M.Sc.

International Business
GLOBAL SHIFT COVER SHEET AND DECLARATION

STUDENT ID No.

1136607

BANNER CODE

07 21331

Using either the Varieties of Capitalism or the National ASSIGNMENT TITLE Systems of Innovation approach compare and contrast the national business or innovation systems of two countries of your choice. Discuss some of the practical implications for international business practitioners of these national differences.

TEACHER DATE OF SUBMISSION

Dr Paulina Ramirez 15th December, 2010

TOTAL WORD COUNT

1962

DECLARATION By completing the above, I declare that this submission is my work; that it has been written in my own words; and that all references, direct or indirect, to other published or unpublished sources have been acknowledged using the Harvard Referencing System.

CONTENTS

1.

INTRODUCTION 1.1. Approaches

2 2 2 3 3

1.1.1 National systems of Innovation 1.1.2 Sectoral systems of Innovation 1.1.3 Regional Systems of Innovation 2. NATIONAL INNOVATION SYTEMS OF INDIA AND CHINA: A COMPARISON 2.1. Research and Development (R&D) 2.2. Governments role in R&D 2.3. Education 2.4. Practical Implications 3. REFERENCES

4 6 7 9 11

1. INTRODUCTION

Ground breaking changes have transpired in the world economy due to liberalisation, dematerialisation, globalisation and technological revolution. These changes have ensured that increased focus be given to the creation, transmission and implementation of knowledge According to Maskell et al (1996). It has been estimated that more than 50% of gross domestic product (GDP) in the economies of the major OECD countries is now knowledge-based. This has affected the Innovation systems globally. The word innovation system was originally used by Freeman in the 1980s, and is the framework which gives impetus to the firms to innovate. Innovation involves the exploration and exploitation of opportunities for new/improved products, processes or services based on advances in technical practice, or a change in market demand, or a combination of the two (Pavitt, 2005).

1.1

Innovation systems can be studied through three approaches:

1.1.1 National systems of Innovation (NIS): NIS was studied by Lundvall, Nelson and Freeman. Freeman (1987:2) defined NIS as the network of institutions in the public and private sectors whose activities and interactions imitate, import, modify and diffuse new technologies. Lundvall (1992) however distinguished between the narrow definition and the broader definition of the NIS. The narrow definition only encompasses organisations and institutions that help in the discovery of new knowledge, mainly Research and development departments, laboratories and educational institutions. The broader definition on the other hand, also takes into account relationships and interactions that enable the spread of knowledge. Nelson and Mowery (1993) concentrated on the narrow

definition and laid stress on innovation system that is engineered through scientific and technological development in R&D, Universities and government laboratories.

1.1.2 Sectoral systems of Innovation(SSI): This approach focuses on Breschi and Malerba (1995:131) define SSI as the specific clusters of the firms, technologies,and industries involved in the generation and diffusion of new technologies and in the knowledge flows that take place amongst them

1.1.3 Regional systems of Innovation (RSI): This approach was advocated by Cooke et al (1997) and laid stress on the functioning of firms, lying within a region, as a whole. The drawback of this approach is that there is ambiguity regarding the size of a RSI.

For the purpose of this essay we consider the NIS approach and choose the narrow definition as proposed by Nelson (1993) to analyse the NIS of China and India. We choose this definition as science and technology are the chief engines of innovation and the definition chooses to stress on that. For our analysis, we consider the R&D departments of firms coupled with Government laboratories and Educational Institutions, as covered under the purview of the definition.

2. NATIONAL INNOVATION SYSTEMS OF INDIA AND CHINA: A COMPARISON

2.1 RESEARCH AND DEVELOPMENT (R&D):

Technological Innovation can be summed up as the transformation of an idea into a new or improved saleable product or operational process in Industry or commerce, etc (Roy and Wield, 1985).

