New directions in R&D: current

and prospective challenges

Jeremy Howells
Manchester Institute of Innovation Research, Manchester Business School, University of
Manchester, Manchester, UK. jeremy.howells@mbs.ac.uk
This paper investigates the paradox of research and development (R&D), that is being
increasingly undervalued by rms and nations, and yet continues to grow and prosper in terms
of overall size and reach. The analysis outlines key developments that are currently affecting
the growth and development of R&D activity and highlights the issues and problems that R&D
managers and policymakers may likely face over the next decade.
1. Introduction
T
his paper seeks to outline the current and
prospective challenges facing research and
development (R&D). There has been recent de-
bate about whether rms and governments
should concern themselves with R&D or instead
focus on the much-wider process of innovation.
Many of the arguments surrounding this are
valid, particularly within the context of advanced
economies as they become more service-oriented
in nature. Moreover, on a more specic company
level, there has been criticism that R&D has just
not delivered in terms of innovative output and
better productivity. There is a continuing R&D
productivity crisis; despite all the heavy invest-
ment in research in many sectors, R&D appears
to be yielding less valuable or signicant new
products, services and processes (Section 2.6).
The value placed on R&D by companies seems
to be at an all-time low and continues to be
declining. In a recent survey conducted by IBM
(quoted in Radjou, 2006, p. 7), in-house R&D
was only rated 8th in terms of importance as a
source for business innovation.
Yet despite all these recent arguments and
criticisms, R&D continues to develop and grow
both within the rm and at a wider national and
international level. Why this paradox of criticism
and low esteem of R&D at a time when R&D
worldwide as an activity continues to grow? This
paper will seek to unravel such a paradox and the
concluding section of this paper will cover this
conundrum.
In the context of this debate, there is, however,
a danger of neglecting the continuing signicance
of R&D for the success and growth of rms and
economies. Even in terms of its economic size,
R&D is a major activity. In 2000, global R&D
expenditure totalled some $729 billion (National
Science Foundation, 2006, pp. 440) and in 2006
R&D expenditure was approaching the $1 tril-
lion
1
mark. Similarly, R&D has many millions of
workers employed in the activity worldwide, with
the United States alone employing over 1 million
R&D workers.
2
R&D is, therefore, a large-scale
endeavour, which continues to grow both abso-
lutely and relatively worldwide.
The signicance of R&D is also reected at the
rm and the government level. The largest com-
pany R&D spender, Daimler-Chrysler, spent
$7.69 billion alone on R&D in 2005. Meanwhile,
governments still remain concerned about their
national R&D in terms of spending. This is high-
lighted in Europe, with the European Commis-
sion having a target of 3% R&D expenditure as a
percentage of GDP by 2010 (see Commission of
the European Communities, 2002, 2003).
The rest of this paper is in two main sections.
The rst section outlines some key developments
R&D Management 38, 3, 2008. r 2008 The Author. Journal compilation r 2008 Blackwell Publishing Ltd, 241
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
that are currently affecting the growth and devel-
opment of R&D activity. The second section is
then more prospective in nature and raises the
issues and problems that R&D managers and
policymakers will either face in the future or those
that are currently an issue, but remain, for what-
ever reason, neglected or downplayed by industry
and/or government. It should be noted that the
main focus of the discussion and analysis of R&D
activity will be on business R&D, although as will
be indicated public and not-for-prot research is
closely intertwined with private R&D activity.
2. Changing dynamics of R&D
2.1. Introduction
This section will look at a number of major trends
and issues that are shaping the growth and
development of R&D globally. These are:
1. the increasingly distributed and open nature of
networked research and innovation;
2. this is, in turn, linked to the growth of ex-
ternally sourced R&D (and a consequent re-
lative decline in internally generated R&D)
within rms;
3. overcoming barriers towards the increased
productivity and effectiveness of R&D;
4. the continued globalisation of R&D, particu-
larly in terms of its spread and reach, asso-
ciated with R&D offshoring; and
5. the relative shift from manufacturing-centred
R&D towards more service-oriented R&D.
