Chapter 6
Innovation, Internationalization, and the Transnational Corporation

Grazia Ietto-Gillies

Introduction 1

Innovation and internationalization are closely linked. Causality between them can go in either and, indeed, in both directions in a dynamic sequence. There are strong theoretical arguments why causation could go either way: from innovation to internationalization and/or from internationalization to innovation. It is, in fact, very likely that the two phenomena are linked by a cumulative causation mechanism. At the micro level, more innovative firms can better compete and thus become more internationalized. At the macro level, countries with a high innovation base will have a better performance on their international business activities compared to less innovative countries.

Conversely, internationalization can impact positively on innovation by setting in train a variety of behavior and learning mechanisms. At the ex-ante level, firms that plan to become involved in foreign markets, be it via exports or foreign direct investment (FDI), are likely to try and improve their innovation performance (Wagner 2007). Moreover, internationalized firms and countries are exposed to diverse cultures, knowledge, and innovation environments from which they can learn. The ex-ante strategic behavior as well as the possible ex-post learning from international activities, lead to improved innovation performance. Through time these processes are likely to cumulate, leading to the enhancement both of firms’ innovation and of internationalization performances for firms as well as countries. A virtuous circle may set in, such that innovative firms and countries can compete successfully in international markets. Similarly the process could become vicious, with poor innovation performance affecting negatively the internationalization performance and the latter, in turn, impacting negatively on innovation.

From the beginning of the twentieth century, a particular type of institution – the multinational company (MNC) – has increasingly been involved in the international business activities of countries. As will be argued below, the very existence of the MNC is due to technological and organizational innovations. The involvement by MNCs in a variety of international activities has become very relevant since the Second World War. Indeed, in the last three to four decades the transnational company (TNC) has come to dominate international business activities. Moreover, its involvement has led to new modalities of activities and it has increased the geographical scope of such involvement. It has also led to the internationalization of the production process. These are the reasons why, in analyzing the connection between internationalization and innovation, this chapter focuses mainly – but not exclusively – on the TNC.

The chapter proceeds as follows. The next section introduces the MNC and discusses the role of technological and organizational innovation in its emergence and development. This is followed by a discussion of the close involvement of TNCs in innovation activities with specific reference to the internationalization of the production process and to the role of the TNCs’ networks in the diffusion of knowledge and innovation. The chapter then considers two specific modalities of internationalization: exports and imports and their relationship to innovation. They are the oldest modes of cross-border activities and their existence well pre-dates the birth of TNCs. In contemporary economies trade can be undertaken by all sorts of enterprises and not just TNCs. Nonetheless the latter are the institutions responsible for the largest share of world trade. A section is devoted to issues related to the possible extension from the micro to macro economy in considering the impact of internationalization on innovation. The last section summarizes and concludes.

Innovation and the Transnational Corporations

The transnational is a corporation that owns assets and operates direct business activities in at least two countries. There are many adjectives and nouns designating a company with direct business activities in several countries. The most used nouns are corporation or company though firm and enterprise are also used. The most used adjective in common parlance as well as in academic works is “multinational”; “international” is also used often in the literature. The term transnational used in this chapter is often preferred by researchers – including those working at the UNCTAD 2 – because it best represents the ability that these companies have developed since 1945 to plan, manage, and control across borders. This is an ability that gives them power vis-à-vis actors that cannot do so, or not to the same extent. Among the latter are: labor; small and medium size suppliers; and governments (see Ietto-Gillies 2012: ch. 14).

Direct investment and related production is a relatively new mode of conducting business activities across countries. The oldest modality of cross-border business activity, going back millennia rather than centuries, is trade 3 (i.e., imports and exports). Companies with direct business activities across borders have existed for the last few centuries: from the Medici Bank in fifteenth-century Florence to the Dutch and British trading companies dating back some four centuries. Steven Hymer, the researcher who first developed a theory of “The International Operations of National Firms” (1976; originally written 1960), disagrees with the view that any of these institutions can be taken as the real precursor of the modern TNC. He writes:

But neither these firms, nor the large mining and plantation enterprises in the production sector, were the forerunners of the multinational corporations. They were like dinosaurs, large in bulk, but small in brain, feeding on the lush vegetation of the new worlds (the planters and miners in America were literally Tyrannosaurus rex). (Hymer 1971: 115–116)

Hymer, following Chandler (1962) sees the forerunner of the international firm in the nineteenth-century joint stock company. The first half of the twentieth century saw the growth of direct business across borders of firms from developed countries investing in developing countries – often colonies – to secure raw materials. However, the last seven decades have seen a huge change not only in the number of TNCs but also in the quantum and quality as well as in the industrial and geographical pattern of these operations. The modern transnational corporation (TNC) has developed after the Second World War.

How do innovation and transnationality interact? What is the position of TNCs – these most internationalized of all business actors – in relation to innovation development and diffusion? There are several ways in which transnationality and innovation interact and, in particular, the following.

For a start, the very existence and development of the modern TNC is the product of innovation. Then there is the interaction of innovation with a variety of TNCs’ activities and, in particular, with the various modalities of internationalization such as FDI and trade. There are also a variety of collateral issues considered in the literature from the contribution of TNCs to R&D to the location of R&D laboratories to the growth of partnerships in R&D. These are not discussed in this chapter. 4

Innovation is at the very basis of the existence and growth of the modern transnational corporation. Two types of related innovations have given the TNC the ability to plan, manage, and control across borders and across space: (a) technological innovations in communications and transportations; and (b) organizational innovations. The reason why these two types of innovation are so important has to do with control.

