The recent economic crisis has brought to light the importance of opportunities that lie in the newly emerging markets (South). Today, we observe southern multinational corporations acquiring access to key resources of knowledge and technologies through global networks of innovation. Should Europe fear the rise of the South or see this global trend as an occasion to turn the threats into opportunities? Mapping the new geography of innovative activities and understanding barriers to international innovation collaborations has been the main objective of the EU 7th Framework Program project INGINEUS. The article introduces the notion of global innovation networks and presents the main results and policy options for both Europe and its southern partners to gain from challenges faced from the internationalisation of innovation activities.
Keywords: Newly emerging economies, Europe, Innovation, Internationalisation, Networks, R&D Offshoring.
JEL classification: O3, O52
Suggested Citation: Naghavi, Alireza and Comune, Maria, The Globalisation of Innovation: Challenges and Opportunities for Europe (May 8, 2012). Review of Environment, Energy and Economics (Re3), http://dx.doi.org/10.7711/feemre3.2012.05.001
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Innovation is a key component of productivity and growth for any economy. The recent shift of events in the world economy has brought the internationalisation of innovation activities in centre stage of debates on globalisation. The European Commission seeks to fulfil its Europe 2020 goals of achieving smart, sustainable and inclusive growth, by seeking innovation policies that retain, foster and attract innovation.
This note sheds light on the importance of tapping into international pools of knowledge in the structure of any upcoming European innovation policy. It discusses results from a recently concluded EC project that proposes the need to set the Europe 2020 strategy in a global context in order to achieve a successful implementation of its goals when basing growth on knowledge. It emphasises the importance of newly emerging economies, yet suggests that the widespread fears that R&D offshoring may have detrimental effects on growth and competitiveness are unfounded.
In the last decade, non-OECD countries have attracted an increasing amount of R&D investment. Newly emerging economies (South), such as China and India, are now considered to be among the most attractive locations for future investments. This is mostly due to their large and rapidly growing markets, their large pools of qualified workers and their relatively low, though rising, labour costs (UNCTAD, 2005). The recent economic and financial crisis have further contributed to the organisational restructuring of many European companies with the simple aim of maintaining profitability. Parts of the developing world are both attracting knowledge intensive activities and expanding their balance sheets abroad at a rapid pace. Multinational corporations (MNCs) from the South are responding to growth at home with long-term internationalisation goals by means of gaining access to key resources of knowledge and technologies through global networks of innovation. In 2010, developing economies for the first time absorbed close to half of global foreign direct investment (FDI) inflows and generated record levels of FDI outflows, much of it directed to other countries in the South. In the same year, the developed countries’ share of FDI inflows in the world total fell below 50 percent (UNCTAD, 2011).
The globalisation of innovation presents challenges and opportunities for both European and Southern countries. But are these truly challenges, or could they be converted to opportunities? Firms may reduce their R&D investments at home, while moving or opening new facilities abroad to profit from specific competitive advantages. Brain drain, deskilling and job losses are among the main sources of conflict between country-partners engaged in the offshoring of R&D and innovation activities. We expect the geographical expansion of knowledge activities to lead to more competition for highly skilled labour and other strategic resources. Firms and institutions should face the challenge by placing themselves in a position where they could not only attract mobile knowledge assets, but also exploit knowledge assets generated. In short, they must build and take part in global networks of innovation, a growing phenomenon that may turn challenges into opportunities.
This issue is explored by project INGINEUS (Impact of Networks, Globalisation, and their Interaction with EU Strategies), sponsored by the 7th Framework Programme (FP7) of the EU Commission (Cooperation, Socio Economic Sciences and the Humanities, 2009-2011) and coordinated by FEEM. INGINEUS has mapped the new geography of knowledge-intensive activities and put an initiative in understanding the concept of Global Innovation Networks (GINs). It analysed the policy-related institutional aspects that affect the features and development of GINs between Europe and some of the fastest growing emerging economies in the world (notably Brazil, India, China and South Africa).
The rest of this paper is as follows. Section 2 introduces the concept of GINs, while Section 3 explains some barriers to its formation. Section 4 continues by assessing the role and impact of internationalisation strategies, followed by concluding remarks obtained from the results of the INGINEUS project.
