Chapter 11
New Product Development in Emerging Economies: Innovation in Reverse from China

Simone Corsi, Alberto Di Minin, and Andrea Piccaluga

Introduction

The aim of this chapter is to present, discuss, and empirically show evidence of a new theoretical framework that highlights the significance of emerging countries as a source of innovation and hence influences the direction of strategic Research & Development (R&D) investment of multinational corporations (MNCs) based in advanced economies. The theoretical contribution of this chapter is to connect the theory of R&D maturation (Asakawa 2001; Almeida and Phene 2004) with the discussion on reverse innovation (Immelt, Govindarajan, and Trimble 2009; Govindarajan and Trimble 2012) and innovation from emerging economies (Hang, Chen, and Subramian 2010). We do so by shedding light on the host country factors that can affect foreign subsidiaries in China and that can trigger innovation globally.

We identify a new configuration of R&D evolution in emerging economies, which prioritizes the need to absorb and reinterpret innovation stimuli from the local market rather than the final aim simply being to tap into indigenous science and technology.

China gained the attention of foreign direct investment (FDI) in 1978 with Deng Xiaoping’s Open Door Policy. Since then, foreign MNCs have triggered internationalization in China involving a wide range of activities with increasing added value (OECD 2008). Foreign R&D-oriented FDI in China has only been examined in a few studies (Gassmann and Keupp 2008) and, to date, a clear understanding of the dynamics that govern subsidiary evolution toward such kinds of activities has been neglected.

Despite the growing importance of China as a “producer” of highly qualified scientists and engineers (von Zedtwitz et al. 2007), and the emergence of Chinese MNCs that are disrupting global markets (Hang et al. 2010), the idea of the nascent giant as a global innovator remains stuck in a low-cost innovation approach. However, China has witnessed incredibly high GDP and market growth rates together with a fast technological catch-up. Innovation is not just being stimulated, it is being generated.

Through the analysis of four case studies of Italian MNCs who have internationalized R&D activities in China, this chapter contributes to the existing literature and highlights the relevance of R&D internationalization in China where host country factors trigger innovation at a corporate level and boost the evolution of subsidiaries.

The next section overviews the literature on R&D internationalization and foreign R&D in China. Then we present our cases and discuss empirical evidence. We finish off with conclusions and suggestions for future research.

Literature Review

R&D Internationalization and the Classic Evolution of Foreign R&D Labs

International trade and MNC theories have widely investigated the reasons behind cross-border economic relations. While classical economists have used factor endowments and the cost of production to explain international trade (Smith 1776; Ricardo 1817; Hecksher 1933), scholars focusing on MNC activities have explored a wide range of factors affecting the decision to invest abroad (Hymer 1976; Buckley and Casson 1985; Vernon 1966; Dunning 1980; Johanson and Vahlne 1977).

Most of these studies concentrate on FDI by adopting a parent company perspective (Birkinshaw, Hood, and Jonsson 1998). FDI is mostly seen as a way to reproduce the specific advantages of firms abroad, without considering subsidiaries as potential contributors to the enhancement of this competitive advantage or to the development of new ones.

Since the mid-1980s extensive research on the role of subsidiaries and its evolution has spawned new perspectives on the configuration of MNCs, sources of their competitive edge, and factors affecting such an evolution. Ghoshal and Bartlett’s (1990) and Gupta and Govindarajan’s (1991) network models, Hedlund’s (1986) heterarchy model, and Ghoshal and Nohria’s (1989) differentiated organization are just four of the several studies that have questioned the parent company perspective.

The role of subsidiaries in different areas has been investigated by defining the concept of centers of excellence (Chiesa 1996; Birkinshaw 1998; Frost, Birkinshaw, and Ensign 2002), focusing on the strategic roles of subsidiaries (Jarillo and Martinez 1990; Anderson, Forsgren, and Holm 2002), and finally by identifying the dynamics of reverse knowledge transfer (Buckley, Clegg, and Tan 2003; Ambos, Ambos, and Schlegelmilch 2006; Frost and Zhou 2005).

The main factors affecting the role of subsidiaries can be divided into three categories (Birkinshaw et al. 1998; Tavares 2001): (1) internal: the activity and power exercised by the parent company and sister subsidiaries; (2) subsidiary: the endogenous forces of the subsidiary itself; and (3) external: the host environment.

R&D is one of the most debated business areas when it comes to internationalization. Several authors have categorized foreign R&D labs and R&D subsidiaries as efficiency seeking (Quan and Chesbrough 2010; Brusoni, Prencipe, and Pavitt 2001), market seeking (Kuemmerle 1997; Håkansson and Nobel 1993), and knowledge-resource seeking (Pearce 1989; Håkansson and Nobel 1993; Chiesa 1994). Kuemmerle’s (1997) distinction between home-base exploiting and home-base augmenting foreign R&D centers has indeed paved the way for a rich generation of categorizations and classifications.

While it is still fair to say that R&D is the least internationalized corporate activity both at the macro (UNCTAD 2005) and industry levels (Macher, Mowery, and Di Minin 2007), empirical research suggests that the globalization of R&D is rising. Following a line drawn by more than one model such as the Product Life-Cycle Theory (Vernon 1966, 1979) or the Uppsala Model (Johanson and Vahlne 1977), it remains unclear as to what extent R&D can ultimately be internationalized. For example, issues connected with Intellectual Property (IP) management and the appropriability of research activities (Teece 1986) have been proposed as barriers to the internationalization of crucial R&D (Patel and Pavitt 1991; Di Minin and Bianchi 2011).