The distinguishing way of doing business abroad, the one that characterizes the transnationals compared with other companies, is direct production and generally direct business activities abroad. In order to engage in these direct activities, the TNCs establish affiliates abroad and acquire the ownership and control of their assets via FDI. This gives them a long-term interest in the strategies and management of the foreign enterprises which they control.

In the context of direct activities abroad by transnational corporations, control has two connotations. First is its relationship with the equity stake in the foreign enterprise. What percentage of the foreign assets must be owned by the main company for it to have control? This issue is far from simple because there is no single percentage of ownership – other than the 50+ percentage – that can definitely ensure control to a single owner or a group of associate owners over the company whose shares are being acquired. It all depends on how widespread the ownership is. Whenever ownership is very widespread even a relatively small percentage of ownership may be enough to give control. This is not the case for companies in which the ownership is very concentrated. The concentration of ownership varies across companies, industries, and countries. The International Monetary Fund (IMF) guidelines set a minimum of 10 percent of share ownership for the main company to be considered to have control (IMF 1977).

But is a controlling share of the equities enough for the main company to exercise control? Equity control is a necessary condition but not a sufficient condition to ensure control. Equity control by itself does not lead to strategic managerial control if the means of exercising such control are not available. Thus the second connotation of control relates to managerial and strategic control. The latter type of control is not possible if the system of communications and the organization of the business across countries are not suitable for the exercise of managerial control. This was indeed the case of much foreign business prior to the First World War. Technological innovation in communications from the wireless onward and in transportation technologies is one of the keys to the development of the modern TNC. The other one relates to organizational innovation.

Organizational innovation plays a key role in the ability of headquarters to control at a distance. Several authors and in particular Chandler (1962) and Williamson (1975, 1981, 1984) analyze how the firm’s strategic objectives – be they growth or efficiency led – drive changes in internal organizations. Historically, such organization has moved from the “unitary form” dominated by the single owner and overseer of all activities to a departmentalized structure – in firms operating large manufacturing projects, particularly the building of railways, during the nineteenth century – to a multidivisional structure. The latter gave the flexibility to move from product division to geography-based divisions and, later, to mixed products and geography divisions. The flexibility for moving into different countries was therefore created as organizational constraints to multi-country expansion were removed.

In conclusion, the modern transnational corporation is characterized by both the equity ownership/control and the ability to manage strategically the foreign affiliates at a distance. The latter characteristic is the product of two relevant and interconnected innovations both of which form the sufficient conditions for the exercise of control: first, the technological innovation in personal communications which started with the telegraph and telephone and led, more recently, to electronic communications; and second, organizational innovations which were made possible (or strongly facilitated) by the communication technologies.

Transnationality and Innovation

TNCs, Innovation, and the Internationalization of the Production Process

Technological and organizational innovations are therefore at the basis of the very existence and growth of the modern TNC. However innovation affects and is affected by TNCs’ activities in many other ways. To understand the complex relationship between innovation and TNCs let us look first at the range of activities TNCs are involved in. International business activities can take a variety of routes and modalities. The main modalities are: trade – both imports and exports – and foreign direct investment (FDI) – both inward and outward. 5 Non-equity contractual relationships such as joint ventures and sub-contracting activities are also important internationalization modalities. The TNCs are the main actor in all these modalities. However, the primary and distinguishing activities of TNCs is foreign direct investment. UNCTAD (2002: Annex B, 275) 6 writes on this:

Foreign direct investment (FDI) is defined as an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy.

Though FDI is the main and defining business activity by TNCs it is not the only one. Trade – both imports and exports – figures very prominently. In fact, TNCs are responsible for some 80 percent of world trade. Moreover, a third of world trade is intra-firm trade, trade that is internal to the firm and external to countries (UNCTAD 2013: 135–136, Fig. IV.14 and Box IV.3). TNCs are responsible for all intra-firm trade, that is, for all the exchange of goods and services between a unit of a TNC – say headquarters or an affiliate – and another unit located in a different country. The growth in intra-firm trade is part of the expansion of TNCs and their activities as well as part of innovation in their location strategies made possible by technological innovations. The digital technologies have made possible the development of vertically-integrated international production or globalized value chains. 7 This means that the production process is split into segments according to a variety of elements such as the degree of skills required, the relative cost of labor and the cost of transportation. The strategy is to locate segments requiring cheap low-skills labor in developing countries and those requiring high-skill and high-cost labor in developed countries. One outcome of this process is the movement of components from country to country for further processing. This movement often takes place within units of the same TNC and is, therefore, intra-firm. Increasingly international vertical integration involves outsourcing to firms with which the links are contractual rather than equity. In such cases the resultant international trade may be inter-firm.

The overall strategy of international vertical integration of the production process has been applied largely to manufacturing from the 1960s onward and has led to the so-called New International Division of Labor (NIDL). 8 This describes the fact that large segments of manufacturing are located in developing countries, contrary to before the Second World War when the direct foreign investment was resource-seeking and manufacturing was located almost exclusively in developed countries.

More recently the digital information and communication technologies (ICTs) have led to further strategies which affect mainly disembodied, service products. The ICTs have, in effect, made possible the development of a new internationalization mode in which service components of a final product in the form of data or documents can be made available in real time to a distant location – whether in the same country or in a foreign one – at a very low cost. We are talking about the processing of data and documents relating to accounting, booking, or the editing of manuscripts for publishing companies. This new form is neither international production nor trade of the traditional type (Ietto-Gillies 2002). It is a new modality of international activity made possible by the ICTs. Nonetheless, some FDI is likely to take place in order to set up the business structure – as either a single or joint venture with a local partner – that will carry on the processing activity.

