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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



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



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

%



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



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



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



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



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



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



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



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



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



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



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



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



Report and presentation available soon at:http://www.vitalwaveconsulting.com/insights/articles-presentations.htm

For more information, email [email protected]

The Globalization of Corporate R&D

16

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the globalization asia of corporate...

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