics. They comprise a number of technological development possibilities in a transnational company, whether centralized or not.
However, in order to decentralize R&D, companies make use of different strategies when distributing their activities and control worldwide. Ronstadt’s typology (1977) presented in the previous section does not include intraorganizational relationships, although widely used as pattern of TNCs international R&D.
The literature shows many models for decentralized development management, even with central coordination. In the model developed by Chiesa and Manzini (1996), an analysis of
a number of international subsidiaries of world
enterprises and the interaction among them, there
is a classification with four R&D structures:
• Isolated Specialization Structure: A foreign laboratory is totally responsible for the development of certain global technology/product/process. This research center is unique in the TNC on the referred area. It is considered center of excellence, and there is no interaction between units on the course of the project development. The transfer of knowledge is limited mostly to the phase of introduction of products to the subsidiary market, going from the center of excellence to the TNC units. It can be performed in different ways, with temporary transfer from the central unit to the subsidiary (usually when the product is produced in the local unit) or the employees are trained in the center of competency to provide technical support to the introduction of the product in a local market (usually when the product is produces in a local different from the subsidiary). This structure is also known as Center of Excellence Structure (Chiesa, 2000).
• Supported Specialization Structure: There is a global center responsible for R&D work, as well as in the isolated specialization structure. However, there are many units in different countries which provide the global center with information useful to the innovation and development of new products, originated from requirements technology and marketing) of the local environment. Such structure combines the specialization/concentration benefits (efficiency, scale economy, project coordination low cost) with the possibility of monitoring local opportunities of innovation. “In this structure, the only phase to not imply in transfer of techno-
logical knowledge is development itself (Chiesa, 2000). The phase of creation/ conception takes place in the central unit, but the information originates from other supervision units. The strategies to transfer knowledge are similar to those used in the isolated structure.
Specialized Contributors Structure: A
division of tasks is established among units, thus maintaining a centralized coordination and each subsidiary is attributed individual activities within the program. The know-how developed in each unit is transferred to the central. In this structure, the interaction between globally spread units is much more complex than the supported specialization structure. In the conception phase, the data flow is ongoing from the units to the center and among the subsidiaries themselves. The phases to define the project and the technical development are performed by international teams and involve different units. That is, in this type of structure, there are much more interaction in the phases of definition and technological, product and process development.
Integrated Laboratories Structures:
Different laboratories spread across many countries and operating in the same production segments or technological areas. The TNCs holding such structure tend to give autonomy to foreign laboratories, but their initiatives and activities are centrally monitored in order to avoid duplications, coordinate spread efforts, and engage different markets. Just as in the specialized contributors structure, the transfer of knowledge is made with close interaction among the many unities in the phases of planning, formulation and technological development. A second name given to such structure is Network Structure (Chiesa, 2000).
These different structures are more frequently used for the development of products. For the research activities, the network structure is more usual since each unit makes its own program under some coordination, but the effort duplication is, in a certain way, allowed (Chiesa, 2000). The building of similar projects by many units at the same time is a way to accelerate the learning process, since each subsidiary work on different manners and under different perspectives, which can lead to internal competition among independent units, thus increasing their creativity and benefiting the company as a whole (Chiesa, 2000).
A classification similar to Chiesa’s was developed by Gassmann and von Zedtwitz (1999), who present five models of structural and behavioral orientation in international R&D organizations:
• Ethnocentric Centralized R&D: Every R&D activity is concentrated in the headquarters’ country of origin, considered technologically superior to their subsidiaries. Their purpose is “to protect” against their competitors technologies regarded as fundamental to the company.
• Geocentric Centralized R&D: It centralizes know-how acquired over the world and technologies available in overseas countries by means of sending R&D employees abroad in order to intensify relationships and collaborate to the local production, suppliers and key clients. In this manner, it is adopted in companies more dependent on foreign markets and local competencies than those which make use of the ethnocentric model.
• Polycentric Decentralized R&D: It is characterized by local development laboratories with no supervision of the corporation center, whose relationship is restricted to the report of activities from the local labs to the headquarters. The subsidiary R&D directors report directly to the manager of their own unit.
• R&D Hub Model: The R&D central unit, usually located in the headquarters, is the corporation technological leader since it is the major advanced R&D laboratory. All activities are decentralized, though tightly controlled by the head office. These foreign labs are usually involved in local monitoring and focus their activities on predetermined technological segments.
• Integrated R&D Network: In this structure, each integrated network unit specializes in a product, component, or technological field, thus becoming center of competency in its segment and has world product mandate for both product development and introduction to other markets. Differently from the Hub structure, the R&D foreign units play strategic roles, that is, a center of competency should not only supervise potential changes, but also engage in defining strategies and prospecting businesses, reaching the TNC as a whole. Once connections are established among the participant units, this structure requires a complex coordination of the R&D international activities.
These structures are not definitively established in a company, that is, the international organization can be - and usually is - continuously modified in order to promote the evolution of R&D processes. Gassmann & von Zedtwitz (1999) point five currents to this change, all based in two criteria: allocation of R&D activities (centralized or decentralized), and type of integration among teams (competition or cooperation).