Both internationalization strategies just described relate to the production process in manufacturing (the first case) and in services (the second case). However, the internationalization of activities by TNCs is increasingly affecting other functional activities from R&D to Sales and Marketing to Business Services (Crescenzi, Pietrobelli, and Rabellotti 2013).

Strategies of international vertical integration – whatever the function or the sector involved – lead to increase in both FDI and trade; they are strategies that generate complementarities between FDI and trade. Resource-seeking FDI also stimulates trade and thus generates complementarity between these two modalities of international business. If a petrol company from a developed country invests abroad in an oil-rich country, its FDI generates trade as the oil is exported to another country for refining and eventually from the latter to several other countries for final consumption.

Nonetheless, the relationship between international production set in action by FDI and trade is not always one of complementarity. 9 Whenever FDI aims at producing abroad for the local market (or/and for exports from the host country to others), the relationship between exports and FDI is likely to be one of actual or potential substitution: foreign markets can be sourced via exports from the home country or via direct production abroad. By choosing to source them via direct production, the company substitutes FDI for actual or potential exports. 10

Multinationality and Knowledge Diffusion

The impact of innovation on the internationalization activities of TNCs – and particularly on their FDI and exports – is well documented and figures directly or indirectly in several theories of FDI and/or the TNC (Vernon 1966; Dunning 1977, 1980; Cantwell 1989). Innovation within TNCs is likely to affect positively both exports and outward FDI (UNCTAD 2002): those TNCs that innovate can successfully compete in both exports and FDI activities. However, the TNCs’ link to innovation is also one of reverse causality: one in which the TNC and its internal organization and its wide geographical reach play a big role in the development and diffusion of innovation.

There is a specific question to be asked regarding the impact of multi- and transnationality vis-à-vis innovation. Are TNCs in a special position regarding knowledge and innovation? In other words does multinationality per se and the fact that TNCs operate in many countries have an effect on the development and diffusion of knowledge and innovation? The theoretical underpinnings to the links between the activities of TNCs and innovation can be found in the evolutionary theory of the firm (Nelson and Winter 1982; Nelson and Rosenberg 1993). This theory led to developments and applications to the TNCs in which the behavior and performance of the latter is linked to their capability for the development, absorption, and diffusion of innovation activities (Cantwell 1989; Kogut and Zander 1993, 2003). 11 These works, as well as those related to networks theory (Forsgren, Holm, and Johanson 2005; Hedlund 1986; Bartlett and Ghoshal 1989; Ghoshal and Nohria 1997; Hedlund and Rolander 1990) rely considerably on the role of TNCs’ networks for knowledge transmission.

Two types of networks involving the TNC are discussed in the literature and in relation to knowledge diffusion: 12 internal and external networks. A TNC’s internal network is constituted by headquarters and all the affiliates, many of them scattered in various countries of the world characterized by diverse business and organizational cultures as well as by diverse innovation environments. Each unit of the TNC can transmit and receive knowledge to/from other parts of the company via the internal network. The mobility of managerial and technical staff across units of the TNC supports knowledge transmission.

Moreover, each unit is part of various external networks within the environment in which it operates. These networks range from contacts with customers or suppliers or distributors and other business partners or local universities and research centers. The range and extent of external networks the TNC is involved in vary according to the types of modality it uses to operate in foreign countries: from FDI to trade to licensing or franchising to sub-contracting to joint ventures. TNCs are likely to use different modalities for different activities and/or host countries. Whichever the modality, the external networks it gives rise to can become channels for the acquisition of knowledge whose diffusion across the various units of TNCs and the countries in which they operate will then be facilitated by the company’s internal networks.

In this scheme, each unit of the TNC acquires knowledge from its environment and then transmits all or some of it to other parts of the company often located in other countries. Moreover, knowledge from the unit – whether it is self-generated or acquired via the internal or external networks – spills over to the local environment via the same transmission mechanisms which led to the acquisition of knowledge by the unit. The transfer of knowledge and innovation can operate in both directions: the firm transfers to the local environment and receives from it. The transfers can be deliberate and planned or they can be accidental.

Various questions emerge in relation to this framework. How is knowledge transferred within internal or external networks and between them? What are the mechanisms that allow/facilitate the transfer? What are the possible constraints to internal or external knowledge transfer? As regards the first question we must distinguish between codified and uncodified – tacit – knowledge (Polanyi 1966, 1967). The former is the type of knowledge that can be written down in clear instructions and codes, thus transmittable to people in different localities and countries. Tacit knowledge cannot be written down in clear instructions because much of it is embodied in what workers do in their everyday tasks and in the way they work together as a group. The latter point forms the basis of Kogut and Zander’s (1993) analysis of the TNC as a social community.

People and their expertise are therefore essential for the development, use, and transfer of both types of knowledge and the innovations linked to it. In the case of uncodified knowledge, transmission via people is the only effective way for it to spread from one business unit to another. The mobility of skilled labor – be it managerial or technical – is an excellent vehicle for knowledge and innovation transfers. Such mobility can take place on an intra- or intercompany basis via internal or external labor markets. In the former the skilled labor moves from subsidiary to subsidiary within the same country or between different countries. However, labor mobility – sometimes on a temporary basis – is not the only mechanism for the transmission of knowledge and innovation. The mobility of products, be they manufactures or services, equipment or final consumption, can also be facilitators of learning.