2.2. Distributed and open R&D
The increasingly distributed nature of innovation
is associated with rms linking with other rms
and organisations not only on a regional and
national basis but also in an international con-
text. This is not a new phenomenon, especially in
relation to the pharmaceutical industry (Sander-
son, 1972; Liebenau, 1984), but it has continued
to expand steadily. This is evident both in more
traditional forms of international linkage, for
example, in the growth of R&D collaboration
and partnerships (see, for example, Powell, 1998;
Tapon and Thong, 1999; Orsenigo et al., 2001;
Hagerdoorn, 2002), as well as in newer forms
(Chen, 1997), such as outsourcing of clinical trial
work overseas. Increasingly, rms have extensive
external research and innovation linkages form-
ing complex distributed innovation networks
(Coombs and Metcalfe, 2002; Chang, 2003), and
leading to industries with highly open research
and technical systems. This has been charac-
terised by Chesbrough (2003a, b) as part of the
open innovation phenomenon.
What is less discussed in relation to the growth
of R&D collaboration and networking is that
these increasingly extensive networks incur high
scanning, coordination and learning costs asso-
ciated with establishing and maintaining these
networks. In addition, most studies adopt a very
static view of R&D linkage networks. It is not just
the cost of building these networks it is their
maintenance that can pose a heavy burden to
rms. Some highly dynamic networks may in-
volve considerable churn in network partners.
The departure of a key collaborator, (a), may
involve a cascade of changes with related partners
of (a) departing from the network. However,
although a highly dynamic pattern of network
change may cause complications, equally, too little
change, associated with the stasis and lock-in of
research networks, can also represent a hazard.
Moreover, as the number of partners increases in a
network, the more likely there will be potential
conict between partners within the network. Ex-
clusive deals and licenses with one partner rm
may exclude collaboration with another rm.
Lastly, there are increased dangers of intellectual
property (IP) loss with increased number of colla-
borators unless rms also spend time and money
monitoring and guarding against such loss.
R&D networking may therefore indeed be ne-
cessary (and indeed become a core competence of
the rm; Madhavan et al., 1998, p. 445); however,
as the cost and complexity of R&D continues to
grow it may also impose an increasing resource
burden to the rm seeking to master such pro-
cesses. Firms need to review constantly the benets
and costs of R&D collaboration and networking;
it may not always be as good as it seems.
2.3. Growth and extent of external
R&D activity
Firms are sourcing more of their research and
technical requirements externally, with their over-
all level of spend increasing signicantly over the
last few years (Howells, 1999; Jones, 2000; Ho-
wells et al., 2003). The growth in R&D outsour-
cing is also reected in the overall and relative
spend by rms on outsourcing R&D. In 2003,
R&D performing rms in the United States spent
$10.2 billion in contract R&D to other domestic
Jeremy Howells
242 R&D Management 38, 3, 2008 r 2008 The Author
Journal compilation r 2008 Blackwell Publishing Ltd
rms. Moreover, the average annual growth rate
of contracted out R&D from 1999 to 2003 was
double the growth rate of in-house R&D in the
United States (9.4% compared with 4.9%
3
; Na-
tional Science Foundation, 2006, pp. 433). How-
ever, extramural R&D is still low for the United
States at around 5.7% of total R&D in 2003
(compared with 3.7% in 1993). For other coun-
tries it is much higher. Thus, data from Ireland
for 2003 revealed that R&D outsourcing
amounted to some h156.4 million compared with
total business expenditure in research and devel-
opment (BERD) of h1,075.6 million in the same
year (Forfa s, 2005, pp. 7, 37), equivalent to 14.5%
of the total Irish industry R&D expenditure. It
should, however, be noted that R&D outsourcing
here included the sourcing of R&D from other
parts of the parent company (within the formal
denition of the rm), but outside the business unit
or enterprise in Ireland (see Section 2.6).