The first tendency pointed by the authors emerges from the necessity to align the R&D process with the international market requirements (increasing cooperation in favor of the development of products and processes), so the R&D center starts to gather outer information and feedback. It characterizes the modification of an ethnocentric to a geocentric structure. Another current presented by Gassmann and von Zedtwitz (1999) intends to create a R&D decentralization, then characterizing the transition from a centralized structure (ethnocentric or geocentric) to a central coordination model (Hub).
As the R&D local units across the world increase their technological competencies, a third current of structural change is identified; an evolution based on the autonomy the R&D control center grants to the local units and, due to it, hey become more flexible and free to carry technological development. This change characterizes the transition from a central coordination structure (Hub) to an Integrated Network.
A fourth tendency identified by Gassmann and von Zedtwitz is related to enterprises whose international R&D growing and strengthening background based on labs is relatively autonomous. When these companies identify the benefits of integration and interconnection of their international R&D activities, centers of competencies are created, and mechanisms to coordinate them are introduced. This tendency characterizes the transition from a polycentric structure to an integrated network.
However, in order to reduce costs, the companies which adopted the Integrated Network structure are forced to focus their efforts on a smaller number of centers of competencies, characterizing a R&D recentralization. This consolidation is aimed at exploring scale effects and improving the coordination of R&D global activities, thus reducing task duplication and intensifying the transfer of technology among laboratories (Gassmann & von Zedtwitz, 1999, p. 246).
The polycentric decentralized model must be highlighted: “is the ‘dying model’ among the five forms of international R&D organization” (Gassmann & von Zedtwitz, 1999, p. 241). In this structure, despite the benefits from strong orientation to local markets, the lack of central coordination increases costs and efforts to promote
R&D. According to the authors and creators of such, the polycentric configuration leads to the central control (Hub) or the integrated network.
Under Gassmann and von Zedtwitz’s consideration, the similarities between these structures and those developed by Chiesa are stronger. Furthermore, both classifications complete each other. There are common points, in special those regarding clear divisions between the two main characteristics: development centralization (with or without the participation of development local units), and the integration in favor of the development (with a stronger or lighter connection with the development local units).
In short, the modes of managing global products development may differ from sector to sector, and company to company. There are a myriad of relevant aspects to consider in the internationalized R&D management process, but two of them are more intensely debated. One are related to the division of work among teams distributed throughout global subsidiaries, and the other refers to the organizational structure required to coordinate these R&D functional unities, both studied in the present section.
R&D INTERNATIONALIZATION OF A BRAZILIAN COMPANY
The present section presents an example of international R&D carried out by Embraco, a former Brazilian company now part of the North-American Whirlpool Group. Although it is formally a company from USA, its R&D (like most of its operations) is still managed from Brazil and by Brazilian executives, which make it an interesting case of a ‘Brazilian company’ with North-American capital control.
Embraco is a manufacturer of electric-electronic products for cooling solutions, including hermetic compressors, condensers, and evaporators. It employs around ten thousand people, was founded in 1971 and its first FDI was in 1994.
The company exports for more than 80 countries and, besides Brazil, it has factories in Italy, China, and Slovakia. In addition to globally locate its manufacturing activities, it also internationalizes product development intentionally (Galina & Moura, 2010).
In order to analyze the R&D function within the company, as well as its internationalization, we looked into the following: the structure of R&D functions, how to implement it, how product development activities are conducted by the company in Brazil and, finally, how they are carried out abroad.
The case study was made by extensive in-depth face-to-face interviews with the R&D director, the manager of product development and the manager ofinternationalization. These interviews were made with a semi-structured questionnaire which addresses specific issues contemplated in this study: the driving forces, roles of subsidiaries, and structure for R&D offshore.
Data used in this study are not only primary, but also secondary, and they were collected between the years of2006 and 2007. The sources of secondary data included: news, scientific articles, reports on internationalization process of Embraco compared to other Brazilian multinationals, and documents gathered directly in the organization (reports, contracts, plans, metrics).
The main drive forces that led Embraco to internationalize R&D were as follows:
• Adaptation of products to local markets:
Embraco has, with regard to technologies already dominated by the company, granted autonomy to its subsidiaries to adapt and customize products and manufacturing processes according to the characteristics
of local plants and markets. The company has opted for decentralization because it needs to operate closer to the customer and to respond more quickly, and this means identifying customer needs, translating them into projects and implementing these in a shorter time period than it would be possible if development were centralized. Development of partnerships with local suppliers: The internationalization of manufacturing activities at Embraco has enabled its offshore plants to develop a local supplier interface that can not only foster cooperation to improve technology but also improve local product development. Thus, agility is not restricted to the company’s responsiveness to its customers; in fact, it permeates the entire supply chain. Technology monitoring and accessing: Embraco is offshoring R&D activities to China not only because of the rapid growth observed in that market but also because of the large number of engineering graduates and post-graduates entering the job market every year, which is transforming some regions in that country into centers of excellence in technology. The same company also benefits from its local partners to monitor technology development. The company studied indicated that the development of proprietary technology was also a decisive factor behind internationalization. It claimed to have signed contracts with competitors to acquire technology for the ultimate purpose of developing products of higher quality. In other words, the company attempted, from the very beginning, to monitor the overseas technology environment. Many of the technological competencies were internalized from abroad, which then allowed the company to develop its own.