There are two theories of R&D. The neo-classical Theory as proposed by Nelson (1959) and Arrow (1962) said that there was only the initial cost of Investment in the R&D that was incurred by firms. There was no cost of transferring knowledge and the knowledge, once generated, did not lessen in any way if it was utilised by other firms. Under this theorys assumption, the social returns for the firm exceeded its private return. The second theory however challenges the notion of the neo-classical theory that knowledge transfer does not involve cost of any kind. According to studies by Rosenberg (1982), Mowery (1983), Pavitt (1984), and Cohen and levinthal (1989) transferring knowledge is a costly and knowledge intensive process.

The economies of the two nations have shown an upward trend particularly because of the increase in FDI and subsequent investment in R&D. Chinas inflow of FDI increased from $1.65 billion in 1985 to $55 billion in 2004. India accounted for an upsurge from $106 million to $5.3 billion during the same period. The reason for such boost can be attributed to the competitive advantages available and the liberalisation policies followed by the government of

the countries (Teagarden et al, 2008). The Economic Intelligence Unit (2004), in its survey on 104 senior executives showed that 39% and 28% of the respondents planned to spend on R&D in china and India in the following years.

The R&D investment in India is focused on Information Technology, Telecommunications, automotive, Pharmaceutical and Biotechnology whereas China concentrates on personal computer, telecommunications followed by petrochemical, pharmaceutical, chemical and biotechnology, automotive and transportation industries. If we talk about the nationality of the investing firms, the US dominates in both the countries. Also, there is presence of European and South Korean firms in India whereas European and Japanese firms can be found in China. (Bowonder & Richardson, 2000; Grassmann and Han, 2004; Von Zedwitz,2004)

If we had to pick out the key areas of knowledge transfer in both the economies, china scores with manufacturing and India with technology services. For example, due to the internet bubble, Yahoo was forced to seek engineers beyond its shores. In 2000, a small office was set up in Bangalore, Indias Silicon Valley. By 2007, the office expanded to a capacity of a 1000 employees and it became Yahoos largest R&D center set up abroad. The research includes developing new services that might be launched globally by the Tech-giant. (Teagarden et al, 2008)

To enter the Chinese market, most MNCS used equity partnership with which they retained managerial control and had access to the large market of china. Motorola is a classic example of this point. It entered China in 1987 with a representative office. Through a rigourous training

programme it managed to build a strong base for its expansion. By 1992, it had its own subsidiary in china and subsequently established 16 R&D centers across China. It controlled more than 20% of chinas telecommunication market by 2006. (Teagarden et al, 2008)

The issue of Intellectual property rights in these countries is of great concern. Even though IPR condition in India is decent it is not of global standards. On the other hand China suffers from spin-off and pirated goods. If these issues are resolved, even more firms would seek to invest in these economies.

2.2. GOVERNMENTS ROLE IN R&D

Since 1999, China encouraged foreign firms to establish their R&D centers across the country by following a liberal policy. Technology transfer and transfer of equipment required in pilot experiments were exempt from import duty. Foreign Invested enterprises were allowed to import and sell some of their high-tech products in the local market on a trial basis if the product was produced by the R&D of its parent company. (China Ministry of commerce 2003, 107). Also, technology developed by an FIE* is exempt from sales tax.. Assistance was provided to the FIE in recruitment. These factors combined let to 400 FIEs setting up R&D

*FIE-Foreign Invested Enterprise

Centers in the country by 2002 including leading names such as Microsoft, GE and GM. (Guoqiang long, 2005). Indian Government on the other hand controlled R&D especially in strategic sectors such as atomic energy, defence and space research. Over 80% of the R&D done in India was financed by The Government of India and conducted within Government research Laboratories (Forbes, 1999). Post Economic reforms of 1991 altered the face publicly funded R&D. Initially these laboratories had poor linkages to the industry. However, after the reforms they became more commercial in nature and this was indicated in the growing number of US patents and external earnings of these Labs. Most industries in the country no longer need industrial licensing and there is approval for 100% FDI in certain industries. (Krishnan, 2003).