Most empirical investigations so far have looked at the localization of R&D FDI in other industrialized countries. Adopting Kuemmerle’s dichotomy of home-base augmenting and home-base exploiting R&D sites abroad, scholars have identified a classic pattern of foreign R&D labs that usually shifts from the exploitation of parent company knowledge of foreign markets to the exploration of new knowledge, tapping into local scientific contexts once the subsidiary has become embedded (Asakawa 2001; Florida 1997).

The ability of foreign R&D centers to develop new knowledge strongly thus depends on the increasing number and intensity of technological relations that they are able to set up during their operations. Once an R&D subsidiary has reached full maturity, reverse technology transfer (Håkanson and Nobel 2000, 2001) or reverse knowledge transfer (Ambos et al. 2006) – bringing technology or knowledge that has been generated in the foreign subsidiaries back to the headquarters – are likely, thus interdependence is created between internationalization and innovation as described by Grazia Ietto-Gillies, this volume, Chapter 6.

China as a Host Country for Foreign R&D and New Product Development

Most studies concerning the mandate and evolution of foreign subsidiaries in the last stage of maturity (R&D) or on R&D internationalization have analyzed the operations of companies from advanced economies in other advanced economies (Birkinshaw and Hood 1997, 2000; Frost 2001; Frost and Zhou 2005). Yet, as mentioned above, there is still no clear understanding of the business climate and market dynamics underlying the motivations of R&D internationalization.

When it comes to China, an understanding of R&D internationalization is even foggier. Only a few studies have considered this phenomenon (von Zedtwitz 2004; Gassmann and Han 2004; Gassmann and Keupp 2008; Walsh 2007; Quan and Chesbrough 2010). If we refer to Kuemmerle’s dichotomy, home-base exploiting tends to be considered as the most common option for foreign companies that locate their R&D in China.

The role of China as a host of foreign explorative R&D labs aimed at conducting “state of the art” research is thus still limited to a few anecdotal cases.

China as a location for advanced or basic R&D FDI has only been sporadically documented (Govindarajan and Ramamurti 2011). Scholars tend to identify one hindering factor in the low level of IP protection, however we believe that this is only one dimension of the explanation.

The idea of an emerging country is very often related to the image of a not fully developed customer base. The latter tends to be characterized by needs that can be fulfilled with skillful modifications of Western products, while there is little to learn from the adaptation to these markets and business environments that can be usefully transferred back to the headquarters for global competitive advantage.

A growing interest in a reverse cycle of innovation originating from China has been suggested by practitioner-oriented journals (Immelt et al. 2009; Zeschky, Widenmayer, and Gassmann 2011; Hang et al. 2010). These studies explain how increasingly innovation is generated in developing countries by both local and foreign firms at the expense of the decreasing importance of advanced countries as a locus of idea generation or product development.

The past 40 years have thus witnessed a shift from a scenario where innovation was developed for advanced economies based only on their local inputs, to one where global innovation also stems from inputs from emerging economies, reversing the international cycle of technology as traditionally set out in Vernon’s early works (1966, 1979).

Table 11.1 shows this shift and highlights the various contributions along the shifting process. Output Quadrant 1 (local, top) represents the original, and first phase of, Vernon’s product life-cycle theory, where an innovation was most likely to be conceived and developed in an advanced economy (specifically the United States) because of the contingent factors that favor it. The product would also be marketed there thanks to a mature market able to “absorb” it. In the second phase of the life-cycle, an innovation, still designed and developed in an advanced country, is marketed in other international markets in virtue of the price reduction and maturation of those markets (represented by European countries in Vernon’s original model). Quadrant 2 (global, top) also represents innovation developed by subsidiaries of MNCs that are located in advanced countries (Cantwell 1995), a trend which paved the way for different contributions regarding subsidiary autonomy and capacity for innovation (Birkinshaw and Hood 1998).

Table 11.1 The shift in the international flow of innovation.

Output
Local Global
INPUT Advanced Economies Vernon’s Product life-cycle Theory (1966: first phase) Vernon’s Product life-cycle Theory (1966: following phases; 1979) Cantwell, 1995; Birkinshaw & Hood, 1998)
Emerging Economies Frugal Innovation (Zeschky et al. 2011)
Innovation at the Bottom of the Pyramid (Prahalad, 2004)		 Reverse Innovation (Immelt et al. 2009; Govindarajan & Trimble, 2012)

In more recent times, the activity of both local and MNCs that have developed and marketed innovations in emerging economies from inputs from those markets has been reported (Quadrant 3, local, bottom). This phenomenon has been referred to using several terms, including frugal innovation (Zeschky et al. 2011), and innovation for the bottom of the pyramid (Prahalad 2004).

The shift from Quadrant 3 to 4 (global, bottom) has only been identified in the last few years. Companies operating in emerging economies source the inputs for innovation which are initially commercialized only in local markets but which, along with their evolution, find their way to advanced markets either by disrupting existing technologies or opening new market segments (Immelt et al. 2009; Govindarajan and Ramamurti 2011; Govindarajan and Trimble 2012). The ideas developed in this chapter fit in this latter quadrant, in an attempt to address the following question: How do the particular features of the host country affect the R&D activities of foreign MNCs in China and trigger reverse innovation?