In relation to the role of foreign subsidiaries, two ofthe three plants owned by Embraco outside Brazil have considered proximity to market as strategic reason for being located in the site, but one of them (Italian unit) creates new processes, products and technologies for the entire organization (in specific niches), being considered ‘Lead’ of the global corporation according to Ferdows
(1997) . According to Ronstadt’s classification, the Italian subsidiary may be classified as Global Technology Unit, and the other two are Regional Technology Units.
It is worth to consider, however, that Embraco’s Server unit in China is going through a process of this kind as the company is considering the possibility of transferring to it certain R&D activities that were handled exclusively in the home country (Brazil). Thus, the plant’s strategic focus is shifting from market proximity to access to skills and knowledge, what may lead it to be reclassified as a ‘Lead’ unit (Ferdows, 1997) and a ‘Corporate Technology Unit’ (Ronstadt, 1977). Still with regard to Embraco, the company’s plant in Italy is undergoing a reverse process. At the time of its acquisition, the plant had a product line that the parent company lacked, which offered an opportunity for the latter to internalize new competencies. Despite the disadvantages, Embraco opted for a “divestment” strategy, causing the plant to shift its focus to high value-add products and thereby to become operationally sustainable. However, if the situation becomes unsustainable, a plant previously classified as a Lead unit can be reclassified as an Outpost.
Thus, summarizing, the Italian subsidiary is a global technology unit while the one in Slovakia can be regarded as a regional technology unit. Finally, the plant in China is a regional technology unit that may become a global and corporate technology unit as the company plans to expand the R&D function there.
Concerning to the coordination of R&D in Em - braco, we may consider that the company shows two R&D configurations: one for the development of company-dominated technology, and another for non-dominated technology. In the first case, the offshore units are free to engage in product development activities with very little coordination from the parent company because the purpose is to streamline products and processes for local markets. This configuration could therefore be described as polycentric decentralized. However, with regard to technologies not yet dominated by Embraco, R&D is almost entirely conducted by the headquarters in Brazil. The purpose here is to allow the organization to internalize the knowledge first. Once the technology has been mastered, it is then internationalized to the manufacturing units. Thus, this configuration was regarded as ethnocentric centralized.
The division of the company in dominated - technology and not-dominated-technology proved to be an interesting approach to the management of technological innovations. That management maintains centralized R&D activities for not- dominated-technologies at the same time that it establishes mechanisms for transferring this technology, when dominated, to foreign subsidiaries, disseminating knowledge throughout the organization and enabling that further developments of this technology are carried out also abroad.
This chapter presented a theoretical literature review which demonstrated that transnational companies have accessed important resources abroad by internationalizing R&D, and also their R&D investments into foreign subsidiaries have presented strong growth. Most of literature has been based on studies with TNCs from developed countries. Studies on global R&D are neglected for developing countries (Wu, 2007). Corroborating to this discussion, this chapter shows a study with a Brazilian company that have internationalized its product development.
The case study draws two general conclusions: first, Brazilian TNC internationalizes its R&D, thus corroborating with studies pointing tendency to the growing of internationalized R&D in developing countries companies (von Zedwitz, 2005; UNCTAD, 2005). Second, this Brazilian internationalization is performed similarly to developed countries. Similar conclusions are achieved by Wu (2007) in his study on Taiwanese companies, showing that “firms in developing countries appear to follow a similar path towards the globalization of R&D activities” (Wu, 2007, p. 308).
The study presented in this chapter was carried out from gathering important issues on global R&D strategies and management. One of these issues is the driving forces towards R&D internationalization, and the results of the Brazilian company are also related to the most known factors that influence corporations: market and/or technology. Another issue is related to the roles of foreign subsidiaries, which are determined by Embraco the same way as companies from developed countries determine specific contributions of affiliates for integrating a global corporative network. Finally, management ofglobal R&D also follows established rules observed in the literature.
From the results, we conclude that Embraco has decided to internationalize its product development process by looking for better conditions for meeting the client’s needs in foreign markets, and this organization has been succeed on this purpose. Competencies and experiences of the R&D team abroad were assimilated into the corporation headquarters (in Brazil) in a way they have intentionally decided to locate an R&D unit in China, intending to access skills and knowledge. R&D activities were thus managed in order to have differentiated contributions of domestic units, leading to jointly development of knowledge, similar to transnational model by Bartlett and Ghoshal (1989). Considering this reality, it raises the question whether companies from emerging countries that recently have been globalized (the called late movers) may follow, some decades later, the same steps to consolidate TNC in terms of R&D internationalization. The answer is positive for the example here analyzed, but it requires additional research to achieve further conclusions.
