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Vital Wave Consulting Field Teams
Latin AmericaArgentinaBrazilChileCosta RicaDominican RepublicMexicoPeru
AsiaIndiaChinaCambodia
Eastern EuropeEstoniaUzbekistanUkraine
AfricaEgyptSouth AfricaNigeriaKenya
Middle EastUnited Arab Emirates
United StatesCalifornia (Headquarters)
The Globalization of Corporate R&D
Changing Patterns of R&D Location, Determinants, and Developing Countries
May 13, 2010
Joe FalitResearch Associate
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Agenda
Background
Key Trend
Evidence of Internationalization
Drivers of Internationalization
Case Study - General Electric
Final Remarks
Q&A
1
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Determining the Causes
• Secondary research on firm-level surveys
• Review of scholarly work and • Third-party reports• Case Study - General Electric (GE)
2
Approach
The Issue - Corporate R&D site location decisions
Reviewing the Evidence for R&D Internationalization
• Analyze changes and patterns of R&D FDI
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
8.5
0.1
3.1
0.20.8
14.8
10.2
0.6
3.2
0.1
3.7
18.2
0
10
20
Canada EU Eastern Europe
Latin America Africa Middle East Asia-Pacific
1995 2005
Key Trend
R&D work is increasingly performed by emerging markets, and East Asia is the main beneficiary
Source: OECD
R&D Expenditure of Affiliates of US Parent Companies Abroad by Country or Zone of Destination
70.4
61.0
3
%
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Europe Still Receives Most US R&D DollarsR&D Expenditure of US Foreign Affiliates by Region: 2007
Source: U.S. Bureau of Economic Analysis
Rest of Latin America Brazil
Middle East
Africa
Rest of Europe
United Kingdom
Germany
Rest of Asiaand Pacific
Japan
China
4
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
US Corporate R&D is Moving Abroad
Between 1994 and 2004:• R&D spent by US corporate parents increased 166%, while R&D spent on US MOFAs increased 231%• US MOFAs increased their share of total R&D spending from 11.5% to 15.3%
Source: U.S. Bureau of Economic Analysis
0
5
10
15
20
25
30
94 95 96 97 98 99 00 01 02 03 04
MOFAsUS$
Bill
ions
R&D Performed by US Foreign Affiliates: 1994–2004
5
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
US R&D Flowing Towards the Developing WorldR&D Expenditure of US Foreign Affiliates by Region: 1995-2005*
R&D - Relative Gainers and Losers
Gainer
Looser
* Figures represent percentage point change in proportion of global, corporate R&D expenditures for given regions between 1995 and 2005
6
1.7
0.5
2.44.0
3.4
2.9
0.1
0.5
0.1
0.5
9.4
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
A Few Developed-Country GainersEmerging Markets Have Seen Most but not All Growth
Between 1995 and 2005, U.S. foreign affiliates in Israel increased their share of total R&D expenditures from 1% to 4%
South Korea & Taiwan - R&D investment mostly from internal sources
Sweden & Finland - continue to be most R&D intensive countries in EU
7
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
China and India - Competing for R&D DollarsIndian English Language Abilities Provide a Competitive Edge
India China
Number of Science & Engineering (S&E) Higher Education Degrees Produced Annually
60,000 75,000
Number of Companies on the Fortune 500 List with R&D Facilities in Country
63 98
Strength of English Language Skills Possessed by the S&E Workforce
Moderate / Strong
Poor / Moderate
8
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Corporate R&D spending in the developing world is driven by strong economic growth in these markets and their growing pools of highly skilled labor
• India is now arguably the most attractive overseas R&D location
• In terms of the quality and availability of human capital, India, China, and Brazil can compete with developed countriesSource: The Economist, 4/17/2010
Source: The Economist, 4/17/2010
Talent & GDP Growth in Emerging World Fuels R&D
9
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Drivers of R&D InternationalizationTwo Primary Types of R&D Sites
Product Development
Purpose: Bring product to local market
Demand-orientedmotivations for site location
Purpose:Augment knowledge base of parent corporation
Supply-oriented motivations for site location
Basic Research
10
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Product Development Basic Research
Availability of Local Talent is Key DriverCost Reduction & IP Right Considerations are Less Important
Proximity to customers
Cooperation with local partners
Proximity to top R&D talent
Proximity to top R&D talent
Agglomeration of resources
Secondary FactorsCost reductionIP right considerations
11
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Case Study: General Electric (GE)Background
Developing Country R&D Sites
$3 billion between its Global Research division and business units
Spending on R&D (2008)
India - Bangalore China - Shanghai Brazil - To be established in 2010
GE is an American-incorporated multinational corporation, with revenues exceeding $180 billion, that produces a diversified set of technology products and services
12
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Reasons for Site Location
Unique & Profitable Innovations
• Vscan Compact Ultrasound• Mac 400 ECG• H80 Turboprop Jet Engine
• “Customer connectivity”• “World’s best talent”• “Reverse innovation”
Sources: GE Healthcare
Case Study: General Electric (GE)The Importance of Reverse Innovation
In 2008, six years following the launch of GE’s portable ultrasound, the product line was a $278 million business growing 50 to 60 percent annually
Source: BusinessWeek
13
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Grant More Autonomy and Decision-Making Capabilities• Delegate P&L responsibilities
• Access to upper-level management at HQ
Concentrate on Low-Cost Innovations• Expand customer base - narrow margins to gain volume
• Creativity not adaptation - build products from the ground up
• Reverse innovation
14
Case Study: General Electric (GE)Lessons on the Management of Foreign R&D Sites
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Final Remarks
Emerging Markets Becoming Competitive with First World
Developing Countries Important Consumer Base
Globally Dispersed Talent
• Reverse migration & improved domestic education
Important Nontraditional Motivations for Internationalization
Defensive R&D
• GE and Chinese power-generation companies in Africa
Reverse Innovation
• GE Vscan Compact Ultrasound & Mac 400 ECG
Diversity of Perspective
15
© 2010 Vital Wave ConsultingTM
Proprietary and Confidential: Do not copy or distribute.
Report and presentation available soon at:http://www.vitalwaveconsulting.com/insights/articles-presentations.htm
For more information, email info@vitalwaveconsulting.com
The Globalization of Corporate R&D
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