The shift from Quadrant 1 to Quadrant 4 is evident not only in terms of the geographical location where an innovation is generated (shifting from a Western-centered to an emerging country-inclusive model), but also with regard to the role of the headquarters and the subsidiaries of an MNC. While the traditional technology life-cycle theory identifies the headquarters as the only innovation generator, more recent models (Quadrant 2) have already acknowledged that foreign subsidiaries could be the creators of innovation to be exploited later on by their headquarters. What is completely new is that this important role in terms of knowledge and innovation creation is now taken over by foreign subsidiaries located in emerging economies. These units can thus generate new value on which the headquarters can build or renew their competitive advantage in global markets.

Empirical Base

The aim of this chapter is to provide a more comprehensive perspective of the evolution of foreign R&D firms in China with particular emphasis on the contextual factors arising from the indigenous business environment that could affect R&D activities and drive them toward global product development.

We regard Italian companies in China as the “talking pig” (Siggelkow 2007) to discuss the relevance of what we have claimed could be usefully labeled as the most upgraded phase of R&D maturation: centered on the analysis and reinterpretation of innovative inputs coming from the indigenous business environment and context for global production.

The strength and sense of urgency of state regulations that guide the interventions of the public sector in China on private enterprises, associated with the relevance of the Chinese market, makes China an obvious region for this sort of maturation. Given the novelty of the topic addressed and its exploratory nature, we adopted a case study methodology (Eisenhardt 1989; Gibbert, Ruigrok, and Wicki 2008) in order analyze the dynamics behind such a phenomenon. 1

All the cases are Italian companies that have set up R&D operations in China and are successfully developing products and adaptations for the local market. All companies are present in various national markets and claim that their experience in China is helping them to develop a global competitive advantage. All the companies also share a strong commitment toward increasing their R&D investment in China in order to reinforce their local development skills and to build the foundations for a subsidiary with a role as a global contributor.

Esaote SpA

Esaote is an Italian designer and manufacturer of medical diagnostic systems. The company operates along three main business lines, Ultrasound Diagnostic Imaging, Dedicated Magnetic Resonance, and Non-Imaging Cardiology, and also develops information technology healthcare solutions. Since 1992, Esaote’s investments in China have been driven by the growing importance of China both as a market and supplying source. The company has production facilities with R&D activities and a sales office in mainland China, a sales office in Hong Kong, and a representative office in Beijing. The R&D lab was established to adapt Esaote’s portfolio to the Chinese market and support local production. Esaote’s corporate management is now reinforcing the R&D strategies in China in the light of three main considerations pushing Esaote to develop technological solutions that are also commercially exploitable in other, more advanced, markets.

Characteristics of the Chinese Health Sector

Ultrasound medical care in China is managed directly by physicians specifically specialized in this area, while in the rest of the world there are medical doctors with broader specializations such as radiology. These highly specialized physicians provide companies with more informed and technologically focused feedback from users. Furthermore the very large Chinese population offers a number of clinical cases that is not available in any other country. Thus Esaote is exploiting the possibility of developing innovative technological solutions in environmental conditions that are not replicable elsewhere. The widespread distribution of wi-fi technologies in China and its adoption for ultrasound machines are two other important characteristics. Thus China is a unique setting for the application of new ICT systems for health and telemedicine. Esaote is developing ultrasound machines that are able to communicate with smartphones or other similar machines through wi-fi. This enables ultrasound machinery to be accessed at a low cost in rural areas and some of the features can be used in isolated care centers or in private homes. The same technological solution would also help overcome the problem, especially in Europe or the United States, of the often lower medical qualification of the technician who delivers the ultrasound, by putting him/her in contact with qualified physicians or with the best performing machines over a wi-fi connection.

Chinese Competition

Esaote’s most important competitors in China are foreign MNCs (mostly North American and Japanese), however there are some Chinese companies that are very strong on a local level thanks to their embeddedness and the result of a business climate characterized by a high level of guanxi 2 (Park and Luo 2001). These companies are increasingly gaining visibility and market share abroad. Their peculiarity is to offer low-performing low-cost technological solutions to the local market, and to develop updated products for advanced countries that are challenging incumbent firms. For example, a well-known Chinese manufacturer of ultrasound machines sells black and white imaging machines, which do not compete with color machines. This will probably have an impact on the incumbents’ sales when this particular Chinese company is able to develop color ultrasound machines of an acceptable quality and, most probably, at a lower price. They might also be able to develop entry-level color ultrasound machines that fit the needs of a specific market segment which the incumbents are not currently serving well in advanced countries. Thus the need for on-site R&D capability to interpret such trends and anticipate their moves with ad hoc technological solutions is urgent.

China’s Health Reform

An interesting element Esaote is addressing is the fact that the Chinese government is creating a potentially very large market but with particular and unique characteristics. The strong role of the Chinese government in controlling and guiding the local economy is well known (Hsueh 2011) and is clearly visible in its major health reform. With a $125 billion investment plan between 2009 and 2012, the government aimed to provide equal access to healthcare for all the Chinese population, mixing government action and market mechanisms to support efficiency and improve quality (Yip and Hsiao 2009). The reform includes the construction of 30,000 new rural hospitals, care centers, or clinics across the country (Rein 2009). Clearly, the government’s stimulus package offers considerable market opportunities to companies that operate in the healthcare sector, although the commercially successful products are those that better address the specific needs of a resource constrained rural hospital. Thus machines will need to be cheaper, to be operable in the harshest climatic conditions, and be simpler to use due to the lack of qualified personnel.

In summary, for Esaote investing in Chinese R&D is a priority in terms of the technology and market opportunities explained above.