As regards constraints to – and facilitators of – the effectiveness of internal and external networks in knowledge diffusion, the following elements are relevant. First, the degree to which the subsidiary of the company is embedded in the locality. The degree to which knowledge spills over from the unit of the TNC to the local environment depends on the strength of its external networks, and, thus, on the degree of embeddedness 13 of the unit in the locality. For example, to what extent are its suppliers chosen from the local community? If they are, this facilitates the spillover process as the suppliers learn from the company while the company learns about the knowledge environment and about the requirements of local markets and production facilities. However, Uzzi (1997) finds that, beyond a certain threshold, embeddedness can have negative effects on performance and knowledge transmission by insulating the business unit from information external to the local environment, and, therefore, making it more vulnerable to external shocks.

Second, the degree of autonomy that the subsidiary has in dealing with the local environment, for example in dealing with suppliers and distributors. A relatively decentralized structure with little control from the center may favor local embeddedness and therefore external knowledge spillovers. However, a more centralized structure may favor the internal transfer of knowledge.

What is the evidence for positive causality link from FDI to innovation? Wagner (2007) and ISGEP (2007) – further discussed in the next section – finds evidence of self-selection mechanisms by exporters which seem to be valid also for the outward FDI of TNCs and, indeed, in a stronger way. This means that firms that plan a strategy of internationalization via exports and specially via FDI engage in innovation activities. In terms of innovation performance – proxied by productivity – there appears to be a hierarchy in relation to international activities: exports are associated with productivity increase; FDI have also this association at a higher level of performance; firms that engage in both exports and FDI appear to be the best performers of all (Kimura and Kiyota 2006). These results are compatible with the fact that exports and FDI tend to be complementary more than substitute as discussed above and this may lead to cumulation in any mechanism of knowledge diffusion. 14

International Trade and Innovation

This section deals more specifically with the relationship between international trade and innovation. As already mentioned, most trade is now the responsibility of TNCs. Nonetheless many national companies contribute to trade. Indeed export is often the first modality of internationalization by companies that had, so far, operated only on the domestic arena. They are usually small to medium size companies and often they may be introduced to international markets and production locations via initial collaboration with a larger company that is already transnational. Once companies learn about internationalization via trade, they may branch out into other modalities. 15

The impact of innovation on internationalization has been explored in various studies. Posner (1961) and Hufbauer (1966) found that trade performance and, specifically, exports are related to the technological gap between countries. Posner’s work formed the background to Vernon (1966) in which the innovation performance of firms and countries determines their exports performance, then – in a time sequence – their propensity to FDI and, eventually, both their exports and imports propensities. 16

The impact of trade on innovation performance is less intuitive and less researched. The evidence for these effects is also more problematic. For these reasons this section concentrates on the latter effects: the causality from trade to innovation and, in general, the impact of trade on the international diffusion of knowledge and innovation. 17 Let us start with an analysis of exports and then go on to consider imports.

Exports

The possible impact of exports on innovation has been the subject of many studies. In 1995 Bernard and Jensen published a paper which was to have a great follow-up for many years to come and still has. Using a large database of US official statistics, the authors give a systematic analysis of the performance of exporters versus non-exporters. One of the performance variables used was productivity and this was taken from then on – and in similar researches – to be a proxy for innovation. Since then, many studies have been devoted to unpicking the role of internationalization via imports, exports, or FDI on innovation. Most of these studies are at the micro level and refer either to firms or to establishments/ plants. 18 The wealth of studies, their analogies and differences, have led to meta studies. Wagner (2007) analyses 54 pieces of research related to 34 countries and finds definite evidence of a positive relationship between exporting and innovation proxied by productivity.

Most studies use productivity growth and productivity premia between exporters and non-exporters to reach conclusions on the impact of internationalization modes on innovation. There are considerable problems with using productivity as a proxy for innovation. 19 Even allowing for correspondence between productivity increase and innovation, we must take account of the fact that the relationship between exporting and productivity/innovation can come in a variety of ways. The first one is self-selection: the more productive/innovative firms become exporters because they can better compete. Moreover, firms that plan to become exporters will invest and innovate in preparation for entering foreign markets. Thus exporting affects innovation in an ex-ante way and via the strategic behavior of firms. This pre-entry innovation performance leads to a positive relationship and to a direct link between exporting and innovation.

A different link can come about via the process of learning-by-exporting (post-entry performance). Firms learn from contacts with customers and competitors and they also benefit – in terms of productivity increases – from the larger scale of activity made possible by exporting. In the 54 studies analyzed by Wagner (2007) there is evidence for all three types of positive relationship between exports and productivity with the third one (learning-by-exporting) less strong than the other two. Wagner is cautious about his conclusions, which were followed up by a comparable study 20 of 14 countries (ISGEP 2007). In this study the export premia between exporters and non-exporters are found to be consistently positive and high. They appear to be unrelated to the level of development of the exporting country. The self-selection hypothesis is confirmed; the learning-by-exporting hypothesis is less so. However, on the latter issue the conclusions cannot be fully accepted because there are problems with the paucity of data.

Imports

Let us now consider the imports component of internationalization. Firms can learn through importing in a variety of ways. Access to foreign suppliers provides access to specialized intermediate and capital goods; importing firms may have to adapt their own equipment to be able to fully use – and benefit from – the imported ones. This requires investment. The human resources component is also crucial. Whether learning is via internal or external processes (Iammarino and McCann 2013: ch. 4; Malerba 1992), investment in staff training may be necessary. There may also be elements of reverse engineering as importing firms may try to find out how the new product was arrived at.

