"Innovation Shift" to the Emerging Economies: Cases From IT and Heavy Industries

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© Sloan Industry Studies.

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Abstract

The current shift of technology development work by multinationals to the emerging economies is often noted but less understood are the implications for innovative capacity and location. It is now high-end (rather than adaptive) development that is being carried out in countries like India, China, Brazil and Mexico. And, increasingly, multinationals from the United States, Japan and Europe are finding themselves competing against, or working with, new technology-based companies from the emerging economies. Our study focuses on the processes and outcomes of globally distributed engineering through field work at 67 technology development sites in eight countries. Based on our fieldwork we conclude that this new shift in the location of technology work at the top of the value chain is not only distinctive, but it is also disjunctive, not following past trajectories of offshoring. We also find that it is occurring as a matter of incremental value chain creep, rather than being guided by “strategy.” We believe current trends are inconsistent with some widely accepted postulates and prescriptions of organization and innovation theory. We find that the consequences of these trends have not been well conceptualized by managers and policymakers.

Introduction

One of the most dramatic developments of the past decade has been the offshoring of technology and product development by Multinational Enterprises (MNEs) to emerging economies (EEs). This trend appears contrary to a historical trajectory in which large firms evolved increasingly integrated organizational structures, followed management strategies that focused on protecting their core competencies and the resources that gave them sustainable competitive advantage, and also devoted considerable resources to the development of human capital. All of these activities were very much geographically embedded, and national innovation policies were predicated on this embeddedness. While a number of studies have documented the increasing globalization of R&D activities (e.g., Thursby and Thursby 2006), the implications for national policies have most often been considered in terms of specific threats to jobs or vaguely conceived notions of “national competitiveness.” Less attention has been paid to the content of this aspect of globalization and the broader transformations that may be occurring.

For decades MNEs have cut costs by offshoring some production and engineering activities to lower cost regions of the world. They have also established development centers to adapt their global products to meet the distinctive needs of countries with poorly educated and low income workers and consumers, and poorly developed infrastructures. As these processes took place, the MNEs retained their system integration and top-of-the-value-chain activities in their home countries, or at least in other sites within the Triad (North America, Europe and Japan). The central strategic concern was for the MNE to maintain tight control over whatever gave it competitive advantage over other firms. To have sustained competitive advantage a firm needed to have resources that were valuable (by giving the firm the ability to exploit opportunities or neutralize threats), rare among the firm’s current and potential competitors, difficult to imitate, and not easily substitutable (Barney 1991).

Is the current wave of offshoring a linear extension of these past trends, with Triad MNEs still orchestrating global activities to maintain their strategic advantage? Or is something different happening? Are decision-makers fully accounting for the implications for the long-term strategic interests of firms when they move top-of-the-value chain and system integration activities to emerging economies? Does the current wave at once represent a change in longstanding theories about the organizational integration of core activities and a change in the geographical stickiness of innovative activity?

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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