Magneti Marelli SpA

Magneti Marelli is one of the largest suppliers of automotive systems with revenues in 2012 of about 5.8 billion euros. The company first started operations in China in 1996 and now operates there with productive and R&D facilities in three locations and in four main business lines: powertrain, exhaust systems, lighting, and electronics.

Here we will focus on electronics, which is responsible for three business lines: instrument clusters, body vehicles, and navigation. Work related to the development and industrialization of these lines is carried out by a local R&D team made up of 100 engineers, with the assistance of basic technologies available in the European R&D units. Particular features of the Chinese market provide Magneti Marelli with new sources of innovation for products that are not found elsewhere.

Specifically, three main conditions, two of which are ascribable to government intervention, have pushed Magneti Marelli to foster its innovative effort in China through the implementation of local projects for worldwide technological solutions.

Future Compulsory

Introduction of Tyre Pressure Monitoring Systems (TPMS) in Passenger Vehicles As for other more advanced markets, state intervention making TPMS compulsory for vehicles determined the market success of such a technology. The Chinese case represents a special situation given the relatively high price of a TPMS and the relatively low purchasing power of Chinese customers. One of Magneti Marelli’s R&D labs in China has thus been forced to study new solutions to overcome this obstacle and is developing a new product that integrates TPMS software algorithms with Access Vehicle Systems, a smart electronic key to access and start the vehicle. The integration of these two functions, which is new in Magneti Marelli’s global product portfolio, would be revolutionary due to its cost reduction estimated at around 30% for consumers. This solution is globally marketable and fits Chinese market features by responding to synergies between low-cost needs and governmental regulations.

Environment

The Chinese government is actively promoting investments that lead to more environmentally friendly vehicles. Magneti Marelli has found some interesting opportunities in this respect. Electronics developed within Magneti Marelli’s R&D labs offer good intermediate solutions for energy-saving control or energy management (e.g., the start and stop system, efficient battery monitoring), and our interviewees remarked that the strong pressure on environmental control in China is a unique scenario in which to develop new solutions for global markets.

Consumer Behavior

Environmental concerns in China are also providing strong incentives for innovation in navigation systems. Dynamic GPS solutions are thus being developed to integrate vehicle distribution and traffic information in major Chinese cities with itinerary suggestions in order to lower fuel and energy consumption. Technological navigation solutions are strongly affected by Chinese consumer preferences, for example, for touchscreen interfaces. This trend is mainly related to the introduction of GPS and navigation systems in parallel with the diffusion of touchscreen smartphones in China. Navigation systems in China thus include a much wider number of applications than those in Europe or the United States. Once developed for the Chinese market, applications can be added to products in other markets at no additional expense for the company.

Brembo SpA

Brembo is a global leader in the design and manufacturing of braking systems for high-performance cars and motorcycles, as well as commercial vehicles. The company first set up a subsidiary in China in 2000, and its current business lines in China are: brake calipers, disc brakes, and drum brakes. Setting up an R&D lab in China was motivated by the increasing growth rates of the local market and the need to dynamically interact with customers, both foreign and domestic. When Brembo started new product development in China, its management identified two main areas of investment focus and global potential.

Drum Brakes

“Advanced” carmakers usually limit drum brakes to small capacity vehicles and trucks, and only in their simplex (front wheels) version. On the other hand, Chinese car manufacturers tend to opt for duplex (both front and rear wheels) drum brakes on a large range of vehicles. The moderate growth rates of the automotive market in advanced countries does not enable Brembo to invest much in the development of new technological solutions for “low profile” segments such as those which require drum brakes. Therefore the company is using the commercial potential of the Chinese market for drum brakes to develop innovative solutions which will be implemented in advanced markets later on.

Environment

Given that sustainability is an area of major interest for the Chinese government, like Magneti Marelli, Brembo is also developing solutions that respond to the strong sustainability requirements of the Chinese market. Brembo’s Chinese subsidiary has ongoing projects that will reduce the weight of brake systems by 10% (a lower weight means lower consumption), a reduction in residual torque (no friction during braking also means lower consumption and emissions), and an improvement in the wear and disposal of components. The decision to respond to this market input with a strong local R&D presence highlights the importance of China as a global “think tank” for the development of environmentally-related innovations.

Carel Industries SpA

Carel is a mid-sized Italian firm operating in three main B2B industries: air-conditioning, commercial refrigeration (OEM and retail), and humidification systems. The company has been operating in China since 1997 and is now present with a productive WOFE supported by an R&D lab as well as commercial branches. Having realized the importance and the needs of the local market, Carel learned from Chinese competitors how to shape local product innovations in order to tackle the low-cost challenge that characterizes the Chinese domestic market. The company quickly learned that the development work of the Chinese R&D lab was also of great value in Western markets. Chinese subsidiary’s contribution concerned two products, subsequently commercialized in advanced markets.

Cheap and User-Friendly

The Chinese R&D lab analyzed local market requirements for electronic controllers for the air-conditioning industry and defined the characteristics of the product demanded by the Chinese customers and provided by local competitors, a controller for temperature and humidity. The inputs from the Chinese market provided the basis for Carel to develop a new product, relying on its existing technology platform but responding to local requirements. The new design and characteristics were offered with a 25% price reduction and a more user-friendly interface competitive with both Chinese and European markets. In the European and North American markets, the new product extended Carel’s customer portfolio and enabled them to offer far more to their previous clients. The new product also gave Carel the chance to penetrate the residential air-conditioning business in Europe and North America. In the past this business field was not widely covered by the company because its products did not meet the ease of use required by residential users.