For example, the knowledge transfer by IBM corps and Texas Instruments Inc with a view to capitalize on the IT services helped boosted the GDP of India which was 6% in the late 1990s to 8%. (Teagarden et al, 2008).

Also, it is believed by certain firms such as GE that even though India is a developing country, its developed for R&D due to its congenial scientific infrastructure and high-quality local R&D environment (Asakawa and Som, 2008)

2.3. EDUCATION: More and more companies seek to invest in the two countries because of the Human capital available. The two countries together account for 38% of the world population and provide ample opportunity to the investors to employ skilled labour at a relatively low cost. Every year

itself, India and China together produce 12 times more engineering graduates than the US. (Teagarden et al, 2008) As of 2001, OECD reports that China was the second largest country in terms of researchers in a single country. (EIU, 2004:10). The country also seeks to lure Chinese returnees from the US to improve its technological base. (Saxenian, 2006). FIEs are also found to set up base close to Universities and Colleges to extract potential labour at cheaper rates. In fact, The R&D department of certain FIEs known to work in collaboration with domestic research organisations. For example, The shanghai Institute of Materia Medica works with Swiss Company, Novartis for the study and development of new drugs made from natural ingredients. (Guoqiang long, 2005). India, on the other hand has a very strong scientific foundation in its universities but its not leveraged for commercialisation. Government grants to the Indian Institutes of Technology, in particular, have led to increase in income from sponsored projects and consultancy. These institutes provide as great source for recruitment of IT professionals. (Asakawa and Som, 2008). Five states in the country have establishes a total of 806 Engineering colleges to meet the growing demand of IT professionals and Engineering courses. (The Hindu, 2003) Intel in India has established a Regional Training agency (RTA), a multi-million dollar investment as a part of the Intel Innovation In education Initiative to uncover and exploit science and technology potential in the country. (Kazuhiro and Som, 2008)

2.4. PRACTICAL IMPLICATIONS: Perhaps the most criticial implication of the knowledge of the NIS of these nations is that it enables firms to formulate their strategy regarding operating in them. The study of these Innovation systems can help a firm model its operational activity based on the networking available. It can decide to collaborate with a local firm or operate on its own. For example, If an MNC recognises talent pool for its R&D within a region, it can enter into agreement with the local Institution or it can lobby for increasing government spending on graduate schemes or scholarships. (kazuhiro and Som, 2008) When it comes to these emerging markets, the conventional way of investing R&D is rendered obsolete. There is need for the firms to recognize and acknowledge the uniqueness of these Innovation systems so that they can model their R&D policy on that. (OECD, 1997) These NIS have abundant knowledge and the firms need to tap and adapt this knowledge to their enterprise so as to increase and develop its innovative capability. As the economies of the two countries continue to grow, we find that knowledge sharing in its conventional form does not suffice. The firms must weigh the future benefits against the current cost of investment. The dynamics of the market ensure that making an accurate estimate is beyond ones capability. However, this risk has to be borne by a firm if it hopes to capture the potential of the local markets that these nations offer. Through the study of these NIS, a company can exploit location advantages by setting up base in an innovation cluster. For example, Many IT companies come to Bangalore, India with a view to recruit skilled IT professionals with Bangalore being the IT hub of the country.

To conclude, the study of NIS does not guarantee success for an organisation but provides useful insights into tapping and exploiting potential resource unique to these economies.