This growth in external R&D spending can also
be seen at the rm level. To take one example of a
survey of R&D outsourcing in the UK pharma-
ceutical industry, the number of rms outsourcing
grew from 56.6% in 1998 to 71.7% in 2003, while
in terms of expenditure the percentage of the
R&D budget being spent externally increased
from some 13.8% of the R&D budget spent
externally in 1998, to 25.8% by 2003, a doubling
over the ve-year period (Howells et al., 2008).
Similarly, given that approximately a quarter of
all pharmaceutical R&D expenditure is spent
externally in Britain, this equates to a market in
just one manufacturing sector in the United King-
dom of some $1.5 billion (d800 million) in 2004,
not a minor sum for just one industrial sector in a
single country. R&D outsourcing should, there-
fore, not be seen as a minor or a quaint appen-
dage to the wider outsourcing debate.
In terms of factors leading to such growth in
external R&D, activity time, cost and lack of in-
house R&D and technical expertise come out as
the most highly rated factors associated with the
decision to outsource. Undertaking research and
technological activity in-house, or seeking exter-
nal sources for it, is all about maintaining future
competitiveness of the company and the future
core competencies and capabilities of the rm.
Other factors in the decision to source externally
are the degree of task modularity and knowledge
tacitness. In terms of the research or technical
activity, i.e. how easy or difcult was it for the
rm to decompose or separate out a particular
research or technical task and to then parcel it out
to another rm or organisation to undertake (see
e.g. Mikkola, 2003). Thus, where a research or
technical activitys boundary is very indistinct and
involves closely interrelated and complex linkages
with other research and technologies, outsourcing
would be less likely to compare with an activity
that forms a very distinct component and where
its relationship with other research areas or tech-
nologies is simple and clear. The degree of tacit-
ness of the knowledge being transferred is also
seen as a factor hindering research and technol-
ogy transfer, which may in turn inuence
the R&D outsourcing decision; the less explicit
the know-how is, the more difcult it is to assim-
ilate it (Cohen and Levinthal, 1990; Lane and
Lubatkin, 1998). Clearly, the degree of tacitness is
likely to affect the ability to absorb the research
process back into the rm. Indeed, absorption
issues, such as different research cultures between
the two or more organisations involved, can be
seen as a more general outcome factor inuencing
the decision of whether to outsource or not.
2.4. The cost, productivity and
effectiveness of R&D
The late 1980s and the early 1990s marked the
beginning of signicant attempts by rms to
reduce their R&D expenditures. This was initially
more about cost savings, less about increasing the
productivity and efciency of R&D as rms in
advanced industrial economies sought to reduce
the overall cost base in the face of recession.
Savings in R&D expenditure was of immediate
benet to the rms bottom line and in the short
term did not have a signicant impact on the
performance of the rm. However, it was often
associated with, or resulted in signicant, organi-
sational change, the most crucial here being the
closure of central, corporate R&D laboratories
and the shift towards atter R&D structures,
devolved to operational contexts lower down the
organisation, namely Divisions and Strategic
Business Units (SBUs).
By the late 1990s, rms had moved away from
simple cost savings towards improving productiv-
ity by targeting R&D in terms of improving
efciency. This was often associated with identi-
fying and closing down unsuccessful projects ear-
lier on and by fast tracking products that seem to
have greatest chances of success, which has been
most marked in the pharmaceutical industry (see
e.g. DiMasi et al., 2003, p. 171; see also DiMasi,
2000). One of the sectors that moved early here
was the pharmaceutical industry, where R&D
New directions in R&D
r 2008 The Author
Journal compilation r 2008 Blackwell Publishing Ltd
R&D Management 38, 3, 2008 243
costs, especially development costs, had been
spiralling but with no commensurate growth in
novel drug output; indeed, productivity levels had
been declining relative to outputs of new chemical
entities (NCEs). Thus, fewer than 5% of all
compounds that are screened enter pre-clinical
development, and only 2% of these candidates
enter clinical testing. Of all drugs that enter Phase
I trials, approximately 80% fail in the develop-
ment stage (Bolten and DeGregorio, 2002).
