International Competiveness and Innovation - Term Paper Example

International competiveness and innovation Table of Contents 1. Introduction 2 2. Collaborations and Alliances 3 3. Technology and Globalisation 4 3.1. Technology, International Investment and Trade 4 3.2. Technology and Globalisation 5 3.3. Globalisation of Knowledge Intensive Services 6 3.4. Internationalisation of R&D 7 3.5. Open Innovation 7 3.6. Multinationals and Innovation 8 3.7. Intellectual Property Rights 10 3.8. International R&D Activities and the role of Public Policies 11 4. Conclusion 12 References 13 1. Introduction There is a very close relationship between globalization and innovation. Globalisation is considered to be one of the most important events of the modern civilisation. It has brought major developments in the human activities as well in the thought process. This has made their thought process more liberal and innovative. People are using their innovative mind as a tool for economic and social enhancement. Innovation is a common trait among scientists and entrepreneurs who use this trait to bring social, technological and economic developments. Innovation refers to the creation of new ideas, concepts, thoughts that can be further be used for growth and developments. Primarily, innovation is categorized into two major types i.e. radical and incremental. Radical innovation involves the performance improvements of product or services and incremental innovation results in bringing improvements in production process like efficiency, cost-effectiveness etc (Urabe, Child and Kagono, 1998, p.4). Innovation is one of the core features of modern society and technological improvement is a major outcome of this feature that boosts the growth of an economy. The changing technological system has influenced the entire structure of an economy. Modern technological system has led to upgradating international trade and business causing enhancement of economic parameters. Moreover, with the technological developments, many new industries have been evolving to meet the latest of population. On the other hand, the existing organisations also aim to implement latest technologies for shaping their performance for gaining an upper hand and sustainable competitive advantage in the market. Constant technological innovation has become an important criterion for social and economic development and due to this, proper awareness among the entire population is inevitable. People have to realize the importance of basic sciences as it develops a foundation for being innovative, creative and productive. R&D programs are initiated by the organisations seeking technological developments and performance enhancements. 2. Collaborations and Alliances The business environment of the modern world is characterised by highly turbulent phases. With the advent of globalisation firms are increasingly trying to reach out to new consumer markets. Collaboration and alliances are largely used as a tool by business organizations to enter new markets. This strategy has largely been used by the airlines industries to form mega consortiums so as to gain strategic advantage. An example in this regard is the airline industry which has used collaborations and alliances for research and development activities. The major players in the American and European airline market which are dominating the global aerospace industry have used collaborations to enhance the level of research and development activities. In spite of the advantages of a strategy of collaboration and alliances, ‘spillover’ effects are also associated with this strategy. The ‘spillover’ effect has largely been observed in technology intensive industry segments like biotechnology. However, the analysis of literature reveals considerable difference in the nature of ‘spillover’ in the aerospace industry with patents and licensing being the most prominent difference between the two sets of industries. Difference in demand and supply dynamics also generates considerable differences. The main sources of ‘spillovers’ in biotechnology industries are reported from research papers published from academic sources whereas the same occurs in the airline industry from its dynamic supply chains. The strategy of collaboration results in creation of conglomerates which generates economies of scale and scope and results in generating entry barriers for new entrants that leads to sustainable competitive advantage (Niosi & Zhegu, 2005, p.4, 6, 17, 22). 3. Technology and Globalisation 3.1. Technology, International Investment and Trade Globalization and technological enhancement are the two major pillars for international trade and business. Technological advancements have facilitated transportation and communication infrastructures which have played a very significant role in business related activities between two nations. On the other hand, the economic decision makers have realized the importance of encouraging the international trade and business. Hence, in this respect, they started to follow the free trade policy, and as a result, the large and capable organisations started to expand their market in different countries. The free trade policies strive to offer multiple benefits to the multi-national enterprises as it offer various techniques to firms for expanding their markets in overseas. The theory of eclectic paradigm which is also known as OLI-models is helpful in explaining this argument. OLI model is one the most celebrated theory in economics for explaining the advantages of foreign direct investment (FDI) and internationalisation. This model considers three major advantages of internationalisation i.e. benefits from ownership, localisation and internationalisation (Lorenzen, 2011, p.4). In case of product life cycle theory, FDI tends to change with time. As per the product life cycle theory, a new product starts with lower but potential demand. Gradually, it takes an upward movement and reaches at maturity level. Therefore, the demand of a product in a particular market determines the flow of FDI. The following figure represents a product life cycle model. Figure 1: Product Life Cycle (Source: Spero and Hart, 2009, p.144) As per the above diagram, when a product is in growth stage, that particular market receives higher FDI inflow, and in case of declining stage, the multinational firms move to other country where product is in growth stage. 