10

3. REFERENCES 1. Arrow, K.J., (1962). Economic Welfare and the allocation of resources for invention, in University-National Bureau committee for economic research. The Rate and Direction of Inventive Activity. Princeton University press, Princeton, NJ. 2. Pavitt K (.1984) Sectoral patterns of technical change: towards taxonomy and a theory. Res Policy; 13:34373. 3. Roy,R., Weild, D., (1985). Product Design and Technological Innovation: A reader. Open University Press, Philadelphia. 4. Maskell P, Eskelinen H, Hannibalsson I, Malmberg A, Vatne E. Employment and growth in the knowledge-based economy. Paris: OECD; 1996. 5. Freeman C. (1987) Technology policy and economic performance: lesson from Japan. London: Frances Pinter; .pp 2. 6. Mowery, D.C., Rosenberg, N., (1989). Technology and the pursuit of Economic growth. Cambridge Univ. Press. 7. Cohen WM, Levinthal D (1990). Absorptive capabilities: a new perspective on learning and innovation. Admin Sci Q; 35:12852. 8. Lundvall B, (1992.) National systems of innovation: towards a theorem of innovation and interactive learning. London: Pinter; 9. Nelson, R.R (Ed.), (1993). National Innovation systems: A comparative Analysis. Oxford Univ Press.

11

10. Breschi S, Malerba F. (1997) Sectoral innovation systems: technological regimes, Schumpeterian dynamics, and spatial boundaries. In: Edquist C, editor. Systems of innovation: technologies, organizations, and institutions. London: Pinter; p. 13056. 11. Braczyk H, Cooke P, Heidenreich M (Eds), 1997 Regional Innovation Systems (UCL Press, London) 12. Xue., Lan (1997). A historical perspective of Chinas Innovation system reform: a case study. Journal of Engineering and technology management JET-M, 14: 67-81 13. Forbes, N.,(1999) Technology and Indian Industry: What is Liberalization Changing? Technovation, Vol. 19, 403-412. 14. Bowonder, B., & Richardson, P.K. (2000). Liberalization and the growth of Business-led R&D: The case of India. R&D management, 30(4): 279-288. 15. Unfettering Higher Education, The Hindu, editorial, 8th March 2003. Downloaded from http://www.hinduonnet.com/2003/03/08/stories/2003030800291000.htm. 16. Krishnan RT (2003).The evolution of a developing country innovation system during economic liberalization: the case of India. Paper presented at The First Globelics Conference, Rio de Janeiro (http://www.globelics.org). 17. China Ministry Of commerce (2003) Foreign Investment report 2003.

http://www.mfocom.gov.cn 18. Economist Intelligence Unit (EIU). (2004). Scattering the seeds of innovation: The globalization of research and development (A white paper sponsored by Scottish Development International).

12

19.

Grassman, O.,& Han, Z. (2004). Motivations and barriers of foreign R&D activities in China. R&D Management, 34(4): 423-437.

20.

Von Zedtwitz, M. (2004). Managing foreign R&D laboratories in China. R&D Management, 34(4): 439452.

21.

Chang, Yuan-Chieh., Chen, Ming-Huei (2004) Comparing approaches to systems of innovation: the knowledge perspective. Technology In society.26:17-37.

22.

Pavitt K., (2005) Key Characteristics of the Large Innovating Firm. British Journal Of management, 2: 41-50.

23.

Long. Guoqiang. (2005). Chinas Policies on FDI: Review and Evaluation In TheodoreMoran, Edward M. Graham and Magnus Blomstrom. Eds. DOES FOREIGN DIRECT INVESTMENT PROMOTE DEVELOPMENT?: New Measurements, New Outcomes, New Policy Approaches, Institute for International Economics.

24.

Saxenian , A. (2006). The new argonauts: Regional advantage in a global economy. Cambridge: Harvard University Press.

25.

Asakawa, Kazuhiro, Som., Ashok (2008). Internationalization of R&D in China and India: Conventional wisdom versus reality. Asia Pacific Journal of Management, 25:375-394.

26.

Teagarden, Mary B., Meyer, Joab. , Jones, Dupre. (2008) Knowledge Sharing Among High Tech MNCs in China and India: Organizational Dynamics, Vol. 37, No. 2, pp.190202.

27.

www.oecd.org.Refrences[online].available from http://www.oecd.org/dataoecd/35/56/2101733.pdf [accessed on 10th december 2010]

13

14