The relevance of imports for learning is explored in several studies. MacGarvie (2006) analyzes patents citations of French firms and finds that the importing firms are more likely to be influenced by the technology of the country they import from, than firms that do not engage in imports from that country. The effect is less significant for firms that export: exporting firms do not cite significantly more patents from their destination country. Liu and Buck (2007) finds evidence that firms learn by importing. Grossman and Helpman (1991) highlight the fact that the import of technology acts as a channel through which domestic firms may “reverse engineer” the products of their foreign rivals. 21

Damijan and Kostevc (2010) study the sequence “imports – innovation – exports – innovation” in a sample of Spanish firms. Theirs is one of the few studies that do not rely on productivity as a measure of innovation performance; they use data on product and process innovation. There is strong evidence of the sequence running from imports to innovation and then to exports. The sequence from exports to innovation to imports is less strong. Evidence of a positive impact from exports to innovation in both products and processes is in Damijan, Kostevc, and Polanec (2010). Bertschek (1995) in a sample of micro German data finds that imports and inward FDI have significant positive effects on product and process innovation. The stronger competition from foreign firms may encourage innovation in domestic firms. 22 Thus the positive impact of imports on innovation may be linked to learning mechanisms or to behavioral ones.

From Micro to Aggregate Effects

Most of the studies that analyze the impact of internationalization on innovation rely on firms’ level data; some relate to establishments or plants; a few to industry level. There are also studies relating to countries. At the meso and macro levels the extent to which internationalization – whichever the modality – affects innovation depends on the following. (a) The size of imports or exports or FDI and their immediate effect on the firms directly involved in them. (b) The extent to which the effects spillover from one firm to others and from public research institutes – such as universities – to firms. (c) The type of spillovers, that is, whether they relate to production or to market access knowledge. Both affect productivity – via new production methods in the first case and via market/scale extension in the second – though only the first one leads to innovation. In other words, innovation and its spillovers lead to productivity increase. However, productivity increases should not be taken as evidence of innovation and possible spillovers from it.

Learning is not automatic or inevitable. Whether it occurs or not depends not only on the knowledge endowment of the institution – be it firm or university or research institute – or country and their ability/willingness to let their knowledge leak away from their boundaries. It also depends on the capacity of the potential receivers, that is, on the extent to which the latter have the relevant absorptive capacity and the appropriate learning culture (Laursen and Salter 2006; Gunawan and Rose 2014).

Blomstrom, Globerman, and Kokko (1999) review the literature on determinants of host country spillover from FDI. 23 They list the main determinants as technological complementarities between home and host country and a series of elements related to the host country such as: strength of intellectual property (IP) rights; competition; size and wealth of host country; technical competence; government policies. Spillovers tend to be higher when the technological gap between the trading countries is low; this means that countries at a similar stage of technological development can better absorb foreign knowledge. It could also be argued that countries may learn more from those with higher knowledge frontiers than themselves. Whether this is the case or not may depend on whether the receiving country has the necessary absorptive capacity (AC) to capture knowledge.

The concept of AC goes back to Cohen and Levinthal (1990). 24 The AC of the locality is usually seen as the main determinant of the ability of firms, sectors, or countries to capture spillovers. The AC has many dimensions ranging from the human skills required to use and develop innovative products and processes to the physical infrastructure and to the knowledge infrastructure related to the build-up of specific knowledge and research capacity. The AC is likely to be the result of cumulative processes; the persistence of research and innovative activities are likely to have a positive impact on the AC at any given point in time. 25

In relation to TNCs and their activities, high AC allows the locality to take advantage of spillovers from local subsidiaries; indeed, it may be a condition for spillovers from a foreign TNC to local firms to take place. Many components of AC – be they in relation to knowledge or to human resources or to physical infrastructure – may also become attractive locational advantages which encourage foreign firms to invest in that particular area. 26 Agglomeration effects set in motion cumulative processes. Therefore the initial location advantages in terms of elements of AC may lead to further location advantages 27 and to the enhancement of AC.

Summary and Conclusions

This chapter deals with the relationship between innovation and internationalization focusing, in particular, on the TNCs and their activities. The TNCs are, currently, the main actors in international business activities. The chapter considers issues of causality between internationalization and innovation and issues of both development and diffusion of knowledge and innovation. The historical trajectory and current organization and activities of TNCs are discussed. The chapter then considers the relationship between innovation and TNCs. It traces the role of innovation in the very existence and birth of the TNC; in the contemporary international fragmentation of the production process and the related impact on trade and on the international division of labor. The organization of TNCs and the related internal and external networks are of relevance for the diffusion of knowledge across countries.

The chapter then analyzes the role of innovation on trade with particular emphasis on the impact of trade – both exports and imports – on innovation. Lastly, there is a discussion of problems and issues related to the application of analysis of impact of internationalization on innovation from the micro to the macro sphere. The passage from one to the other involves analysis of possible spillovers whose capture requires relevant absorptive capacity at firm, industry, and country levels.

Innovation and internationalization are both old concepts. However they are also very new and present specific characteristics in the contemporary era. This is now dominated by the activities of TNCs. The domination is in terms of number of modalities with which they operate; depth, quantity, and relevance of such activities; and in terms of geographical extension. Moreover, it is in terms of the TNCs’ ability to plan, organize, and control across borders to an extent not yet achieved by other economic actors. All these elements point to a position of dominance in today’s world by TNCs in world economics, politics, and power. Studying the links between – and the impact of – TNCs and their activities on innovation is therefore important for a proper understanding of contemporary economic systems. Some of the theoretical and empirical works cited above are not fully conclusive, interesting though they may be. There is a great need for further research in the field and I hope this chapter encourages young researchers to contribute to the advancement of knowledge in it.