However, these efciency and productivity im-
provement initiatives remain a new phenomenon
for most other sectors and rms. There remains a
lot more to be done here. Interestingly, although
these initiatives, in the short run, have led to a
constraint on the growth of R&D expenditure, in
the long run, it will improve the ability of R&D to
deliver new products, processes and services and
thereby encourage more R&D investment.
2.5. Globalisation of R&D and the
increasing spatial division of R&D:
the geographical widening and
deepening of R&D
The globalisation of R&D continues, but is now
entering a new phase. Advanced industrial nations
still perform most of the worldwide R&D. OECD
member states, for example, accounted for an esti-
mated 82% of the total worldwide R&D in 2000
(National Science Foundation, 2006, pp. 440). The
global expansion of R&D has, therefore, been
largely one of investment by multinational enter-
prises (MNEs) from one advanced economy going
into another advanced economy (Howells, 1990a, b).
This was associated with either supply-side reasons
related to asset augmentation factors (i.e. to gain
access to labour, resources or know-how readily
available in the parent headquarters home country),
or for demand-driven asset-exploiting reasons
(namely, adapting products to foreign markets and
to be able to lend technical support to offshore
manufacturing plants). Global expansion of R&D
up until the end of 1990s could therefore be char-
acterised as more of the same, in similar locations.
However, we are now entering a new phase of
the globalisation of R&D associated with the
geographical widening and deepening of R&D in
relation to the internationalisation of R&D. This
has three new closely interrelated characteristics:
(1) after a period of limited expansion, R&D
globalisation is now entering a period with a
much wider geographical span from the
North to the South and from the West to
the East;
(2) the search for lower cost solutions via R&D
offshoring (linked to productivity and ef-
ciency drives in R&D; Section 2.4); and
(3) the desire to get closer to consumers in the
rapidly growing economies of China, India
and Brazil.
The complete globalisation of R&D still has a
long way to go; large parts of Africa, South
America and central Asia still remain off the
global R&D map. However, recently, there has
been a dramatic growth in R&D activity within
China, India and southeast Asia. These changes
are indeed being reected in the changing value
placed on China and India as destinations for
R&D investments in recent years. Thus, in 1994,
China was only ranked 30th in 1994 ($7 million)
in terms of where US rms conducted their R&D,
but 11th by 2000 ($506 million; National Science
Foundation, 2005, pp. 469). More specically,
the most recent UNCTAD survey of the largest
R&D spenders among MNEs for 2004 revealed
that China was now the third largest global
destination, behind the United States and the
United Kingdom, and India the sixth most im-
portant location (UNCTAD, 2005, p. 133). Of the
885 R&D-oriented greeneld FDI projects an-
nounced in the Asian region, covered by the
UNCTAD survey, three-quarters (723) were in
China and India. This is in part associated with
the lowering of barriers to undertaking R&D in
China (Gassmann and Han, 2004).
Part of this shift is linked to the phenomenon of
R&D offshoring (although in reality it is difcult to
distinguish this from the more general process of
R&D globalisation). R&D offshoring can be asso-
ciated as both an intra-rmand an inter-rmactivity
(Figure 1). What has been seen as being distinct
about R&D offshoring, compared with previous
rounds of international R&D activity, is that:
(a) it is a more cost-led process;
(b) because of this, it is more closely linked to
investments in less developed economies; and
(c) in its inter-rm form, it is closely linked to the
process of R&D outsourcing.