3.2. Technology and Globalisation Globalization has taken place in every field of human activities, but globalization of international trade related activities are the most prominent for social and economic developments. Primarily, there are three ways of market entry i.e. through licensing, exporting and FDIs. Each of these market entry techniques has deferent benefits. For example, licensing has very limited benefits compared to FDI. FDI offers ownership, internationalisation and locational advantages. On the hand, licensing strategy is cheaper, easier but it cannot avail internationalisation and locational benefits. Firms with greater capability and financial strengths should make FDI in a foreign market. In case of FDI, a firm can develop R&D programs in an international market. In this process, they can enjoy a number of advantages like government supports, host country’s technical expertise, skilled employees, better infrastructure etc. On the other hand, unavailability of these benefits may turn to be as major disadvantages for the firm. During mid 1990s, the Japanese firms started developing their R&D programs in multiple countries like U.S., France, Britain etc, in this respect, they experienced the stated advantages and disadvantages (Shimizutani and Todo, 2008, p.543). As the global trade between the world’s economies are increasing, the technological expertises among them are being exchanged. For example, many firms use their patent rights in multiple countries other than the domestic markets (Patel and Pavitt, 1990). 3.3. Globalisation of Knowledge Intensive Services Outsourcing and offshoring has become an important strategic tool. These two strategies helps organisation to avail services or products with lower cost and with better expertise. Outsourcing and offshoring strategies offer geographical as well as better governance scope. Due to these benefits, apart from the multinational companies, small scale companies are also availing outsourcing and offshoring. However, there are also major emerging issues with offshoring the services or products like low capital intensity, excessive reliance on service providers, complex process structures etc. Moreover, offshoring also leads to increased unemployment and discourages industrialization in the operating country (Sako and Tierney, 2005). In the process of encouraging outsourcing and offshoring, information and communication technology (ICT) plays a role of facilitator. It makes the tasks of offshoring more transparent, automated and logical. On the other hand, ICT technologies like SAP are very useful in managing and coordinating complex and high value activities. It also helps in tracking the entire activities. 3.4. Internationalisation of R&D The aspect of globalisation has been directly related to the aspect of international expansion. The internationalisation of business organizations has fuelled the diffusion of innovations across nations. The aspect of internationalisation of R&D has been found to be different for different categories of nations suggesting wide gaps between the developed and the less developed economies. It has also been observed that patents are the categories that have the highest level of international exposure with regard to globalisation of research and development. The lowest exposure is probably in the area of scientific research which includes industry segments like biotechnology etc. Country specific data indicates that the European Union is possibly the largest technological federation followed by USA and Canada. Government policies also have a major role in internationalisation of R&D activities of business organizations. An example of a positive government role can be found in the contrasting example of Japan and USA-Canada. The Japanese government adopts a rather closed ended approach aimed at protecting its indigenous companies which is quite contrary with the case of USA and Canada (Carlsson, 2005, p.59). 3.5. Open Innovation Innovations are perhaps an area which is largely being used by business organizations to gain competitive advantage. Firms like Apple, IBM, Xerox and Sony have their business competence based on aspects of innovation. Various literatures have segregated innovations into two types namely open ended and a closed ended innovation. Historically, firms resorted to a closed ended form of innovation, however, the nature of easy imitation by the competitors have forced firms to look into a closed ended form of innovation (Braczyk, Cooke & Heidenreich, 1998, p.169). An open ended innovation is based on the premise that any new discovery is an asset to the firm discovering it and they should be the pioneers to introduce the innovation in the market. Closed ended innovations lay stress on protecting the innovations as intellectual property rights and also try to restrict the use of this innovation to the organization without benefitting its competitors. Open ended innovations on the other hand lay stress on external sources for research and development. The proponents of this school of thought state that many organizations do not have access to the skilled manpower and technology for conducting research and development activities which according to them must not come in the way of introducing innovation in their product lines. It also does not restrict the use of the innovation by the competitors in the market. FMCG giant Procter and Gamble is an organization that uses the open ended model of innovation in its business model. The firm has a policy of sharing its research and development activities to its competitors if the idea is not used in the organization within three years. This has been mainly done to maintain the pace of innovativeness in the organization (Mayle, 2006, 130-133). 