The analysis and conclusions in this chapter point also to possible policy implications and specifically toward those policies that facilitate learning from different business and innovation environments and increase the absorptive capacity of countries and regions.

References

  1. Amendola, G., G. Dosi, and E. Papagni. 1993. “The Dynamics of International Competitiveness.” Review of World Economics 129(3): 451–471.
  2. Balcet, G., H. Wang, and X. Richet. 2012. “Geely: A Trajectory of Catching Up and Asset-Seeking Multinational Growth.” International Journal of Automotive Technology and Management 12(4): 360–375.
  3. Bartlett, C.A., and S. Ghoshal. 1989. Managing Across Borders: The Transnational Solution . Boston, MA: Harvard Business School Press.
  4. Bernard, A.B., and J.B. Jensen. 1995. “Exporters, Jobs and Wages in US Manufacturing: 1976–1987.” Brookings Papers on Economic Activity: Microeconomics 1995: 67–119.
  5. Bertschek, I. 1995. “Product and Process Innovation as a Response to Increasing Imports and Foreign Direct Investment.” Journal of Industrial Economics 43(4): 341–357.
  6. Blomstrom, M., S. Globerman, and A. Kokko. 1999. “The Determinants of Host Country Spillovers from Foreign Direct Investment: Review and Synthesis of the Literature.” The European Institute of Japanese Studies Working Paper 76.
  7. Breschi, S., and F. Lissoni. 2001. “Knowledge Spillovers and Loxcal Innovation Systems: A Critical Survey.” Industrial and Corporate Change 10(4): 975–1005.
  8. Cantwell, J. 1989. Technological Innovation and Multinational Corporations . Oxford: Blackwell.
  9. Cantwell, J. 1994. “The Relationship Between International Trade and International Production.” In Surveys in International Trade , ed. D. Greenway and L.A. Winters, 303–328. Oxford: Blackwell.
  10. Cantwell, J., and S. Iammarino. 2003. Multinational Corporations and European Regional Systems of Innovation . London: Routledge.
  11. Cantwell, J., and F. Sanna Randaccio. 1993. “Multinationality and Firm Growth.” Weltwirtschaftliches Archiv 129(2): 275–299.
  12. Cassiman, B., and E. Golovko. 2011. “Innovation and Internationalization Through Exports.” Journal of International Business Studies 42(1): 56–75.
  13. Castellani, D., and A. Zanfei. 2004. “Choosing International Linkage Strategies in the Electronic Industry: The Role of Multinational Experience.” Journal of Behaviour and Organization 53: 447–475.
  14. Castellani, D., and A. Zanfei. 2006. Multinational Firms, Innovation and Productivity . Cheltenham: Edward Elgar.
  15. Caves, R.E. 1971. “International Corporations: The Industrial Economics of Foreign Investment.” Economica 38: 1–27.
  16. Chandler, A.D. 1962. Strategy and Structure: Chapters in the History of the Industrial Enterprise . Cambridge, MA: MIT Press.
  17. Cohen, W. 1995. “Empirical Studies of Innovative Activity.” In Handbook of the Economics of Innovation and Technological Change , ed. P. Stoneman. Oxford: Basil Blackwell.
  18. Cohen, W.M., and D.A. Levinthal. 1990. “Absorptive Capacity: A New Perspective on Learning and Innovation.” Administrative Science Quarterly 35: 128–195.
  19. Crescenzi, R., C. Pietrobelli, and R. Rabellotti. 2014. “Innovation Drivers, Value Chains and the Geography of Multinational Corporations in Europe.” Journal of Economic Geography 14(6): 1053–1086.
  20. Damijan, J.P., and C. Kostevc. 2010. “Learning from Trade Through Innovation: Causal Link Between Imports, Exports and Innovation in Spanish Microdata.” Leuven, Licos Centre for Institutions and Economic Performance Discussion Paper 264/2010.
  21. Damijan, J.P., C. Kostevc, and S. Polanec. 2010. “From Innovation to Exporting or Vice Versa?” The World Economy 32(2): 374–398.
  22. Dosi, G., K. Pavitt, and L. Soete. 1990. The Economics of Technological Change and International trade . Brighton: Harvester Wheatsheaf.
  23. Driffield, N., and J.H. Love. 2003. “Foreign Direct Investment, Technology Sourcing and Reverse Spillovers.” The Manchester School , 71(6): 659–672.
  24. Dunning, J.H. 1977. “Trade, Location of Economic Activity and the MNE: A Search for an Eclectic Approach.” In The International Allocation of Economic Activity , ed. B. Ohlin, P.O. Hesselborn, and P.M. Wijkman, 395-431. London: Macmillan.
  25. Dunning, J.H. 1980. “Explaining Changing Patterns of International Production: In Defense of the Eclectic Theory.” Oxford Bulletin of Economics and Statistics 41(4): 269–295.
  26. Fagerberg, J. 1996. “Technology and Competitiveness.” Oxford Review of Economic Policy 12(3): 39–51.
  27. Filippetti, A., M. Frenz, and G. Ietto-Gillies. 2011. “Are Innovation and Internationalization Related? An Analysis of European Countries.” Industry and Innovation 18(5): 437–459.
  28. Filippetti, A., M. Frenz, and G. Ietto-Gillies. 2013a. “The Impact of Internationalisation on Innovation: An Analysis of Patent Activities in 42 Countries.” Workshop on Internationalization and Innovation, Centre for Innovation Management Research (CIMR), Department of Management, Birkbeck University of London, September 28.