Environment

China’s demand for energy is well known. Carel’s Chinese subsidiary detected a need from the Chinese branch of one of the most important global producers and distributors of soft drinks. This big player asked Carel China to develop a solution for an electronic controller for a bottle cooler that would meet energy-saving requirements. The aim was to save energy in a process that accounts for a considerable portion of the total cost of the product. Based on their previous experience in the refrigeration and energy-saving industry and relying on headquarters knowledge, in 2009 Carel developed a new technological solution. The new product is particularly strong in energy saving thanks to two alternative functions developed for the first time in global markets by Carel. Once this product had been adopted by the Chinese branch of the soft-drink producer, it was then adopted globally by the same company for the same purposes. This technological solution is now in Carel’s product portfolio and it is offered on a global basis leading to, in accordance with customer data in different environmental and working conditions, up to 50% energy saving compared to the other solutions available.

Discussion

The four cases have some similarities in the way they entered the Chinese market via an internationalization process that essentially seems in line with the Uppsala stage model (Johanson and Vahlne 1977, 2009). An increased commitment to the foreign market has been spurred on by the collection and analysis of additional knowledge and experience of the competitive context. Despite the growing knowledge and development capabilities within the Chinese subsidiaries, favored by the establishment of ad hoc R&D labs, local engineers have to rely on existing knowledge at a corporate level in order to detect technology opportunities and develop new products.

This is even the case with locally marketable products, although our companies stated that China provides them with a large number of highly qualified engineers and technicians. If anything the problem lies in the relatively immature level of industrialization of the country which is not providing experience or accumulated knowledge in process or product innovation in several industries. Chinese R&D personnel hired by foreign companies thus need to be trained both in China and at the headquarters in Europe. In the latter case, week- or month-long training periods are organized by parent companies when a pool of Chinese engineers are required to focus on the development of new products whose concept stems from Chinese market inputs. This approach not only increases the skills of Chinese personnel and the amount of information on corporate technologies and products, but also represents a strong tool for consolidating corporate identity and reducing cultural gaps in the Chinese branch. The same objective is pursued via recruiting Chinese personnel who grew up or have studied in Europe.

The managers of Chinese subsidiaries’ have a relatively low autonomy for new product development without the approval of the parent company. Despite this, all our cases confirm that R&D labs need to be set up in China and local managerial and technological skills need to be strengthened in order to develop future products autonomously.

As for host country factors behind the evolution of R&D investment in China, our cases enabled us to identify three primary reasons for this phenomenon: (1) State Intervention; (2) Local Competition; and (3) Local Market Features. Chinese governmental action, be it for example the promotion of new rules and laws or special fiscal or FDI policies, is especially effective in creating the premises for foreign R&D to identify new product development opportunities. Despite the socialist market economy seeming to share many characteristics with Western capitalism, the Chinese government is certainly invisibly, but strongly, managing the local economy and thus affecting the technological paths and strategies of foreign players. While foreign companies commonly have the highest technological competence, local companies struggle to reduce the technological gap. In the meantime, local companies compete, generally speaking, over what they do best: low cost. They mostly provide products with a lower quality at a much lower price than Western companies. This strategy proves successful in an economy where awareness of product quality or performance still needs refining.

The counter attack of foreign companies cannot neglect this aspect. They thus develop new products locally that can compete with local firms. Eventually the same products (may) find market success in advanced markets, maybe in a segment ignored to date, thus giving rise to low-end disruptive innovation (Christensen 1997) or disruptive innovation from emerging economies (Hart and Christensen 2002).

The cost approach is not the only difference that drives Chinese innovation. Another key factor is cultural differences. Familiarity or diffusion of a certain technology can affect the development of complementary technologies or products as in the case of wi-fi for Esaote and Magneti Marelli. On the other hand, low competence or experience related to early stages of industrialization can create the effects presented for Carel: customers need simple and user-friendly products. These factors are summarized in Table 11.2.

Table 11.2 Innovation stimuli from the Chinese market.

Company State Intervention/ Regulatory Issue Local Competition Local Market Features
Esaote SpA Health reform Risk of erosion of global incumbents’ share through low cost entry level technology Physicians specialized in ultrasound;
Very high number of clinical cases;
Large diffusion and familiarity with wi-fi technologies
Magneti Marelli SpA TPMS compulsory on all passenger vehicles;
Environmental policies		 Local firms compete in terms of low cost low quality products and customers are very price sensitive High number of applications for navigation systems;
Touchscreens
Brembo SpA Environmental policies Focus on drum brakes. Exploit Chinese large market as a development field
Carel Industries SpA Environmental policies Local firms compete over low cost and product simplicity in order to penetrate Western markets High cost of energy implies strong energy saving incentive;
Need for user friendly products

To date, the literature has mostly asserted that the learning curve of foreign subsidiaries in China is driven almost exclusively by cost (Zeng and Williamson 2007). The discussion of our cases suggests that this view should be extended. The sheer size of the Chinese market empowers companies to develop innovations that are targeting wider sections of the population. The focus is on lower costs and profiting from the mass adoption of innovations rather than from higher margins on products and technologies that are developed for the richest, and smallest, segments of the market. This approach might eventually grant them access to market segments in advanced countries which are currently not served or exploited for low profitability reasons, as we have seen for Brembo.