As noted above, it is difcult to untangle R&D
offshoring from the wider process of R&D glo-
balisation, although at a rm level there is some
evidence that MNEs are certainly themselves
dening certain types of low-cost R&D invest-
ment as R&D offshoring, particularly in less
developed but rapidly growing economies (see
Jeremy Howells
244 R&D Management 38, 3, 2008 r 2008 The Author
Journal compilation r 2008 Blackwell Publishing Ltd
Zedtwitz et al., 2004). It is perhaps too early to be
able to determine fully the phenomenon of R&D
offshoring overall, and in particular in terms of
cost criteria (see e.g. Jones and Teegan, 2003).
However, there is evidence of close links between
offshoring and outsourcing. Thus, in Ireland, of
the h156.4 million of R&D activity outsourced,
some h101 million, nearly two-thirds (64.6%),
was spent outside Ireland. Eighty-eight percent
(h138.8 million) of outsourcing was undertaken
by foreign-owned companies, usually via related
companies (parent, subsidiary or afliate compa-
nies); this might be seen as intra-rm offshoring
(Section 2.3; category 4) (Figure 1).
Thirdly, there has been the rapid expansion of
the economies of China, India and Brazil, coupled
with the desire to get closer to consumers in
relation to R&D activity (Section 3.4). Despite
the many supply-led claims of R&D globalisation,
the demand side is strongly correlated with the
expansion of foreign R&D activities (and still
associated with overseas R&D activities helping
to adapt technologies and products to local market
requirements). There is also evidence that shows
that MNEs rarely internationalise R&D to com-
pensate for technological weaknesses at home. A
study by Le Bas and Sierra (2002) showed that,
most often, R&D offshoring takes place in loca-
tions that are strong in technology and in technol-
ogies where the parent rm has an advantage.
The picture of R&D globalisation is therefore
changing, but is associated with a complex mix of
both supply and demand factors that are also
operating at a more specialised and multilateral
geographical level (OECD, 2005); this is particu-
larly true in relation to the offshoring of R&D
(Chen, 2004).
Lastly, in addition to managing (inter-rm)
R&D offshoring (category 4, Figure 1) are the
ongoing spatiotemporal pressures of managing
R&D worldwide (Howells, 1995). Many multi-
national companies are not only facing ever
shorter development cycles (see e.g. Stalk and
Hout, 1990) but at the same time also confronting
wider geographical spans
4
of their R&D estab-
lishments. For some rms, it may be a gradual
process (rm A, Figure 2), but for others they are
facing squeezed developments cycles at the same
time as they are expanding their R&D capabilities
more widely (rm B).
2.6. The growth of service R&D
Service sector R&D is growing rapidly. Thus,
between 1990 and 2001, service-sector R&D
5
in-
creased at an average annual rate of 12% across
OECD member countries, compared with ap-
proximately only 3% for manufacturing sectors.
Thus, by 2002, the European Union (EU) average
for the share of services in BERD had increased to
over 15%, although for some countries, such as
the Portugal, Denmark, United States and Greece,
this was much higher at over 30%. In the United
States, nearly 40% of all business R&D is per-
formed in the service industries, whereas in the EU
this share is only 15% (Figure 3). However, since
1997, an increasing proportion of business R&D is
being performed in the services sector in Europe
(from 11.5% in 1997 to 15.1% in 2002).
The increasing importance of services sector
R&D is perceived to be due mainly to three
factors (European Commission, 2005, p. 37):
an improvement in the measurement of
services sector R&D;
a growth in R&D intensity in the services
sectors; and
an increase in the outsourcing of R&D by
both the business and the government sectors.
Obviously, within the overall services segment,
there is an important sector for R&D activity the
R&D services sector. This sector covers the NACE/
ISIC schema 73, namely research and development
Home (Domestic)
Country
In-House
R&D
1) Domestic,
In-House R&D
3) Domestic,
Outsourced R&D
4) Offshore,
Outsourced R&D
2) Offshore,
In-House R&D
Foreign (Overseas)
Country
Outsourced
R&D
Figure 1. Typology of R&D Outsourcing and Offshoring.