  29. Filippetti, A., M. Frenz, and G. Ietto-Gillies. 2013b. “The Role of Internationalization as a Determinant of Innovation Performance: An Analysis of 42 Countries.” Birkbeck College University of London, CIMR Research Working Paper 10.
  30. Forsgren, M., U. Holm, and J. Johanson. 2005. Managing the Embedded Multinational: A Business Network View . Cheltenham: Edward Elgar.
  31. Frenz, M., and G. Ietto-Gillies. 2007. “Does Multinationality Affect the Propensity to Innovate? An Analysis of the Third UK Community Innovation Survey.” International Review of Applied Economics 21(1): 99–117.
  32. Frenz, M., and G. Ietto-Gillies. 2009. “The Impact on Innovation Performance of Different Sources of Knowledge: Evidence from the UK Community Innovation Survey.” Research Policy 38(7): 1125–1135.
  33. Frenz, M., C. Girardone, and G. Ietto-Gillies. 2005. “Multinationality Matters in Innovation: The Case of the UK Financial Services.” Industry and Innovation 12(1): 1–28.
  34. Frobel, F., J. Heinricks, and O. Kreye. 1980. The New International Division of Labour . Cambridge and Paris: Cambridge University Press and Éditions de la Maison des Sciences de l’Homme.
  35. Ghoshal, S., and N. Nohria. 1997. The Differentiated MNC: Organizing Multinational Corporations for Value Creation . San Francisco, CA: Jossey-Bass.
  36. Görg, H., and E. Strobl. 2005. “Spillovers from Foreign Firms Through Worker Mobility: An Empirical Investigation.” Scandinavian Journal of Economics 107: 693–709.
  37. Granovetter, M. 1985. “Economic Action and social Structure: The Problem of Embeddedness.” American Journal of Sociology 78(3): 3–30.
  38. Grossman, G., and E. Helpman. 1991. Innovation and Growth in the Global Economy . Cambridge, MA: MIT Press.
  39. Gunawan, J., and E.L. Rose. 2014. “Absorptive Capacity Development in Indonesian Exporting Firms: How Do Institutions Matter?” International Business Review 23(1): 45–54.
  40. Hagedoorn, J. 1996. “Trends and Patterns in Strategic Technology Partnering since the Early Seventies.” Review of Industrial Organization 11: 601–616.
  41. Hedlund, G. 1986. The Hypermodern MNC – A Heterarchy? Human Resource Management 25(1): 9–35.
  42. Hedlund, G., and D. Rolander. 1990. “Action in Heterarchies: New Approaches to Managing the MNC.” In Managing the Global Firm , ed. C.A. Bartlett, Y. Doz, and G. Hedlund, 1–15. London: Routledge.
  43. Hufbauer, G.C. 1966. Synthetic Materials and the Theory of International Trade . London: Duckworth.
  44. Hughes, K. 1986. Exports and Technology . Cambridge: Cambridge University Press.
  45. Hymer, S.H. 1971. “The Multinational Corporation and the Law of Uneven Development.” In Economics and World Order , ed. J.W. Bhagwati, 113–140. London: Macmillan.
  46. Hymer, S.H. 1976. The International Operations of National Firms: A Study of Direct Foreign Investment . Cambridge, MA: MIT Press.
  47. Iammarino, S., and P. McCann. 2013. Multinationals and Economic Geography: Location, Technology and Innovation . Cheltenham: Edward Elgar.
  48. Ietto-Gillies, G. 2002. “Internationalization and the Demarcation Between Services and Manufactures: A Theoretical and Empirical Analysis.” In Internationalization, Technology and Services , ed. M. Miozzo and I. Miles. Cheltenham: Edward Elgar.
  49. Ietto-Gillies, G. 2012. Transnational Corporations and International Production: Concepts, Theories and Effects . Cheltenham: Edward Elgar.
  50. Imbriani, C., and Reganati, F. 1997. “Spillovers internazionali di efficienza nel settore manifatturiero italiano – International Efficiency Spillovers into the Italian Manufacturing Sector.” Economia Internazionale 50(4): 583–595.
  51. IMF. 1977. Balance of Payments Manual , 4th edn. Washington, DC: International Monetary Fund.
  52. IMF. 1993. Balance of Payments Manual , 5th edn. Washington, DC: International Monetary Fund.
  53. ISGEP. 2007. “Exports and Productivity – Comparable Evidence for 14 Countries.” The International Study Group on Exports and Productivity. Leuven, Licos Centre for Institutions and Economic Performance Discussion Paper 192/2007.
  54. Javorcik, B. 2004. “Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages.” American Economic Review 94: 605–627.
  55. Johanson, J., and J.-E. Vahlne. 1977. “The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitment.” Journal of International Business Studies 8(1): 23–32.
  56. Johanson, J., and F. Wiedersheim-Paul. 1975. “The Internationalization of the Firm: Four Swedish Cases.” Journal of Management Studies 12(3): 305–322.
  57. Keller, W. 2004. “International Technology Diffusion.” Journal of Economic Literature 42: 752–782.
  58. Kimura, F., and K. Kiyota. 2006. “Exports, FDI, and Productivity: Dynamic Evidence from Japanese Firms.” Review of World Economics 142(4): 695–719.
