prism / 2 / 2006 · prism / 2 / 2006 global r&d danisco: global and local r&d danisco is a...

Prism / 2 / 2006

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Back in the mists of time, companies conducted theirresearch and development in well staffed and well fundedcorporate laboratories, their secrets closely guarded fromthose outside. In fact, Arthur D. Little was instrumental inthe creation of the first such lab, for General Motors in1911, and for many years the corporate labs worked well.Technologies and products were conceived that helpedbuild the multinational companies that dominated theeconomy of the 20th century, creating wealth and provid-ing secure long-term employment on a phenomenal scalewhile applying science and engineering in ways thatenhanced the quality of life for much of the world.

But the old model has changed. Many of the corporatelaboratories have disappeared; others, much reduced insize, are focused on a narrower range of medium-termbusiness priorities. Business investment in R&D remainsas vital as it ever was, but the new model is one of “openinnovation”, drawing on knowledge, skills, technology andresearch outputs from a wide variety of different placesand sources, and deploying them through a multiplicity ofexploitation mechanisms – product and service creation,spin-outs and start-ups, joint ventures, licensing and soon. Where substantial in-house R&D laboratories remain,they are likely to see themselves not as ivory towers butas nodes in global networks of knowledge.

In a globalised world, those knowledge sources, and theoutput routes by which they can be exploited, are distrib-uted across the globe. So for global firms there is a needto place R&D activity in different international locationsand to enter into collaboration with partners in an evenwider range of places. Sometimes the aim is to tailorproducts and services to local markets and technicalrequirements, helping to enhance the value that can begenerated in those markets by companies based else-where. Sometimes – increasingly – the aim is to tap intolocal sources of expertise and research to augment whatis available at the home base of the organisation. Often,both elements can be combined to good effect.

Global R&D: Where to place the bets?David Brown, Merete Fargemand, David Lever, Philippe Mengal,Paul van Tilborg and Philip Kyte

The old model of R&D is

quickly morphing into

something completely dif-

ferent as centralised R&D

functions are replaced by

global cooperation across

the board.The new model

draws on knowledge,

skills, technology and

research from a wide vari-

ety of sources. In this arti-

cle the authors describe

how global firms can set

up R&D networks that

provide maximum benefit

in their endless search for

innovation.

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Prism / 2 / 2006

Global R&D

Danisco: Global and local R&D

Danisco is a Danish company which has become one ofthe world’s leading players in the food ingredientsindustry. With activities in more than 40 countries andover 10,000 employees worldwide, globalisation comesnaturally to Danisco and to its R&D.

The company has R&D facilities in many countries,some planned and built for Danisco and others theresults of acquisitions, and it finds many advantages inhaving R&D facilities located in several countries. Forexample, Danisco has a health and nutrition R&D cen-tre in Finland. “The Finnish research environment withinthe area of nutrition is excellent,” says Dr LeifKjaergaard, Chief Technology Officer of Danisco. “Thismeans that in Finland there is critical mass in the edu-cation of nutritional scientists, enabling us to recruitfrom top-class nutritional scientists as well as to estab-lish valuable collaborations.”

Starter cultures for fermented dairy products are animportant R&D area for products such as cheese andyoghurt. Danisco has placed its R&D centre for dairycultures in France. Knowledge of cheese is tremendousin France, and being close to the market and some ofthe world’s largest dairy companies in France is themain determining factor for the location of the culturesR&D centre, according to Dr Kjaergaard.

Danisco has R&D facilities in Asia, mainly in Singaporeand China. R&D facilities in China allow Danisco to beclose to the world’s fastest-growing food market. Themain advantages of placing R&D in China are access toa fast-growing customer base and a high degree ofinsight into a market which is very different fromEurope or America - enabling the targeted developmentof ingredients to suit these different needs. Knowledgeabout global, regional and local food trends and prefer-ences is vitally important to Danisco as a global foodcompany.