R&D
Development
Time Span
(months/years)
R&D Establishment
Spatial Span
(adjusted concentration index)
1
4
3
2
1
2
3
4
Zone of
Spatio-
Temporal
Challenge
Zone of
Spatio-
Temporal
Comfort
Firm B)
Firm A)
Figure 2. Stages in the SpatialTemporal Complexity of R&D.
New directions in R&D
r 2008 The Author
Journal compilation r 2008 Blackwell Publishing Ltd
R&D Management 38, 3, 2008 245
services. It is a signicant sector in its own right
and obviously an important generator and provider
of R&D to other parts of the economy. Thus, in
2002, across the EU25, the value added by R&D
services was h13.3 billion, although most of this
was accounted for by the EU15 h11.9 billion.
EU25 employment in R&D services was 365.5
thousand (EU15 289.7 employees).
Over the next 1020 years, service R&Dis likely to
become the dominant form of R&D activity in many
developed economies. Increasingly, both service and
manufacturing rms are undertaking or contracting
in more service-like R&D as they seek to get closer
to customers and gain high value added. As yet,
though, very little analysis of this rapidly growing
segment of the knowledge-based economy has been
undertaken and both rms and nations remain
ignorant around these particular changes in R&D.
3. Prospective trends in R&D
3.1. Outline
This section of the paper now takes a more
prospective look at R&D trends in relation to
what the author sees as becoming more signicant
over the next 510 years, or what is already a
signicant issue but remains overlooked by man-
agers, policymakers and academics. These key
issues are as follows:
1. the supply and availability of R&D talent
worldwide;
2. the changing nature of R&D itself its spread
and intertwining with other activities;
3. the blurring between producers and consu-
mers of R&D, both internal and external to
the rm;
4. the control/creativity trade-off issue in R&D;
and
5. the new forms of R&D organisation; and,
closely linked to this; and
6. the emergence of new R&D actors.
3.2. Competing for global talent: supply
and availability of high-level R&D
workers
Section 2.5 has already described recent changes
in the globalisation of R&D, but there is one
aspect of this ongoing process that deserves a
separate mention. It is a basic issue, but one that
nevertheless will increasingly frame and deter-
mine the development of R&D over the next
decade, namely the lack in the supply of talented,
creative R&D workers. With the continued
growth in R&D activity, there has been a growing
realisation and concern about the availability of
skilled R&D and technical staff due to demographic
trends and patterns in university enrolment. The
prospect that China and India would provide a new
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Figure 3. Share of Business Expenditure in Research and Development Performed in Services (%), 1997 and 2002.
Jeremy Howells
246 R&D Management 38, 3, 2008 r 2008 The Author
Journal compilation r 2008 Blackwell Publishing Ltd
stream of untapped R&D workers that could be
used by existing large R&D players has failed to
materialise as Chinese companies acknowledge they
too are running out of key R&D workers. Thus,
although the number of R&D workers increased
from around 531,000 in 1999 to around 811,000 in
2002, the volume of R&D investments has been seen
to grow even faster, with the real-term average
annual R&D growth in China being 15.2% between
1991 and 2002 (UNCTAD, 2005).
6
This is also at a time when the quality of R&D
supply is cited as the key locational criterion for
attracting in new business investment in R&D to
a locality. Thus, the lack of suitably qualied
R&D personnel is also reected increasingly in
R&D location decisions. It has been found that
the number of university- and PhD-trained scien-
tists and engineers in a locality is positively
associated with foreign R&D investment in that
country (Jones and Teegan, 2003). It is highly
trained scientists and engineers who are therefore
being sought, and who attract foreign investment
in R&D. Thus, some MNEs seem to be setting up
operations overseas in order to tap into knowl-
edge and technology sources in centres of scien-
tic excellence located worldwide. The supply of
creative and science and engineering talent is
going to become ever more crucial over time.