  59. Kogut, B., and U. Zander. 1993. “Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation.” Journal of International Business Studies 24: 625–645.
  60. Kogut, B., and Zander, U. 2003. “A Memoir and Reflection: Knowledge and an Evolutionary Theory of the Multinational Firm 10 Years Later.” Journal of International Business Studies 34: 505–515.
  61. Kokko, A. 1992. Foreign Direct Investment, Host Country Characteristics and Spillovers . Stockholm: Stockholm School of Economics, Economic Research Institute.
  62. Krugman, P. 1995. “Technological Change in International Trade.” In Handbook of Economics of Innovation and Technological Change , ed. P. Stoneman. Oxford: Blackwell.
  63. Laursen, K., and A. Salter. 2006. “Open for Innovation: The Role of Openness in Explaining Innovation Performance among UK Manufacturing Firms.” Strategic Management Journal 27: 131–150.
  64. Lileeva, A., and D. Trefler. 2010. “Improved Access to Foreign Markets Raises Plant-Level Productivity … for Some Plants.” The Quarterly Journal of Economics 125(3): 1051–1099.
  65. Liu, X., and T.W. Buck. 2007. “Innovative Performance and Channels for International Technology Spillovers: Evidence from Chinese High-Tech Industries.” Research Policy 36(3): 355–366.
  66. MacGarvie, M. 2006. “Do Firms Learn from International Trade?” The Review of Economics and Statistics 88(1): 46–60.
  67. Mahroum, S., R. Huggins, N. Clayton, K. Pain, and P. Taylor. 2008. Innovation by Adoption: Measuring and Mapping Absorptive Capacity in UK Nations and Regions . London: National Endowment for Science, Technology and Arts.
  68. Malerba, F. 1992. “Learning by Firms and Incremental Technical Change.” The Economic Journal 102: 845–859.
  69. Narula, R., and A. Zanfei. 2004. “Globalization of Innovation: The Role of Multinational Enterprises.” In The Oxford Handbook of Innovation , ed. J. Fageberger, D.C. Mowery, and R.R. Nelson, 318–346. Oxford: Oxford University Press.
  70. Nelson, R.R., and N. Rosenberg. 1993. “Technical Innovation and National Systems.” In National Innovation Systems: A Comparative Analysis , ed. R.R. Nelson. Oxford: Oxford University Press.
  71. Nelson, R.R., and S.G. Winter. 1982. An Evolutionary Theory of Economic Change . Cambridge, MA: Harvard University Press.
  72. OECD. 1996. Detailed Benchmark Definition of Foreign Direct Investment , 3rd edn. Paris: OECD.
  73. Patel, P., and K. Pavitt. 1994. “Uneven (and Divergent) Technological Accumulation among Advanced Countries: Evidence and a Framework of Explanation.” Industrial and Corporate Change 3: 759–787.
  74. Polanyi, M. 1966. “The Logic of Tacit Inference.” Philosophy 41: 1–18.
  75. Polanyi, M. 1967. The Tacit Dimension . London: Routledge.
  76. Poole, J. 2010. “Knowledge Transfer from Multinational to Domestic Firms: Evidence from Worker Mobility.” Working Paper, Department of Economics, University of California, Santa Cruz.
  77. Posner, M.V. 1961. “International Trade and Technical Change.” Oxford Economic Papers 13: 323–341.
  78. Soete, L. 1981. “A General Test of Technological Gap Trade Theory.” Weltwirtschaftliches Archiv 117: 638–659.
  79. UNCTAD. 2002. World Investment Report 2002: Transnational Corporations and Export Competitiveness . Geneva: United Nations.
  80. UNCTAD. 2005. World Investment Report 2005: Transnational Corporations and the Internationalization of R&D . Geneva: United Nations.
  81. UNCTAD. 2013. World Investment Report. Glabal Value Chains: Investment and Trade for Development . Geneva: United Nations.
  82. Uzzi, B. 1997. “Social Structure and Competition in Interfirm Networks: The Paradox of Embeddedness.” Administrative Science Quarterly 42: 35–67.
  83. Vernon, R. 1966. “International Investment and International Trade in the Product Cycle.” The Quarterly Journal of Economics 80: 190–207.
  84. Wagner, J. 2007. “Exports and Productivity: A Survey of the Evidence from Firm-Level Data.” The World Economy 30(1): 60–82.
  85. Wakelin, K. 1998. “The Role of Innovation in Bilateral OECD Trade Performance.” Applied Economics 30: 1335–1346.
  86. Williamson, O. 1975. Markets and Hierarchies: Analysis and Anti-trust Implications . New York: Free Press.
  87. Williamson, O.E. 1981. “The Modern Corporation: Origins, Evolution, Attributes.” Journal of Economic Literature 19: 1537–1568.
  88. Williamson, O.E. 1984. “Efficient Labour Organization.” In Firms, Organization and Labour: Approaches to the Economics of Work Organization , ed. F.H. Stephens, 87–118. London: Macmillan.
  89. Zahra, S.A., and G. George. 2002. “Absorptive Capacity: A Review, Reconceptualization, and Extension.” Academy of Management Review 27(2): 185–203.
  90. Zahra, S.A., R.D. Ireland, and M.A. Hitt. 2000. “International Expansion by New Venture Firms: International Diversity, Mode of Market Entry, Technological Learning and Performance.” Academy of Management Journal 43: 925–950.

Notes

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
18.191.144.194