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But all this is a costly business, and choosing where tomake a play, and with whom to link, involves makingtough decisions. The growth of Asian economies meansthat R&D investments in emerging countries, particularlyIndia and China but with countries such as Brazil andMalaysia in their wake, are high on the agenda with manyCEOs and Chief Technology Officers. Here, the decisionsare especially tough because although countries such asIndia and China offer formidable and fast-developingknowledge and technology bases, the sheer scale of thecountries and the cultural issues that face investors fromelsewhere pose real challenges. These make it hard to seehow to determine the best course of action and harderstill to get maximum business value from the investmentsmade or the collaborations entered into. Smart Innovationdemands that companies make objective choices, drawingon the most appropriate skills and technologies fromwherever they can be found, and translating them cost-effectively into products and services for a wide variety ofmarkets across the world. Sometimes, acquisitions openup the chance to do that – for instance, when Swiss-based Nestlé acquired competitor Rowntree Mackintosh,the latter’s R&D centre was transformed into a global con-fectionery centre of excellence for the new parent. Atother times, the combination of research and engineeringexcellence with a flexible, responsive managementapproach secures strategic partnerships with companiesfor R&D providers, such as BAE Systems’ alliances withLoughborough and Cranfield universities in the UK.

For companies looking to undertake R&D internationally,whether through direct investment of facilities and peopleor through collaboration with local partner companies,R&D institutions or universities, it is essential to under-stand how to make these difficult choices. At Arthur D.Little, we have advised many of the companies that findthemselves addressing this sort of challenge, as well asnational, regional and city authorities that want to ensuretheir locations are as attractive as possible to inward R&Dinvestors. All need to understand the costs and benefitsinvolved, such as those in the table below, derived from arecent study for the UK government.

Smart Innovation demandsthat companies makeobjective choices, drawingon the most appropriateskills and technologiesfrom wherever they can befound, and translatingthem cost-effectively intoproducts and services for awide variety of marketsacross the world.

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Prism / 2 / 2006

Global R&D

So how do companies make location decisions?

Two recent studies have thrown light on this critical question.

The first took a European perspective. Under the auspicesof EIRMA, the European Industrial Research ManagementAssociation, several of us surveyed companies across abroad selection of industries. A total of 56 companies,predominantly large multinationals, responded to the sur-vey, with nearly all respondents based in Europe. All com-panies employed at least 100 people and over 70 percent

Exhibit 1 Costs and benefits of internationalisation of R&D

Source: Thuriaux, Veugelers, Brown, ADL report: Internationalisation of R&D for the UK Office of Science and Innovation

Potential benefits: Why do firms doR&D at affiliate level?

� Closer to ‘lead’ markets� Better integration with local production� More responsive to local regulations� Access to foreign centres of excellence� Greater efficiency in production and innovation

(not only for the foreign subsidiary but for therest of the company through intra-firm transfers)

� Reduced economies of scale and scope� Disadvantage of being outsider in the host

country innovation system� Increased barriers to internal knowledge

transfer due to inter-unit geographical andtechnological distance

� Leakage of key technology to foreigncompetitors

Potential costs: Why do firms keep R&Dat home?

Exhibit 2 Determining factors for location of R&D

Rank

12345678910111213141516

Factors

Access to customersAccess to expertise/technologyAccess to collaboratorsMindset/creativityInnovativeness of customersEntrepreneurial spiritIP systemsRegulatory systemsCultureTax systemsAvailability of fundingEmployment lawLanguage barriersInternal differences in the regionCost of labourProtectionism

Weight

4.54.44.03.93.93.63.53.23.13.02.82.82.72.62.62.5

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more than 5,000 people. Virtually every respondent com-pany performs R&D on several continents. Eighty-sevenpercent of the respondents considered the location whereR&D is carried out to be important.

Exhibit 2 shows an overview of the factors determiningR&D location and the weight assigned to them by therespondents.

It’s clear from the results that factors connected with peo-ple, innovativeness and creativity, and the ability to engageand network with customers, collaborators and sources oftechnology are more important in location decisions thantax, labour costs or the availability of funding. That’s impor-tant news for Western economies, where costs are a lothigher than in Asia (though the difference is narrowing asIndian and Chinese scientists and technologists are increas-ingly in demand). Intellectual property and regulatory sys-tems are of intermediate importance to the respondents.

Looking at the table in more detail, the top-ranking factorsare access to customers and access to expertise/technol-ogy. On both of these factors, the EU15 was rated most

Exhibit 3 Scoring of four regions with respect to factors influencing R&D location

Access to customers

EU 15

USA

Asia

Eastern Europe

Access to expertise/technology

0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0Score (4-very favourable, 1-unfavourable) Score (4-very favourable, 1-unfavourable)

Access to collaborators

EU 15

USA

Asia

Eastern Europe

Mindset/creativity

0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0Score (4-very favourable, 1-unfavourable) Score (4-very favourable, 1-unfavourable)

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Global R&D

highly, closely followed by the US. Asia and EasternEurope follow at some distance. The EU15 and US alsoscore substantially higher than the other regions on thefactors ranking 3, 4 and 5 (access to collaborators, mind-set/creativity, and innovativeness of customers).

