In light of the rise of Asia in research and development (R&D) and the challenge it poses on American supremacy, SPRIE invited industry and academic R&D leaders for a panel discussion entitled "The Globalization of R&D" on February 10, 2005. The panel included Dr. John Seely Brown, visiting scholar, Annenberg Center, USC; Dr. Kris Halvorsen, vice president and director, Solutions and Services Research Center, Hewlett-Packard; and Dr. Yoshio Nishi, director of research at the Center for Integrated Systems, director of Stanford Nanofabrication Facility, National Nanotechnology Infrastructure Network. Participants discussed a wide array of issues, including the economic rationale for new models of R&D, national/regional comparative advantage in R&D, and the coordination of global R&D.
The Economic Rationale for New Models of R&D
Dr. Nishi highlighted the economic rationale behind the quest for new models of R&D. While back in the early 1990s, a $200 million investment in R&D would grant a semiconductor company a one-year lead in technology, by the early 2000s, a one-year lag would transpire with the same investment level. Such an escalation of R&D cost points to the mounting importance of the efficiency of R&D--or as Dr. Nishi put it, the importance of generating "the right technology at the right time for the right cost." The economic forces will not only alter how R&D activities are organized and distributed within and across firms, markets, regions, and countries but also influence the breadth and depth of knowledge searches. For example, R&D alliance might become a viable and lucrative scheme for cost/risk sharing in R&D. The search for non-silicon-based devices might rise in importance as silicon fabrication reaches its limits. By the same token, the division of innovative labor across nations/regions might deepen to further exploit respective comparative advantages.
Regional Comparative Advantage in R&D
One strand of development is the globalization of R&D, which necessitates comparative advantages across regions. Dr. Brown maintained, "I'm moving my analysis from individual firms to [regional] 'niches.' What I see happening is that thousands of [regional] niches are developing all over the place. What's interesting is how dynamic these niches are in building their unique capabilities." The availability of innovative talents, for example, varies significantly across regions. Invoking "the law of large numbers," Dr. Brown pointed out that given its enormous population size, Asia could produce a large number of engineers, even if they are only a tiny fraction of the total population. Currently, the U.S. produces 50,000 engineers every year; the number is 500,000 for Asia--and it is rapidly growing. Meanwhile, more and more immigrant talents choose to return to their home countries after receiving higher education and some work experience in the U.S. Few U.S. companies can afford to ignore such alarming trends. "We need to move with the market for talent," commented Dr. Halvorsen who overseas HP's global R&D activities. Take HP's R&D effort in Bangalore, India as an example. The effort had a humble start in the mid-1980s. Yet, within ten years, the number of local technical staff grew to 3,000. Today, the number is approaching 10,000.
Market-specific demand also pushes R&D to relocate. As Dr. Halvorsen put it, "when success depends on [geographical] closeness,
you need to do design in close loop with the rest of the activities." Furthermore, overseas R&D might well find its way back into the U.S. As explained by Dr. Brown, "The rise of the middle class in China and India at 1/10 of the price point [of the U.S.]" could spur innovations at 1/10 of the price point. Innovations taking place in China or India might be totally unheard of in the U.S. and eventually finds its way into the U.S. market.
The Coordination of Global R&D
While the globalization of R&D brings many promises, it also poses acute challenges to firms that need to coordinate R&D efforts across national boundaries. As Professor William Miller pointed out, "Increase in R&D cost forces specialization. Then you have to put together an assembly of specialists. The problem is that they are everywhere. Therefore, being able to pull them together becomes the differentiator." The story of Li & Fung serves as a perfect example. Li & Fung is a global leader in the apparel business. In 2002, the company contracted with 7,500 factories in 37 countries and generated a revenue of $5 billion. In an industry with thin margins of a few percent, the company continues to uphold a return-on-equity of 30-50%. Yet, Li & Fung owns no factories. Its competitive advantage lies entirely in its expertise in assessing and orchestrating the unique capabilities of each of the 7,500 suppliers. As Dr. Brown summed up, "Making money will depend less on what you own than on what you can mobilize--[i.e. the ability to] orchestrate."
In a parallel argument, Dr. Halvorsen proposed the new model of "meta-national" R&D. Different from the traditional multinational setup, where R&D is orchestrated from the center and diffused to the peripheral, in a meta-national setup, innovation for different parts of the system are consciously placed in different parts of the world. Advances are made in parallel and feedbacks flow bi-directionally.
An even more decentralized model was advanced by Dr. Brown. Dubbed a "swarm ecosystem," such a system is characterized by one (or more) assemblers and hyper-competition among a constellation of component suppliers. The assembler merely provides the focal model with no detailed design, and leaves it to the component suppliers to compete for coming up with the best fit. In this model, the assembler does not orchestrate the development process from top-down; rather, progress is made from the bottom-up. Yet, at the end of the day, only the fittest component suppliers survive and the result is a highly efficient and competitive system that best exploits its own niches.
Other Issues
Panelists and the audience also engaged in lively discussions about intellectual property rights, organizational learning, institutional innovations, the role of public policy, and the impact of culture on innovation. The globalization of R&D--particularly rising competencies in Greater China and their network of relations to Silicon Valley and their worldwide implications--is a new priority area of research for SPRIE.