We are thus far from a framework where the host country affects the innovation of MNC subsidiaries based on its technological richness and diversity (Almeida and Phene 2004; Phene and Almeida 2008; Frost 2001; Frost and Zhou 2005). Chinese subsidiaries can instead be read as interpreters of local market characteristics whose inputs configure unique innovation sources. The contextual factors are thus classified as especially important in shaping the evolution of subsidiaries. In order to fully exploit these inputs, subsidiaries need to be guided by parent companies through a technological evolution. A shift in R&D activities from home-based to a more explorative-oriented development (Asakawa 2001; Florida 1997) is thus confirmed. Strong technological knowledge must be held by parent companies, but China is the right place to develop it on the basis of new market inputs once Chinese R&D labs have filled the knowledge gap.

Implications and Future Research

In this chapter we have analyzed four cases of foreign R&D activities in China. We have seen how the evolution of foreign subsidiaries in China is affected by the host country. These are not determined by the possibility of tapping into local knowledge or technology pockets, but rather by innovative inputs stemming from local market-related factors. We divided these factors into three categories: (1) State Intervention; (2) Local Competition; (3) Local Market Features, and we have seen how the traditional evolution path of foreign R&D activities has moved from being exploitative to explorative. The combination of corporate knowledge and technology with innovation inputs from the Chinese market highlights the technological paths needing to be explored. The exploration of new avenues is moving from the headquarters to the subsidiaries given the characteristics of the context in which the latter operate.

We believe that future research should address two issues, which are driven respectively by the policy and managerial implications of our study. The first concerns Chinese FDI policies. Scholars have already drawn a tentative Chinese developmental state approach (Breslin 1996) and spillover effects of foreign R&D investments have been assessed from different perspectives (Cheung and Lin 2004; Wei and Liu 2006). The effects of the Chinese developmental state approach on foreign MNCs at a corporate level still needs to be clarified from a technological point of view. Can a foresight developmental state influence how the competitive advantage of foreign MNCs can spread a global level? Given the current Chinese FDI policies aimed at attracting technologies that Chinese companies still lack, by inviting foreign companies to cooperate with local ones, it might be beneficial if the Chinese government consider fostering FDI in technological areas in which the Chinese market can provide unique opportunities in order to trigger innovation and facilitate its adoption.

The link connecting the subsidiary’s role and disruptive innovation from emerging economies is also worth investigating. In their work on disruptive innovation, Christensen (1997) and Christensen and Raynor (2003) discuss the importance of an independent spin-off company in taking advantage of innovation inputs from emerging markets or unserved market segments. Chinese subsidiaries of foreign MNCs can thus be seen as those independent spin-off companies responsible for the development of disruptive innovations from Chinese market inputs which could then have disruptive implications on global markets. The corporate management of foreign MNCs should then increase the autonomy of Chinese subsidiaries in order for them to overcome what we would define as “the innovator’s dilemma of foreign companies in China.” By granting autonomy to Chinese subsidiaries, they will be able to develop innovations based on local market inputs that could otherwise not be foreseen by managers in their country of origin.

In a world in which innovation has been traditionally driven by market inputs (Myers and Marquis 1969; Vernon 1966, 1979) rather than the push of technology, we believe that China could play the role that originally belonged to the US market. The oriental giant could represent a strong source of inspiration and generation for new products, thus reversing the traditional view of industrialized countries as innovation leaders.