3.3. The changing nature of R&D
R&D activity has been constantly evolving and
changing. This, in part, has been reected in
changes in the denition of R&D used by govern-
ments and ofcial organisations. The most widely
adopted denition of R&D is that dened by the
OECD under the Frascati denition, the latest
version being published in 2002 (OECD, 2002).
The manual has undergone three revisions since
the denition rst appeared in 1963 (OECD,
1963, 1981, 1989, 2002). Changes, associated
with redenition, are therefore not a new phe-
nomenon, while links with other key functions,
such as production and sales and marketing, have
also been acknowledged for a substantial time.
However, changes associated with its expansion
and blurring of R&D especially with other cor-
porate activities are arguably more recent and
substantial.
The most signicant and earliest of these
changes has been that of R&D and design, which
started to emerge in the early 1990s and was
associated with the shift towards electronic design
tools, in particular computer-aided design
(CAD), as well as the need to improve integration
of R&D with other key activities. It was particu-
larly visible with a number of key manufacturing
sectors including the automotive sector and elec-
tronics. Because of their increasingly close links,
studies examining globalisation of R&D in these
sectors often grouped the activities together under
the heading Research, Development and Design
(R, D&D
7
; see e.g. Miller, 1994). Links with
design have also been coupled with closer links
downstream with computer-aided modelling, ra-
pid prototyping techniques and rendering of
computer graphics, in turn allowing effective
simulation or emulation of key processes.
Another activity that has also become more
inter-linked with R&D is that of testing, mainte-
nance and monitoring, which was always linked to
development activities, but has become closer be-
cause of advances in technology. These include
rapid prototyping, Laboratory Information Man-
agement Systems (LIMS) and Laboratory Infor-
mation Systems (LIS), a range of electronic and
design testing developments [associated with e.g.
engineering valuation test (EVT) or design valua-
tion test (DVT)] and remote monitoring and testing
developments. Here industrial consumers are clo-
sely linked with the co-development of such new
pieces of equipment. A third area where R&D has
also become close to other corporate functions is in
the softer side of market research and strategic
forecasting associated with increasingly specialised
marketing and core strategy functions within the
rm. This is particularly true in fast-changing,
consumer-led technologies where tastes and de-
mands are changing every three to six months.
What does all this mean for R&D? It indicates
that R&D has become even harder to dene and
delimit at a time when control over these re-
sources and activities, especially in terms of costs
and efciency, has become ever more critical to
the success of the rm. This issue is also closely
associated with the growth in the co-production
(and co-consumption) of R&D, which is now
discussed below (Section 3.4).
3.4. Co-production and co-consumption
of R&D
Increasingly, activities related to research and
innovation are co-produced and indeed co-con-
sumed. Thus, the issue of who is producer and
who is consumer of research is often becoming
less clear. Even with arms length contracting out
of R&D (Haour, 1992), there is a high degree of
interaction and as we move through the spectrum
of more informal reciprocal collaborations, there
New directions in R&D
r 2008 The Author
Journal compilation r 2008 Blackwell Publishing Ltd
R&D Management 38, 3, 2008 247
is a greater likelihood of co-production in the
invention and innovation process. Many users
innovate (in the industrial and consumer product
industries, this is between 10 and 40%), and rms
that systematically involve lead-users into their
R&D process can reap a considerable competitive
advantage (von Hippel, 2005, p. 20). Close con-
sumer interaction in the R&D and new product
development (NPD) process is closely associated
with project success (Salomo et al., 2003; see also
Callahan and Lasry, 2004).
Some of the attractions of R&D outsourcing
(Howells et al., 2003) are that R&D projects are
easier to manage and that many of the responsi-
bilities of the actual tasks are taken away from the
rm that outsources. However, it is argued here
that to be truly successful in externalising R&D
operations, rms will have to remain closely
involved in the process as active R&D con-
sumers. This may not require as much resource
as undertaking the R&D in-house, but more than
is commonly supposed in outsourcing other types
of functions or activities.