3.6. Multinationals and Innovation The aspect of globalisation of innovation and its association with multinational organizations have been associated since the era of World War II. Multinational organizations have emerged like a conduit for inducing quality innovations in business processes. Traditionally, European and American firms are known to be the pioneers for this concept. The aspect of FDI has a direct linkage with the concept of innovation. It has been observed that Multi-National Corporations are the largest entities that help in diffusion of innovations related to research and development of new product lines. It has been largely observed that the top 100 MNC’s are the most innovative firms spending a large proportion in research and development related activities. It has also been observed that home countries are the major points for innovation with examples to be found from firms like Siemens, Bayer and Hoechst spending approximately 18 percent of their R&D expenditures in their home nations. These activities have been significant contributors towards their quest for attaining competitive advantage (Fagerberg, Mowery & Nelson, 2006, p.320-324). Figure 2: Globalisation of Innovation (Source: Fagerberg, Mowery & Nelson, 2006, p.320) The figure above shows the general categories of globalising innovation along with the possible actors and forms of the same. It reveals the nature of innovations that are required for a firm particularly the MNC’s and their role in promoting innovations across nations. 3.7. Intellectual Property Rights The aspect of protecting innovations has evoked a debate among many authors. Initially, strategists were of the view that IPR was an impediment to the process of diffusion of innovations. Thereafter, it was largely believed that IPR would help promote and induce innovations. A research study conducted by Mazzoleni & Nelson (1998) proposed four theories that analyse the aspect of IPR and diffusion of innovation. These four aspects are based on different scenarios of invention motivation, commercialisation of innovation, disclosure of data regarding innovation and finally control and innovation. The advantages of patents towards diffusion of innovation can be analysed from the examples of GE, AT&T which have used patents to monopolise the markets and in turn gain strategic competitive advantage. However, certain disadvantages of patenting include reduction of the pace of innovation in organizations. Moreover, with large scale protection, diffusion of innovation slows down which weakens the business prospects of many firms. It would lead to loss of motivation for firms to innovate their business processes or product offering which may hinder the pace of growth of an entire industry (Mazzoleni & Nelson, 1998, p.273-284). 3.8. International R&D Activities and the role of Public Policies Government has a key role in the diffusion and promotion of innovation in business organizations. Traditionally, governments across the world have tried to protect their domestic and indigenous industries by awarding them contacts which in many ways caused harm towards the process of diffusion of innovation (Howells, 1989, p.142). The role of government includes setting up a policy framework regarding patents and licensing as well as monetary policies which have a major role in the aspect of diffusion of innovations. The concept of innovation assumes importance in the context of R&D activities as innovations form the backbone for the R&D activities of business organizations. The example of MITI (Ministry of International Trade and Industry) which was formed by the Japanese government to promote R&D activities in the nation shows how government policies can help augment R&D activities in organizations. The organization sought to enhance and motivate firms to promote better R&D activities. It also allowed the entry of foreign firms but laid down certain restrictions which prevented the foreign firms to dominate the level of activities related to research and development. This example is a classic case where governmental policies have used the aspect of globalisation to enhance the learning curve of indigenous organizations by taking help of foreign firms so as to allow better R&D activities of the domestic firms on one hand and promoting diffusion of innovation one the other hand (Carlsson, 2005, p.57, 60-63). 4. Conclusion The analysis of the topic of study reveals considerable linkage of globalisation with the aspect of innovation. Multinational firms have been the backbone for diffusion of innovation as they are presently engaged in spreading their business processes to new destinations which offer good market potential as well as cheap manpower. The study also shows how the concept of innovation has changed from being a closed ended system towards being an open ended system. It also reveals that external agencies like public policies of government are also responsible for diffusion of innovation. The study also leads to the conclusion that globalisation is perhaps the buzzword that has triggered a new wave of innovations and their diffusions. The key to success for business organizations’ success, however, lies in fostering greater tie-ups and alliances as well as reaping the benefits of globalisation so as to gain a strategic competitive advantage. References Braczyk, H.J, Cooke, P.N., & Heidenreich, M. 1998. Regional innovation systems: the role of governances in a globalized world. Routledge. Carlsson, B. 2005. Internationalization of innovation systems: A survey of the literature. [Pdf]. Research Policy 35 (2006) 56–67. Fagerberg, J., Mowery, D.C., & Nelson, R.R. 2006. The Oxford handbook of innovation. Oxford University Press. Howells, J. 1989. The Location and organization of research and development: New Horizons. [Pdf]. Centre for Urban and Regional Development Studies, University of Newcastle. Lorenzen, A. 2011. Volkswagen's Way East - Brownfield or Greenfield Investments: Business Location Decisions. GRIN Verlag. Patel, P. and Pavitt, K. June 1990. Large firms in the production of the world's technology: an important case of "non-globalization". Journal of International Business Studies, Vol. 22, No. 1 (1st Qtr., 1991), pp. 1-21. Mayle, D. 2006. Managing innovation and change. SAGE. Mazzoleni, R., & Nelson, R.R. 1998. The benefits and costs of strong patent protection: a contribution to the current debate. [Pdf]. Available at: http://dimetic.dime-eu.org/dimetic_files/MazzoleniNelsonRP1998.pdf. [Accessed on March 22, 2011] Niosi, J. & Zhegu, M. 2005. Aerospace Clusters: Local or Global Knowledge Spillovers. [Pdf]. Industry and Innovation, Vol. 12, NO. 1, 1-25, March 2005. Sako, A. and Tierney, M. June 13, 2005. Sustainability of Business Service Outsourcing: the Case of Human Resource Outsourcing (HRO). [Pdf]. 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