So Europe is actually in pretty good shape when it comesto its competitiveness for locating R&D. It continues toscore highly on most of the factors that companies see asimportant.

That said, the sheer size and rate of change of Asian mar-kets – and the strength of countries such as India andChina as sources of talent – mean that global firms willinvest in a research and development presence in thosecountries. Of the survey respondents, 76 percent foreseethat their next R&D location will be opened in Asia. This isconsistent with other work: for example, we found similarresults when surveying views among Belgian, German,Austrian and Swiss companies (see Vantrappen, Bohlin,and Bijnens, “A Climate for Knowledge: How Governmentscan Enable Innovation” in Prism 2004 no. 2, p.25). But thatdoesn’t mean Europe is facing disaster in research. Mostcompanies expect the level of R&D they perform in Europeto stay the same or increase over the next 10 years, withonly a quarter anticipating a decrease. R&D in India andChina – and doubtless elsewhere in Asia – will grow.Western firms will want an R&D presence, through directinvestment and/or collaboration with research providerssuch as universities, in those countries. This can be on avery large scale – at the time of writing, for example, DowEpoxy had just announced plans to invest more than US $200 million over the next five years in R&D facilities inChina. Meanwhile, Asian firms with global aspirations willinvest both at home and internationally and their growingpotency will make them important partners for Europeanand North American research institutions and companies.

In a second study, sponsored by UK Trade & Investment,we interviewed decision-makers from over 70 companiesacross four parts of the world that for different reasonsare important in globalised R&D. In each case we focusedon a selection of sectors especially important in that coun-try in relation to R&D collaboration. We looked at the US,

Exhibit 4 R&D in Europe

Do you think your company willplace more or less R&D inEurope over the next ten years?

More

50

40

30

20

10

0Less Same

Res

pons

e pe

rcen

t

Europe is actually in prettygood shape when it comesto its competitiveness forlocating R&D.

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home to the world’s largest science and technology base.We looked at the Nordic countries, sophisticated andmature R&D performers with high R&D intensity and,because of their comparatively small size, well versed ininternational collaboration and investment. Then we lookedat companies from the fast-growing economies of Chinaand India, recognising that companies from those coun-tries with global aspirations will be increasingly importantplayers in the world of international research and develop-ment, while leading universities and research institutionsin those countries operate formidable science base inscale, quality and cost.

Turning to the results from US and Nordic companies,there is a good deal of consistency between the two setsof opinions as to which factors rate most highly in thechoice of a location for investment on collaboration, and

Exhibit 5 Decisive location factors (Nordics & USA)

Nordics

Career prospects

0 1 2 3 4Importance (5-priority, 1-not important)

5

Individual taxation

EU research progaccess

Immigration

Market access

Education for staff

Future R&Dexcellence

Staff willingness

Language

Incentives

Windowon the world

Costs

Culture ofR&D base

Decision makingspeed

Willingness tocollaborate

IP framework

Internationallyrecognised R&D

Qualified staffavailability

Flexibility ofR&D base

USA

Career prospects


5

Individual taxation


Immigration

Market access

Education for staff

future R&Dexcellence

Staff willingness

Language

Incentives

Windowon the world

Costs

Culture ofR&D base



IP framework




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Prism / 2 / 2006

Global R&D

broad consistency with the first study. The top factor forboth US and Nordic companies is the availability of highquality, qualified staff. A willingness to collaborate, forexample among the academic and research community, israted highly, as is the related issue of the culture withinthe R&D base and its flexibility in co-operation. A soundintellectual property framework is important too. Moreobvious issues such as cost and language barriers feature,but are somewhat less strongly weighted, particularly byNordic companies.

