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

SLOAN INDUSTRY STUDIESWORKING PAPERSNUMBER WP-2007-22HTTP://WWW.INDUSTRY.SLOAN.ORG/INDUSTRYSTUDIES/WORKINGPAPERS“INNOVATION SHIFT” TO THE EMERGING ECONOMIES:CASES FROM IT AND HEAVY INDUSTRIESByLeonard LynnCase Western Reserve UniversityCleveland, Ohio 44106AndHal SalzmanUrban InstituteWashington, DC 200372007ABSTRACTThe current shift of technology development work by multinationals to the emerging economies is distinctive, as many are now observing, though less understood are the implications for innovative capacity and location. It is now high-end (rather than adaptive) development that is being carried out in countries like India, China, Brazil and Mexico. And, increasingly, multinationals from the U.S., Japan and Europe are finding themselves competing against, or working with, new technology-based companies from the emerging economies. Our study focuses on the processes and outcomes of globally distributed engineering. Field work was carried out at 67 engineering headquarters or development sites in eight countries. The firms in our study were in IT and a range of other industries, though in this paper we concentrate on the IT and heavy industries sectors. Based on our fieldwork we conclude that this new shift in the location of technology work at the top of the value chain is not only distinctive, but it is also disjunctive, not following past trajectories of offshoring. We also find that it is occurring as a matter of incremental value chain creep, rather than being guided by “strategy.” We believe current trends are inconsistent with some widely accepted postulates and prescriptions of organization and innovation theory. We find that the consequences of these trends have not been well conceptualized by managers and policy-makers.The research described here was supported by the National Science Foundation (Societal Dimensions of Engineering, Science & Technology, SES-0431755, and the Human and Social Dynamics Programs, SES-0527584), and the Ewing Marion Kauffman Foundation. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the funders. 1ABSTRACT The current shift of technology development work by multinationals to the emerging economies is distinctive, as many are now observing, though less understood are the implications for innovative capacity and location. It is now high-end (rather than adaptive) development that is being carried out in countries like India, China, Brazil and Mexico. And, increasingly, multinationals from the United States, Japan and Europe are finding themselves competing against, or working with, new technology-based companies from the emerging economies. Our study focuses on the processes and outcomes of globally distributed engineering. Field work was carried out at 67 engineering headquarters or development sites in eight countries. The firms in our study were in IT and a range of other industries, though in this paper we concentrate on the IT and heavy industries sectors. Based on our fieldwork we conclude that this new shift in the location of technology work at the top of the value chain is not only distinctive, but it is also disjunctive, not following past trajectories of offshoring. We also find that it is occurring as a matter of incremental value chain creep, rather than being guided by “strategy.” We believe current trends are inconsistent with some widely accepted postulates and prescriptions of organization and innovation theory. We find that the consequences of these trends have not been well conceptualized by managers and policymakers. 2“Innovation Shift” to the Emerging Economies: Cases from IT and Heavy Industries One of the most dramatic developments of the past decade has been the offshoring of technology and product development by Multinational Enterprises (MNEs) to emerging economies (EEs).1 This trend appears contrary to a historical trajectory in which large firms evolved increasingly integrated organizational structures, followed management strategies that focused on protecting their core competencies and the resources that gave them sustainable competitive advantage, and also devoted considerable resources to the development of human capital. All of these activities were very much geographically embedded, and national innovation policies were predicated on this embeddedness. While a number of studies have documented the increasing globalization of R&D activities (e.g., Thursby and Thursby 2006), the implications for national policies have most often been considered in terms of specific threats to jobs or vaguely conceived notions of “national competitiveness.” Less attention has been paid to the content of this aspect of globalization and the broader transformations that may be occurring, For decades MNEs have cut costs by offshoring some production and engineering activities to lower cost regions of the world. They have al