The Hindu Business Line : A wave of internationalisation of R&D

Transnational corporations have come a long way from the conventional norm of retaining proprietary assets within the company (or group). They are no longer coy maidens who hide their assets in their home country; they have seen a greater openness in recent years. This paradigm shift brought about by digitisation has led TNCs to use `asset-augmenting' approaches to complement their earlier `asset-exploiting' strategies.

THIS year's World Investment Report (WIR-05) of UNCTAD is about the role of transnational corporations (TNCs) in promoting Research and Development in developing countries. It discerns a new `wave' of internationalisation of R&D through TNCs and analyses the factors leading to it. It is sanguine about the contribution of TNCs in R&D in developing countries. However, it cautions them by drawing attention to the flip side. The subject is the flavour of the season and several economists and industry analysts have been contributing to it.

The WIR-05 claims that, "new form of R&D internationalisation can be seen as the next step in the increasingly globalised production systems of TNCs." It compares it with earlier systems such as international re-structuring in export-oriented manufacturing of the 1970s and the 1980s and the transformation of back office operations in recent years, covered respectively in WIR-02 and WIR-04. In addition to a trend analysis, WIR-05 adds a case study of the chip design industry (pages 173-6) and analyses the factors spurring its growth in Asia.

Data suggest an increasing TNC involvement in R&D in developing countries. However, it is confined to few countries such as China and India. A 2003 UNCTAD study reviewed the successful experience of some countries and noted that the TNCs were slow to relocate innovation from home to developing countries (UNCTAD/ITE/IPC/2003/2) and, even when it occurred, it was within their affiliates. This was dependant on the availability of high-level skills and infrastructure such as R&D institutions, universities, etc. The conclusion drawn then was that only a few economies reach the stage of "blue sky" research by the TNCs and also that the outlays involved were small compared to their R&D in advanced economies.

The WIR-05 sounds more upbeat now. Its data suggest a relative increase in R&D investment in developing countries. The global R&D expenditure, which had grown to $677 billion in 2002, was concentrated in ten developed countries, led by the US, which accounted for more than four-fifths of the total. In the aggregate, while their share fell from 97 per cent to 91 per cent from 1991 to 2002, the share of developing countries rose from 2 per cent to 6 per cent. This increase may not be wholly attributed to the TNCs as it leaves out expenditures funded by governments. It shows separately that from 1993 to 2002, the R&D expenditure of TNC affiliates worldwide climbed from $30 billion to $67 billion or from 10 per cent to 16 per cent of global business R&D.

In developing countries from 1996 to 2002, it rose from 2 per cent to 18 per cent. A WIR-05 study on the changing R&D trends in the US and Asia found that the largest number opted for investment in R&D in China followed by the US and India. Korea, Singapore, Taiwan, Thailand and Vietnam were other preferences.

The Economic Intelligence Unit, in its survey with 100 top executives, had also found that the majority (39 per cent) favoured China; the US came second with 29 per cent and India third with 28 per cent. (Globalisation of R&D, October 2004). Purely on such evidence, it is rather difficult to be over-optimistic about across the board internationalisation of R&D.

However, some studies show a shift in the policies and strategies of the TNCs with regard to R&D abroad, especially the developing countries. This shift questions the accepted wisdom among economists. TNCs have come a long way from the conventional norm of retaining proprietary assets within the company (or group). They are no longer coy maidens hiding their assets in their home country. With greater openness in recent years, the TNCs have added "asset-augmenting" approaches to complement their earlier "asset-exploiting" strategies. For one, the local context is given more attention andviewed as sources of competencies and opportunities and not as constraints. With the result that, the TNCs are open to sourcing their technologies externally. This is clear from recent advances in electronics, communication, DVD, audio and video devices. Surprisingly, leading manufacturers get their licences from the same company possessing a unique technology. Companies such as Philips and Thompson get more revenue from licensing technology than from manufacturing electronic products. As a report in International Herald Tribune (October 3) puts it, "Companies say they license as a way to stay ahead of the swift mimicry of new technologies and designs that can turn a sales sensation into an inexpensive commodity within months." What in the post-War years was explained by the product cycle theory of Raymond Vernon is now captured by a cycle where technology itself becomes a commodity. This paradigm shift has been brought about by digitisation, which has invaded areas such asautomobiles, biotechnology, drugs, life-sciences, medical electronics, nanotechnology, and petro-chemicals.

This inevitably led to the TNCs outsourcing "innovation" itself. Outsourcing is both within the TNC affiliates and through arm's-length contracting. Wipro's laboratories, for instance, work on designs or prototypes for satellite navigation system, high-definition TV and satellite set-top boxes. Drug companies such as Ranbaxy, Nicholas Piramal, Zydus Cadilla and Dr Reddy's are flush with contract research and manufacturing (CRAM) deals with drug multinationals. The list can go on.

Why have the TNCs moved away from their earlier strategy and seeking alliances? The one obvious reason for this shift is cost reduction. The TNCs shrink home R&D to the critical mass and shift the non-creative segments to low-wage locations.

Moreover, they are under pressure to reduce R&D outlays in a global market where the life-cycle for products is precipitously reduced. Cell phone users want newer models every quarter and demand additional features. The dependence on single product is passé. They need a diversified basket as insurance against risk.

These developments have changed the strategies of the TNCs. If a country has to benefit from these changes, it should have human and other endowments, which can make them attractive as locations.

Sadly, only a handful qualify. But this is not to say, that countries such as India are winners in the game. In fact, there are minor gains in employment opportunities for the educated. Even this comes at a social cost. The loss lies in the fact that the stronger party sets the terms of R&D engagement. The property (patent) rights vest in the TNCs.

Countries such as India are small players in the on-going global battle over patents. The US is aggressive in pursuing its policy of imposing a patent regime on its terms.

It has succeeded in including it in free trade agreements (FTAs) with some countries. It is, therefore, difficult to take an over-optimistic view, as the WIR-05 seems to do.

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)

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