Collaboration Between Companies: Growing International Alliances in Research and Development

“The World Is Connected as it has never been before, and the power of collaboration is beginning to emerge”. With reference to growing international alliances in research and development (R&D), critically assess this statement using examples

Introduction

Collaboration between companies is a crucial strategy in the contemporary business environment. Collaboration entails the pursuit of common benefits and mutual interests. In this regard, the business world comprises a network of inter-firm relations established and strengthened via strategic cooperation with the main objective of accomplishing mutual benefits. Collaboration between firms also occurs in the realm of research and development (R&D), which is primarily driven by the increasing costs of the latter, fast changing technology, and increasing technological complexity. As a result, firms are diversifying their knowledge sourcing activities, which makes it evident that geographically diversified R&D helps firms in accessing unique knowledge that is available in a particular region as well as taps into knowledge found in foreign markets. The goal of this paper is to critically assess the statement “the world is connected as it has never been before, and the power of collaboration is beginning to emerge” with reference to the growing international R&D alliances.

Relationship between State Policy, Firm-Directed R&D Activities, and Mobility of Professionals

State Policy

R&D plays a crucial role in the development of a global economy that is both knowledge-driven and competitive. Investment in R&D helps in the development of new services and products that, in turn, drives economic growth, creates employment, and enhances the national welfare (Ezell & Andes 2010). As a result, governments of various countries are focusing on creating policies aimed at R&D activity. In the absence of supportive government policies, the private sector is incapable of harnessing all the benefits associated with innovation, which results in R&D underinvestment (Kremer & Williams 2010). The crucial role that government policies play in supporting innovation has been emphasized by various authors. Essentially, the policies adopted by the state have a direct bearing on R&D activity in the private sector.

The tax policy is one of the ways through which the government can spur R&D, especially through tax credits, which works by permitting companies to take unlimited tax deductions for eligible research expenditures (Hobday, Boddington & Grantham 2012). The effectiveness of tax credits in spurring R&D and innovation has been affirmed empirically. Moreover, many economists agree that tax credits help in increasing R&D investment in the private sector to a level that is more optimal socially. Presently, several countries have generous incentive programs. Different countries use different approaches in their tax credits. The US is utilizing the incremental tax credit, whereas other countries such as France, Canada, and Brazil are using volume-based tax credits. Some countries such as Korea and Japan employ hybrid systems when computing tax credits (Ezell & Andes 2010). Volume-based tax credit systems entail rewarding companies for all their R&D activities; thus, they tend to be expensive and generous but relatively simple to execute. The incremental tax credit system is characterized by greater complexity, which results in costs for the tax authority and the company, which may be sufficiently high to discourage some companies from pursuing tax credit.

Another policy through which the government can use in order to spur R&D and innovation is flexible immigration and education policies (Ezell & Andes 2010). Countries are acknowledging that restrictive immigration policies are limiting their abilities to attract skilled professionals in various fields such as engineering and science. For instance, countries in the European Union are encouraging the mobility of workers (Parsons 2011). For example, France has adopted programs and initiatives aimed at encouraging high-skilled individuals to relocate from their countries to France. Similarly, German reduced the income level for which a foreign skilled individual can be granted an unlimited settlement permit. The EU in general is encouraging the mobility of researchers within the bloc (Parsons 2011). Due to flexible immigration policies, the number of international students is increasing significantly. China is a notable example of a country having the highest number of its students studying in overseas universities (Ezell & Andes 2010). Policies geared towards openness to high skill immigration can help in encouraging R&D and innovation. Such policies stimulate the emigration of skilled workers. The subsidization of overseas study is another essential immigration policy that governments can adopt to encourage R&D.

There are other diverse policy options existing that the government can adopt to encourage investments in R&D. Examples of policies targeting R&D directly include direct government funding in R&D labs, businesses and universities; investments in the formation of human capital; and laws focusing on the protection of patients (Ezell & Andes 2010). Other policies, although targeting R&D indirectly, include regulation and competition policies, which have a considerable effect on the level of the investment in R&D. Incentives for companies to make investments in innovation and R&D depend often on the competitive conditions (Kremer & Williams 2010). A competitive environment offers greater incentives for R&D investments. Empirical evidence suggests that an increase in competition results in an increase in innovative activity. In sum, it is evident that the amount of R&D activity is partly dependent on the policies adopted by the government to encourage R&D and innovation.