Turning to companies in India and China, several featuresstand out. Indian companies look for partnerships withcountries with an internationally recognised reputation forexcellent R&D, and which are able to provide a “windowon the world” of wider science and technology develop-ments. Companies in both countries look for partner loca-tions which are taking the necessary steps to ensure they

Exhibit 6 Decisive location factors (China & India)

China

Career prospects


5

Individual taxation


Immigration

Market access

Education for staff


Staff willingness

Language

Incentives

Window on the world

Costs

Culture ofR&D base



IP framework




India

Career prospects


5

Individual taxation


Immigration

Market access

Education for staff


Staff willingness

Language

Incentives

Window on the world

Costs

Culture ofR&D base



IP framework




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sustain their R&D excellence into the future, and both alsolook for locations where they can be sure of a pool of wellqualified staff from which to recruit. In the case ofEuropean locations, investments and collaborations thatgive access to EU research programmes are given a mod-erately high rating. Against this, some of the more obviousfactors such as relative costs and the presence or absenceof language barriers assume lower significance. Perhapsunsurprisingly, Chinese companies attach weight to a loca-tion that offers a secure intellectual property framework.

There’s an important message for governments in thesefindings. The growing importance that companies attach tothe availability of suitably qualified staff is a salutary warn-ing for developed countries which, in relation to their pop-ulation, are producing far fewer graduate scientists, tech-nologists and engineers than the Indians and Chinesethemselves. A healthy disciplinary base in universities andcolleges and a favourable public reputation for technology-based industry look like being essential characteristics ofcountries that will continue to be partners of choice.Moreover, the fact that India and China rate highly thecommitment of the country to sustain its R&D excellencein future is a warning for Western countries that are failingto keep up with the fast-growth economies in financialsupport for the research base in universities and else-where. On the positive side, however, many local andregional government and public agencies are focusingsupport on clusters or ‘poles of excellence’, where co-operation between companies and strong links to the sci-ence base in universities and research institutes can bebuilt up. Arthur D. Little has helped a range of them to doso, such as the Walloon regional government in Belgiumand the UK’s Regional Development Agencies.

During the study we were surprised by the low level ofawareness among many companies of the details of theR&D capabilities available internationally. We asked partic-ularly about the perception of the UK’s capabilities as ascience and technology partner. The UK has one of thehighest-quality and, in terms of scientific output per unitinvestment, the most cost-effective science bases amongthe advanced countries and, as our recent work for theUK government’s Office of Science and Innovation has

The growing importancethat companies attach tothe availability of suitablyqualified staff is a salutarywarning for developedcountries which, in relationto their population, are producing far fewer graduate scientists, technologists and engi-neers than the Indians and Chinese themselves.

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shown, it is more internationalised in character than is nor-mal for countries of its size. Intuitively, one might there-fore have expected the UK’s science base to be reason-ably well understood by companies elsewhere. In fact, wefound that, beyond a general perception that the UK hasgood science, detailed awareness was extremely lowacross the majority of companies interviewed – not only inthe Chinese and Indian companies, some of them relative-ly new to international collaboration, and in the US wherefirms might consider the States largely self-sufficient inscience and technology, but also in the sophisticated,mature R&D performers from the Nordic countries. Soanother message for governments is: make sure thatpotential R&D investors have ready access to appropriate,targeted information on science and technology capabili-ties – don’t just assume a general good scientific reputa-tion will suffice.

R&D in India and China – and doubtless elsewhere in Asia– will grow. Western firms will want an R&D presence,through direct investment and/or collaboration withresearch providers such as universities in those countries.Meanwhile, Asian firms with global aspirations will investboth at home and internationally – and their growingpotency will make them important partners for Europeanand North American research institutions and companies.

Insights for the executive

There are some important lessons to draw for CEOs andCTOs looking to choose where to place their R&D and sci-entific investments and collaborations:

• Look for a location where you can be sure of access toa pool of highly motivated, high-quality staff fromwhich to recruit. That’s probably going to be a locationwith well reputed, well funded universities and arecord of technological advancement in your own orcognate areas.

• Look for a location where the research community ischaracterised by flexibility and openness to workingwith business, and willingness to collaborate in theservice of business needs rather than just scientific

R&D in India and China –and doubtless elsewherein Asia – will grow.Western firms will want an R&D presence, throughdirect investment and/orcollaboration with researchproviders such as univer-sities in those countries.

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curiosity. You will then be able to make the most oflinkages with the scientific, technical and researchcommunity, for instance through collaboration or jointresearch with the universities, or through personal linksestablished by your own staff located in the area con-cerned.