2. Defining Global Innovation Networks
2.1. The Concept
Anticipating the changing strategies and long-term internationalisation goals of MNCs from both developed and emerging economies, the research project focused on the evolution of Global Production Networks (GPN) to GINs and reflected upon how government actions and business efforts can interact in a globalised knowledge economy. That is, even if innovation may result a highly localised phenomenon within national systems of innovation, the creation and diffusion of ideas and knowledge may not abstract from the formation of global networks.
Methodologically, the project adopted a dynamic, global, multi-sectoral and multi-method approach. It combined the analysis of existing datasets with the collection of new data through a survey and in-depth case studies. The macroeconomic analysis covered all industrial sectors for which data is available, while the micro and meso analysis of the project focused on the three industries of agro-processing, automotive and ICT, to represent different extents of R&D intensity. Such five-dimensional approach was crucial to address our main research questions: Why and how do GINs arise? What are some barriers that work against their formation? Are there any sectorial difference in the offshoring of R&D? Do firms go global to complement or substitute their R&D at home?
2.2. The Existence
The findings show that European firms are already active in the process of creating GINs to reap the opportunities offered by the rapidly growing emerging markets such as China, India or Brazil. They have also been engaged in the creation of new global market niches by ‘new to the world’ technologies. Results from the INGINEUS investigation suggest that more than half of the 1215 firms polled in the INGINEUS Survey (i) operate across national borders, (ii) are at least somewhat innovative and (iii) rely on some form of networks for their offering [Note 1].
Nonetheless, global innovation networks is only a new phenomenon and not yet exploited by policy makers and industry representatives as just about one percent of the total number of firms in the survey are highly involved in all three components of GINs (INGINEUS, 2011d).
3. Which barriers and for whom?
A total of 82% of European firms interviewed between 2009 and 2010 were facing some type of barrier or challenge when engaging in innovation-related collaborations with foreign firms. INGINEUS revealed that (i) migration regulations for employing foreign scientists and technicians, (ii) regulations, practice and jurisprudence around intellectual property rights, (iii) access to international research networks and (iv) rules for foreign direct investment and trade, are among the most important policy-related factors that could improve the internationalisation of European firms’ innovation activities (Borrás and Haakonsson, 2011).
At sectoral level, barriers to international collaborations risk to slow GINs formation and evolution mostly for those industries dominated by complex engineering knowledge and advanced production equipment. INGINEUS Survey findings revealed that only the few large biotechnology related MNCs from advanced countries are those highly engaged in GINs, and very few European ICT firms offshore innovation or production (INGINEUS, 2011c). European industries face a limited domestic supply of highly trained personnel and the challenge of attracting skill from abroad or going global to search for talents. In the South, Chinese and Indian ICT firms present a more global reach, strongly motivated by being highly export oriented and highly specialised in sub-fields (INGINEUS, 2011a).
In general across all countries and sectors, it resulted that working for consistent global standards is increasingly crucial to motivate innovative activities, to supply new products and to facilitate market access. European respondents emphasised the need to harmonise tools, structures and processes for international collaboration and to facilitate the management of globally dispersed projects. Differently, the greatest obstacles for the South are changing locations of operations and gaining local management acceptance.
4. The role and impact of internationalisation strategies
Emerging markets clearly represent opportunities to European innovative firms to expand their operations, to gain access to low cost labour and to take part in new knowledge networks. INGINEUS aimed to understand the changing strategies of European and Southern firms in the internationalisation of their innovative activities and the effects of R&D offshoring on economic growth at home and in host locations.
As previously underlined, it is in sectors with lower R&D entry costs that networks conducting complementary innovation tend to occur and enhances growth (Naghavi and Ottaviano, 2010). If the internationalisation of innovation is not aimed to decrease R&D investments and employment at home, discouraging R&D offshoring may risk to reduce the competitive standing of firms in the global market. In Europe offshoring regions experiment higher productivity growth, while R&D offshoring activities boost the host region productivity only when investments are large enough (Castellani and Pieri, 2011).
The decision to offshore R&D can be driven by demand and/or supply factors. Innovative firms may go abroad to undertake complementary R&D activity or to substitute R&D undertaken at the headquarter. INGINEUS case studies revealed that MNCs still conduct core R&D in the HQ and that they internationalised innovation for the purpose of product adaptation, customer support and access to local markets. This is the case of the automotive industry and of the agro-food industry. Differently, both substitution and complementarity are observed in the ICT sector. Here, cost factors and market proximity matter and products are developed abroad for both local and global market (INGINEUS, 2011b) [Note 2] .