Firm-Directed R&D Activities

With flexible policies adopted by governments, firm-directed R&D is increasingly becoming global. A notable trend in firm-directed R&D is inter-firm collaboration, which has resulted in a network of inter-firm relationships established and strengthened via strategic cooperation in order to accomplish mutual benefits (Sachwald 2008). Numerous reasons exist for firms to collaborate with each other in the field of R&D. Some of the motives for inter-firm collaboration in the sector include benefiting from the economies of scale via pooling diverse resources; risk minimization while ensuring stability; and accessing the technologies and knowledge of other firms (Andersson & Pedersen 2010). Inter-firm partnership in R&D is often characterized by the respective firms remaining independent economic agents. Such partnerships may take various forms such as joint development agreements, joint R&D pacts, and equity-based joint ventures (Slone, Becker & McNamee 2011). Joint ventures in R&D are declining in popularity because of the associated costs; as a result, contractual approaches to R&D partnerships like joint development agreement and joint R&D pacts are increasing (Bojanowski, Corten & Westbrock 2012). These agreements are characterized by R&D and technology sharing between at least two companies having joint development projects or joint research. In such a case, the initiatives entail sharing of resources mainly via project-based groups of scientists and engineers drawn from each partnering firm (Richtnér & Rognes 2008). The costs associated with capital investment including equipment, office space, and labs among others are often shared among the partnering companies. Though contractual R&D partnerships tend to be short-term oriented because of their project-based nature, they stimulate the partnering companies exhibiting serious commitment (Capozzi, Van Biljon & Williams 2013). Such arrangements also demand high levels of inter-organizational dependence during the joint R&D projects.

A key trend in the firm-directed R&D is the international nature of these inter-firm relationships (Dunning & Lundan 2009). Malecki (2010) explains that the increase in international competition is compelling companies to embark on international strategies, wherein the former are not only seeking to gain entry into foreign markets but also to gain access to foreign assets and to build global inter-firm partnerships for global sourcing of supply, production, and R&D (Dunning & Lundan 2008). Internationalization has resulted in an increase in non-domestic R&D partnerships.

Mobility of Professionals

Besides spurring global R&D and innovation, flexible state policies have also played a crucial role in resulting in the mobility of professionals. The latter, in turn, has an impact on R&D and innovation capabilities of countries (Erkelens et al. 2010). The mobility of knowledge workers has been likened to a double-edge sword. On the one hand, the mobility of professionals could undermine the innovative capability of individual firms because the human resources (HR) investment in the training of knowledge workers is relatively high, yet the return of the investment is often accrued in the long run. As rejoining the increasing mobility of knowledge workers, companies focus on establishing internal retention mechanisms in order to enhance their innovation capabilities (Hegde & Hicks 2008). On the other hand, the mobility of professionals could help enhance the innovative capabilities of companies, particularly for small clustered businesses. The sharing of knowledge and the creation of new products require the mobility of knowledge workers (Li & Xie 2011). Companies should direct their efforts to creating environments characterized by the sharing of knowledge rather than the retention of workers if the former want to increase their innovative capacity (Li & Kozhikode 2009). Information exchange and knowledge spillovers are prerequisites for innovation (Cloodt, Hagedoorn & Roijakkers 2010). An example here is that the regular professional and social meetings among the Silicon Valley engineers and the exchange of jobs between workers resulted in swift dissemination and maturation of ideas, which, in its turn, accelerated the innovation witnessed in the Silicon Valley.

Possibility and Limitations of Cross-Country Collaboration in R&D

National differences matter significantly in the globalizing knowledge economy (Lahiri 2010). Companies engage in R&D activities that are nationally diversified for the purposes of accessing unique knowledge that is available in a particular country or region (Howells 2008). Diversified R&D activities also serve as an aim of tapping into foreign embedded knowledge to attain sustainable organizational growth. In particular, international R&D is partly motivated by the need to exploit location specific advantages. Kar, Subramanian, and Saran (2009) explicates that nations differ in terms of the nature and type of the innovation systems; as result, they have different levels of attractiveness for foreign companies. For example, because of the differences witnessed in the technological background (availability of particular technologies) and education systems, countries may exhibit differential levels of R&D productivity and activity (Lasserre 2012). Other differences between nations have been observed in intellectual property protection, the degree to which R&D agencies are concentrated, and the university-industry relationship among others. As a result, foreign companies may opt for diversifying their R&D overseas to countries having unique diverse technologies and extremely productive labour force (Li 2010). Location specific advantages in R&D can only be gained through interactions between both local and foreign firms in order to lead to crucial spillovers in the sectors found in the country. The collaboration between firms is increasingly emerging and is taking the form of cross-border research alliances because of these national differences (Malecki 2010). The latter have resulted in the stratification of R&D through the relocation of some divisions to enhance the efficiency of the R&D process. Moreover, regional divide is seen as a way of catering for local markets.