• Take the trouble to understand and map out theresearch capabilities available to you in some detailacross the candidate locations. Few companies havethe necessary “mental map” of the capabilities acrossthe public and private sectors on which they could beable to draw and from which they could derive signifi-cant business advantage. Taking the trouble to map outwhat’s there could be a very valuable investment oftime indeed.

• Look for locations where the talent pool is technicallyhighly qualified and where the culture is such that itfosters creativity. Next to access to expertise and col-laborators, creativity and mindset were judged high onthe list of factors determining location. Whereas techni-cal skills may easily be mapped out, mapping out cre-ativity is more of a challenge. It may require the com-pany to engage with communities other than the tech-nical and scientific, for example architecture, art anddesign. In many companies, there is a lot of focus ontechnical qualifications, but nothing happens for agroup of very technically bright people if they do nothave the right mindset (or creativity) to use theirknowledge in different ways.

• Look for locations in a country where the intellectualproperty framework is clear, reliable and well respect-ed. This is an area where “advanced” countries stillscore. For example, the UK has recently introduced aset of model frameworks for handling IP from jointresearch (the “Lambert Agreements”)

1, while Ireland

has introduced an intellectual property code ofpractice2, drafted with the help of a team from ArthurD. Little and explicitly designed to make Ireland a loca-

1 Lambert review: http://www.dti.gov.uk/innovation/randd/collaborative-business-university-research/page10577.html2 Irish Code of Practice: http://www.sciencecouncil.ie/reports/index.html

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tion of choice for international partnerships. A keyaspect of best-practice IP management frameworks isthe ability to reach agreements quickly and simply, withspeed of decision-making being at least as important afactor as the fine detail of ownership and division ofrewards. Interestingly, Nordic companies in our surveyidentified decision-making speed as one of the top fac-tors in choosing a location for collaboration.

• Don’t overestimate the importance of tax breaks andfunding incentives. They’re welcome, of course, but formost companies we’ve consulted, they’re not themajor influences. Factors concerned with people, inno-vativeness, creativity and engagement with commer-cial and technological partners predominate. In short,talent, not tax, is the top issue to consider.

• Work with regional and other public and governmentagencies to maximise the benefits of whatever loca-tion is chosen – developing contacts with local univer-sities, engaging with industry clusters and helping sus-tain a strong science and technology skills base in theregion.

Insights for the policymaker

Governments and companies that want to keep theirhome country as an attractive place for international R&Dwill need to work together to ensure the right conditionsare in place:

• A simple and clear IP framework;

• A high-quality public research base;

• Incentives and styles of leadership that encourage aca-demics and others to collaborate with industry and seetheir careers benefit from doing so;

• A positive and upbeat perception of science, technolo-gy and engineering among young people;

• A sound, up-to-date, motivated and well equippedteaching capacity within universities and colleges.

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David Brown … is a Director in Arthur D. Little’s Cambridge office and leadsthe Technology and Innovation Management Practice in the UK.He specialises in innovation management and the characteristics ofinnovative organisations, enterprise and innovation policy, and theexploitation of R&D. E-mail: [email protected]

Merete Fargemand … is performing R&D within Danisco to develop new food ingredi-ents. She is managing a group working in the field of biotechnology,specialising in the development of food enzymes to improve the quali-ty of food products. E-mail: [email protected]

David Lever… is Development Manager in the R&D group of Rio TintoMinerals. He specialises in developing new, commercially viableapplications for borates in industrial glass and ceramics. E-mail: [email protected]

Philippe Mengal … is a Manager in Arthur D. Little’s Brussels office and is a mem-ber of the Technology and Innovation Management Practice. He hasa particular interest in technology and R&D management in thefield of food ingredients, pharmaceuticals and cosmetics. E-mail: [email protected]

Paul van Tilborg … is involved in development of new potential drugs for humanhealth care within N.V. Organon. Paul is leading a group of 18analytical chemists who are performing method development for, andfull characterisation of, drug candidates. E-mail: [email protected]

Philip Kyte … is a Consultant in Arthur D. Little’s Cambridge office and is amember of the Technology and Innovation Management Practice. E-mail: [email protected]

Countries that invest in these assets will be well placed tosecure R&D investments with leading companies. Thosethat don’t risk losing the science and technology assetsthat they already have.

prism / 2 / 2006 · prism / 2 / 2006 global r&d danisco: global and local r&d danisco is a...

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