On this basis we can conclude that offshored R&D is in most cases complementary to R&D activity conducted at home and as such should not have a negative impact on R&D activity and employment in Europe. The findings suggest that policies aiming to discourage offshoring may reduce the competitive standing of EU firms in global markets.
5. Concluding Remarks
A correct analysis of the globalisation of innovation requires a multi-dimensional approach. The project INGINEUS has brought us a step closer in achieving this by creating a new perspective from which we believe Europe must view innovation to attain and maintain long-term growth. The project focused on GINs: their existence, impact, and implications. Presently, we can observe two different categories of global networks of innovation: one seeing large multinational corporations as central node, and the other involving many different actors, some tied together through ownership, and others through R&D agreements or partnerships (INGINEUS, 2010).
An important upshot of the project was providing evidence that offshoring R&D activities by European firms tend to be complementary to those carried on at home. Therefore, measures aimed at providing disincentive to offshoring activities may actually reduce firms long-term competitiveness by limiting the opportunities of technological upgrading (INGINEUS, 2011b).
In sum, both Europe and its Southern partners must face the challenge of establishing a virtuous cycle that could foster and attract new knowledge from abroad. That is, regional and national policymakers must not only ensure that their locations is an attractive node in firms’ global networks, but also present the ability to identify and absorb technologies. Given the expansion of knowledge-based economies and the globalisation of innovation, INGINEUS underpins the importance of a shift of context to an outward-looking rather than a protectionist perspective in European innovation policy and growth strategy.
Note 1] INGINEUS sample is composed by ICT firms set in China, India, Norway, Sweden and Estonia;, agro-processing firms located in South Africa and Denmark and automotive companies operating in Germany, Italy and Brazil. INGINEUS survey results are available at: http://ingineus.eu/UserFiles/INGINEUS_D2.2_Fulldatasetandcodes(1).zip
[Note 2] For case studies see INGINEUS, 2011e. Conclusions on R&D complementarity elaborated by Lukasz Grzybowski.
Borrás, S. and Haakonsson S. (2011), INGINEUS Policy Brief n.4, “GINs: Evidence and Policy Challenge”, December 2011, forthcoming at http://www.ingineus.eu/getpage.aspx?id=421&sec=17
Castellani, D. and Pieri F. (2011) R&D offshoring and the productivity growth of European regions. Universidad de Valencia Working Papers in Applied Economics, WPAE-2011-20.
INGINEUS (2010), Deliverable 3.2: National Innovation Systems and Global Innovation Networks, June 2009, available at http://www.ingineus.eu/UserFiles/INGINEUS_D3.2_part1.pdf
INGINEUS (2011a) Deliverable 4.1: Patterns of knowledge accumulation, institutional frameworks and insertion in GINS in successful sub-national regions, June 2011, available at http://www.ingineus.eu/UserFiles/INGINEUS_D4.1.pdf
INGINEUS (2011b) Deliverable 8.1: The long-run impact of GINs in Northern countries, December 2011, forthcoming at http://www.ingineus.eu/getpage.aspx?id=302&sec=300
INGINEUS (2011c) Deliverable 9.2: Report summarising the implications per industry for EU countries and emerging economies, December 2011, forthcoming at http://www.ingineus.eu/getpage.aspx?id=302&sec=300
INGINEUS (2011d) Deliverable 10.1: Comprehensive research paper on “Global Innovation Networks: challenges and opportunities for policy”, December 2011, forthcoming at http://www.ingineus.eu/getpage.aspx?id=302&sec=300
INGINEUS (2011e) Deliverable 5.1: “Research paper on “Understanding strategies of R&D offshoring by Northern and Southern firms”, June 2011, available at http://www.ingineus.eu/UserFiles/INGINEUS_D5.1_3_.pdf
Naghavi, A., Ottaviano, G. (2010) Outsourcing, complementary innovations, and growth, Industrial and Corporate Change, Volume 19, Number 4, 2010, pp. 1009–1035
UNCTAD (2005), World Investment Report: Transnational Corporations and the Internationalisation of R&D, United Nations publications, 2005, available at: http://www.unctad.org/en/docs/wir2005_en.pdf
UNCTAD (2011), World Investment Report: Non-equity modes of international production and development, United Nations publications, 2011, available at: http://www.unctad-docs.org/files/UNCTAD-WIR2011-Full-en.pdf
Impact of Networks, Globalisation, and their INteraction with EU Strategies