In establishing international alliances in R&D, a core limitation that Cloodt, Hagedoorn, and Roijakkers (2010) emphasized is the importance of similarity in national institutional environments and cultures in the R&D partners in order to facilitate resource exchange and foster inter-form trust. R&D partners sharing similar cultures have a higher chance of success when compared to R&D partners from completely different national cultures. Similarly, Richtnér and Rognes (2008) report that due to the differences with respect to the perceived uncertainty between the partnering R&D firms, national culture has a direct and indirect influence on the formation of such international alliances in R&D. According to Slone, Becker, and McNamee (2011), the unfamiliarity associated with the host country factors such as economic, institutional, and cultural differences can hamper the flow of information between R&D partners. Moreover, it may also increase the costs associated with sustaining the alliance. The geographical or physical distance is also another important factor affecting the formation of R&D alliances. Due to the implicit nature of knowledge and the difficulties associated with transferring knowledge, companies are more likely to collaborate with firms that are geographically proximate (Sachwald 2008). Thus, geographical, institutional, and cultural proximity are crucial determinants when forming international alliances in R&D. Also, the differences in terms of culture and institutions have been identified as one of the important factors that determine the formation of international alliances in R&D.

Issues Related to Coordinating Cross-Country R&D

International R&D has increased significantly in the recent, with bulk of those investments being made in emerging markets. In current difficult economic situation, international R&D remains a crucial strategy; however, it is characterized by numerous coordination problems, especially when the R&D units are located in countries that are geographically dispersed (Bojanowski, Corten & Westbrock 2012). The internationalization of R&D activities that were initially concentrated in the headquarters of global corporations results in a paradigm shift with respect to the manner in which corporate R&D strategy is managed and coordinated. For several R&D managers, engineers, and scientists, the internationalization of R&D poses a new and difficult challenge because the former are put in a situation whereby they have to exchange knowledge with their peers in various parts of the globe (Dunning & Lundan 2008). Firms that have globalized their R&D have to manage numerous tensions, which are related to the focus of the market, organizational structure, technology strategy, allocation of resources, and the communication strategy.

With regard to the focus of the market, choosing between both local and global emphasis is crucial due to its implication for the manner in which the resources will be utilized and the product will be suitable (Hegde & Hicks 2008). Embarking on a global strategy increases efficiency and economies of scale; however, the risk here is that the product may not be appropriate for all markets. Furthermore, embarking on a local strategy implies developing a greater product variety that better addresses the needs of the market. Nevertheless, this could result in significant cost increases because of the reduced economies of scale. The optimal solution for the firm in this tension would be balancing between the local and global market requirements (Howells 2008). Despite the fact that no unique solution exists for this dilemma, firms having the capability of exploiting both local and global markets can significantly enhance their market competitiveness.

The autonomy-centralized control tension is another coordination issue in cross-border R&D. With the internationalization of R&D, the spreading of R&D activities globally are characterized by high coordination costs together with the high risk of leakage of strategic R&D information and knowledge. Consequently, there is a need for exercising greater control of foreign R&D labs by the firm’s headquarters (Li 2010). Conversely, due to the swift rate of change and the heightened competition in the business environment where R&D labs are located, these labs may perhaps require autonomy in order to be able to react to threats and opportunities with more flexibility and in a timely manner. Firms often fear that autonomy may result in R&D labs embarking on their own agenda instead of working towards the achievement of the corporate goals and objectives (Sachwald 2008). As a result, R&D managers must have necessary requirements for providing R&D labs with autonomy.

Achieving and maintaining an efficient and effective global R&D system requires firms to balance between depending on face-to-face communication and technology-facilitated interactions (Howells 2008). The challenge herein is that, while technology-supported communication is cost effective and more effective in transferring explicit knowledge, it is simultaneously less effective and efficient for capturing and exchanging tacit knowledge (Sachwald 2008).

The technology strategy is another coordination dilemma in cross-border R&D. In this respect, the dilemma relates to the assignments of the R&D tasks among the various geographically dispersed ones. Another issue relates to whether R&D activities should be performed within or outsourced to a third party (Malecki 2010). Among various R&D labs, the type of task performed determines the status and prestige within the firm; thus, R&D managers should refrain from pitting labs against one another. Additionally, some labs may resist adopting technologies that have been developed by other labs due to the self-styled ‘not-invented-here’ syndrome, which is a real issue in some firms.

Conclusion

The amount of R&D activity in a country depends partly on the government policies adopted in order to encourage R&D and innovation such as tax policy, flexible education, and immigration policies. Such policies have been instrumental in encouraging inter-firm R&D relationships as well as the diversification of R&D activities geographically. Moreover, R&D is influenced by the mobility of professionals, which is a product of flexible state policies. The mobility of professionals can either stifle or encourage innovation. Also, national differences in terms of culture, economic, institution, and technological availability play a crucial role in fostering cross-border R&D. Thus, the firms are collaborating with an aim of diversifying R&D overseas into the countries having unique technologies and workforce. When forming international alliances, similar national environments are pivotal in contributing to the success of R&D alliances. Lastly, cross-border R&D comes with dilemmas that should be balanced to realize innovative synergies from dispersed R&D.