References

  1. Almeida, Paul, and Anupama Phene. 2004. “Subsidiaries and Knowledge Creation: The Influence of the MNC and Host Country on Innovation.” Strategic Management Journal 25: 847–864.
  2. Ambos, Tina C., Bjorn Ambos, and Bodo B. Schlegelmilch. 2006. “Learning from Foreign Subsidiaries: An Empirical Investigation of Headquarters' Benefits from Reverse Knowledge Transfers.” International Business Review 15: 294–312.
  3. Andersson, Ulf, Mats Forsgren, and Ulf Holm. 2002. “The Strategic Impact of External Networks: Subsidiary Performance and Competence Development in the Multinational Corporation.” Strategic Management Journal 23: 979–996.
  4. Asakawa, Kazuhiro. 2001. “Organizational Tension in International R&D Management: The Case of Japanese Firms.” Research Policy 30: 735–757.
  5. Birkinshaw, Julian. 1998. “Foreign Owned Subsidiaries and Regional Development: The Case of Sweden.” In Multinational Corporate Evolution and Subsidiary Development, ed. Julian Birkinshaw and Neil Hood, 268–298. London: Macmillan.
  6. Birkinshaw, Julian, and Neil Hood. 1997. “An Empirical Study of Development Processes in Foreign-Owned Subsidiaries in Canada and Scotland.” MIR: Management International Review 37(4): 339–364.
  7. Birkinshaw, Julian, and Neil Hood. 1998. Multinational Corporate Evolution and Subsidiary Development. London: Macmillan.
  8. Birkinshaw, Julian, and Neil Hood. 2000. “Characteristics of Foreign Subsidiaries in Industry Clusters.” Journal of International Business Studies 31: 141–154.
  9. Birkinshaw, Julian, Neil Hood, and Stefan Jonsson. 1998. “Building firm-Specific Advantages in Multinational Corporations: The Role of Subsidiary Initiative.” Strategic Management Journal 19: 221–241.
  10. Breslin, Shaun G. 1996. “China: Developmental State or Dysfunctional Development?” Third World Quarterly 17: 689–706.
  11. Brusoni, Stefano, Andrea Prencipe, and Keith Pavitt. 2001. “Knowledge Specialization, Organizational Coupling, and the Boundaries of the Firm: Why Do Firms Know More Than They Make?” Administrative Science Quarterly 46: 597–621.
  12. Buckley, Peter J., and Mark Casson. 1985. The Economic Analysis of the Multinational Enterprise: Selected Papers. London: Macmillan.
  13. Buckley, Peter, Jeremy Clegg, and Hui Tan. 2003. “The Art of Knowledge Transfer: Secondary and Reverse Transfer in China’s Telecommunications Manufacturing Industry.” Management International Review 43: 67–93.
  14. Cantwell, J. 1995. “The Globalisation of Technology: What Remains of the Product Cycle Model?” Cambridge Journal of Economics 19(1): 155–174.
  15. Cheung, Kui-yin, and Ping Lin. 2004. “Spillover Effects of FDI on Innovation in China: Evidence from the Provincial Data.” China Economic Review 15: 25–44.
  16. Chiesa, Vittorio. 1994. “International Technology Development Organisation: A Framework.” In La globalizzazione delle attività di ricerca e sviluppo, ed. Umberto Bertelè and Vittorio Chiesa. Milano: Consorzio MIP-Politecnico di Milano.
  17. Chiesa, Vittorio. 1996. “Managing the Internationalization of R&D Activities.” IEEE Transactions on Engineering Management 43: 7–23.
  18. Christensen, Clayton M. 1997. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Cambridge, MA: Harvard Business Press.
  19. Christensen, Clayton M., and Michael E. Raynor. 2003. The Innovator’s Solution: Creating and Sustaining Successful Growth. Cambridge, MA: Harvard Business Press.
  20. Di Minin, Alberto, and Mattia Bianchi. 2011. “Safe Nests in Global Nets: Internationalization and Appropriability of R&D in Wireless Telecom.” Journal of International Business Studies 42: 910–934.
  21. Dunning, John H. 1980. “Towards an Eclectic Theory of International Production: Some Empirical Tests.” Journal of International Business Studies 11: 9–31.
  22. Eisenhardt, Kathleen M. 1989. “Building Theories from Case Study Research.” Academy of Management Review 14: 532–550.
  23. Florida, Richard. 1997. “The Globalization of R&D: Results of a Survey of Foreign-Affiliated R&D Laboratories in the USA.” Research Policy 26: 85–103.
  24. Frost, Tony S. 2001. “The Geographic Sources of Foreign Subsidiaries’ Innovations.” Strategic Management Journal 22: 101–123.
  25. Frost, Tony S., and Changhui Zhou. 2005. “R&D Co-Practice and Reverse Knowledge Integration in Multinational Firms.” Journal of International Business Studies 36: 676–687.
  26. Frost, Tony S., Julian M. Birkinshaw, and Prescott C. Ensign. 2002. “Centers of Excellence in Multinational Corporations.” Strategic Management Journal 23: 997–1018.
  27. Gassmann, Oliver, and Zheng Han. 2004. “Motivations and Barriers of Foreign R&D Activities in China.” R&D Management 34: 423–437.
  28. Gassmann, Oliver, and Markus Keupp. 2008. “The Internationalisation of Western Firms’ R&D in China.” International Journal of Entrepreneurship and Small Business 6: 536–561.
  29. Ghoshal, Sumantra, and Christopher A. Bartlett. 1990. “The Multinational Corporation as an Interorganizational Network.” The Academy of Management Review 15: 603–625.
  30. Ghoshal, Sumantra, and Nitin Nohria. 1989. “Internal Differentiation within Multinational Corporations.” Strategic Management Journal 10: 323–337.
  31. Gibbert, Michael, Winfried Ruigrok, and Barbara Wicki. 2008. “What Passes as a Rigorous Case Study?” Strategic Management Journal 29: 1465–1474.
  32. Govindarajan, Vijay, and Ravi Ramamurti. 2011. “Reverse Innovation, Emerging Markets, and Global Strategy.” Global Strategy Journal 1: 191–205.
  33. Govindarajan, Vijay, and Chris Trimble. 2012. Reverse Innovation: Create Far from Home, Win Everywhere. Boston, MA: Harvard Business Review Press.
  34. Gupta, Anil K., and Vijay Govindarajan. 1991. “Knowledge Flows and the Structure of Control within Multinational Corporations.” Academy of Management Review 16: 768–792.
  35. Håkanson, Lars, and Robert Nobel. 1993. “Determinants of Foreign R&D in Swedish Multinationals.” Research Policy 22: 397–411.
  36. Håkanson, Lars, and Robert Nobel. 2000. “Technology Characteristics and Reverse Technology Transfer.” MIR: Management International Review 40: 29–48.
  37. Håkanson, Lars, and Robert Nobel. 2001. “Organizational Characteristics and Reverse Technology Transfer.” MIR: Management International Review 41: 395–420.
  38. Hang, Chang-Chieh, Jin Chen, and Annapoormina M. Subramian. 2010. “Developing Disruptive Products for Emerging Economies: Lessons from Asian Cases.” Research Technology Management 53: 21–26.
  39. Hart, Stuart L., and Clayton M. Christensen. 2002. “The Great Leap: Driving Innovation from the Base of the Pyramid.” MIT Sloan Management Review 44: 51–56.
  40. Hecksher, Eli F. 1933. Interregional and International Trade. Cambridge, MA: Harvard University Press.
  41. Hedlund, Gunnar. 1986. “The Hypermodern MNC – A Heterarchy?” Human Resource Management 25: 9–35.
  42. Hsueh, Roselyn. 2011. China’s Regulatory State: A New Strategy for Globalization. Ithaca, NY: Cornell University Press.
  43. Hymer, Stephen H. 1976. The International Operations of National Firms: A Study of Direct Foreign Investment. Cambridge, MA: MIT Press.
  44. Immelt, Jeffrey R., Vijay Govindarajan, and Chris Trimble. 2009. “How GE Is Disrupting Itself.” Harvard Business Review 87: 56–65.
  45. Jarillo, J. Carlos, and Jon I. Martinez. 1990. “Different Roles for Subsidiaries: The Case of Multinational Corporations in Spain.” Strategic Management Journal 11: 501–512.
  46. Johanson, Jan, and Jan-Erik Vahlne. 1977. “The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitments.” Journal of International Business Studies 8: 23–32.
  47. Johanson, Jan, and Jan-Erik Vahlne. 2009. “The Uppsala Internationalization Process Model Revisited: From Liability of Foreignness to Liability of Outsidership.” Journal of International Business Studies 40: 1411–1431.
  48. Kuemmerle, Walter. 1997. “Building Effective R&D Capabilities Abroad.” Harvard Business Review 75: 61–70.
  49. Macher, Jeffrey T., David C. Mowery, and Alberto Di Minin. 2007. “The ‘Non-Globalization’ of Innovation in the Semiconductor Industry.” California Management Review 50: 217–242.
  50. Myers, Sumner, and Donald G. Marquis. 1969. Successful Industrial Innovations. Washington, DC: National Science Foundation Report No. 69–17.
  51. OECD. 2008. Review of Innovation Policy: China. Paris: OECD.
  52. Park, Seung H., and Yadong Luo. 2001. “Guanxi and Organizational Dynamics: Organizational Networking in Chinese Firms.” Strategic Management Journal 22: 455–477.
  53. Patel, Pari, and Keith Pavitt. 1991. “Large Firms in the Production of the World’s Technology – An Important Case of Non-Globalization.” Journal of International Business Studies 22: 1–21.
  54. Pearce, Robert D. 1989. The Internationalization of Research and Development by Multinational Enterprises. London: Palgrave Macmillan.
  55. Phene, Aanupama, and Paul Almeida. 2008. “Innovation in Multinational Subsidiaries: The Role of Knowledge Assimilation and Subsidiary Capabilities.” Journal of International Business Studies 39: 901–919.
  56. Prahalad, C.K. 2004. The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits. Philadelphia, PA: Wharton School Publishing.
  57. Quan, Xiaohong, and Henry W. Chesbrough. 2010. “Hierarchical Segmentation of R&D Process and Intellectual Property Protection: Evidence from Multinational R&D Laboratories in China.” IEEE Transactions on Engineering Management 57: 9–21.
  58. Rein, Shaun. 2009. “Health-Care Reform, China Style.” Bloomberg Businessweek, August 21, http://www.businessweek.com/globalbiz/content/aug2009/gb20090821_005732.htm (accessed December 29, 2014).
  59. Ricardo, David. 1817. “Principles of Political Economy.” In The Works and Correspondence of David Ricardo, ed. Piero Sraffa (1951). Cambridge: Cambridge University Press.
  60. Siggelkow, Nicolaj. 2007. “Persuasion with Case Studies.” Academy of Management Journal 50: 20–24.
  61. Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations, ed. E. Cannan. London: Methuen.
  62. Tavares, Ana Teresa. 2001. “Strategic Management of Multinational Networks: A Subsidiary Evolution Perspective.” University of Reading Discussion Papers in International Investment and Management.
  63. Teece, David J. 1986. “Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy.” Research Policy 15: 285–305.
  64. UNCTAD. 2005. World Investment Report: Transnational Corporations and the Internationalization of R&D. New York and Geneva: United Nations.
  65. Vernon, Raymond. 1966. “International Investment and International Trade in the Product Cycle.” Quarterly Journal of Economics 80: 190–207.
  66. Vernon, Raymond. 1979. “The Product Cycle Hypothesis in a New International Environment.” Oxford Bulletin of Economics and Statistics 41: 255–267.
  67. von Zedtwitz, Maximilian. 2004. “Managing Foreign R&D Laboratories in China.” R&D Management 34: 439–452.
  68. von Zedtwitz, Maximilian, Tadashi Ikeda, Li Gong, Richard Carpenter, and Seppo Hämäläinen. 2007. “Managing Foreign R&D in China.” Research – Technology Management 50: 19–27.
  69. Walsh, Kathleen A. 2007. “China R&D: A High-Tech Field of Dreams.” Asia Pacific Business Review 13: 321–335.
  70. Wei, Y., and X. Liu. 2006. “Productivity Spillovers from R&D, Exports and FDI in China’s Manufacturing Industry.” Journal of International Business Studies 37: 544–557.
  71. Yin, Robert K. 2003. Applications of Case Study Research. Thusand Oaks, CA: Sage Publications.
  72. Yip, Winnie, and William Hsiao. 2009. “China’s Health Care Reform: A Tentative Assessment.” China Economic Review 20: 613–619.
  73. Zeng, Ming, and Peter J. Williamson. 2007. Dragons at Your Door: How Chinese Cost Innovation Is Disrupting the Rules of Global Competition. Boston, MA: Harvard Business School Press.
  74. Zeschky, Marco, Bastian Widenmayer, and Oliver Gassmann. 2011. “Frugal Innovation in Emerging Markets: The Case of Mettler Toledo.” Research Technology Management 54: 38–45.

Notes

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

You can't read the all page of ebook, please click here login for view all page.
Reset
3.138.35.193