R&D remains special and indeed may be be-
coming more special in relation to outsourcing
activities. This, therefore, has lessons not only for
the outsourcing rm but also for the supplier of
R&D services. In this latter context, the R&D
supplying rm may have to accept even closer
collaboration with its client rms if it is to be a
successful supplier of R&D services.
3.5. Control/creativity trade-off in R&D
Many of the trends outlined above have suggested
that rms have had to exert more control over
their R&D operations than they have had to do
previously. In particular, efciency (associated
with the need to improve R&D productivity)
and coordination (the need to manage geographi-
cally dispersed units within and between the rm)
has meant that control in terms of monitoring
and closer supervision of R&D has increased.
However, this need for more control has come
at a time when many industries and rms are
seeking greater creativity and entrepreneurship
from their research and technical staff, as well
as attracting new, highly qualied, creative per-
sonnel (Section 3.5).
Attempting to resolve these conicting trends
is, however, a difcult task for rms. However,
there are some solutions, four of which are
suggested (Table 1):
1. controlled freedom;
2. time out;
3. hidden supervision; and
4. zoning of R&D.
These are some initiatives that have or may
emerge to resolve this control/creative trade-off
but more are likely to appear in an attempt to
solve this growing problem. The problem is be-
coming more urgent and other solutions need to
be developed to balance the conicting require-
ments of successful R&D in this respect.
3.6. Emergence of new forms of R&D
organisation
R&D is constantly evolving in terms of the way
R&D is organised. The adoption and develop-
ment of matrix structure structures in R&D in the
1970s and 1980s (Katz and Allen, 1985) is one
such example, while the shift away from central
group R&D laboratories and R&D hierarchies in
the late 1980s and early 1990s towards atter
R&D structures was another. Moreover, devel-
opments in information and communication tech-
nologies (ICTs) have allowed for multinationals
to run round-the-clock 24/7 virtual R&D opera-
tions on a worldwide basis (see e.g. Howells, 1995;
Chiesa and Manzini, 1997; Gassmann and von
Zedtwitz, 2003) and have potentially allowed for
much greater exibility in the shape and variety of
organisational forms for R&D.
Table 1. Managing the control/creative R&D trade-off
Strategy Description
1.Controlled
freedom
This is by allowing a large degree of
slack in time and resource allocation
for staff, sometimes called
harmonized management (becoming
increasingly rare).
2.Time out Time out of dedicated, supervised R&D
work. This may relate to 510% of
total time commitments and, for a
number of companies, this framework
has been in place for some time (see
e.g. 3M and Xerox). This is a much
more regulated regime than the
controlled freedom strategy.
3.Hidden
supervision
This is by putting in place staff within
the R&D unit that seek to remove as
much of the administrative burdens
and responsibilities for progressing
research projects to allow the targeted
creative R&D staff to be creative.
4.Zoning Zoning of R&D within the rm. This is
achieved by allowing some research
groups, units and locations to have
much looser supervisory control than
others.
Jeremy Howells
248 R&D Management 38, 3, 2008 r 2008 The Author
Journal compilation r 2008 Blackwell Publishing Ltd
Indeed, rms continue to experiment with types
of R&D organisation. An example is the rise of
co-located research groups, involving a mix of
rm and university or public research establish-
ment staff; this has grown rapidly since the 1980s
to enable companies to tap into and work to-
gether with research groups involved in longer
term basic research projects (e.g. Rolls Royce has
a worldwide network of University Technology
Centres). Firms have also sought to establish new
organisational arrangements to help bridge the
often-difcult transition between basic research
and development or between R&D and produc-
tion. Thus, in the former case, GlaxoSmithKline
(GSK) has established Centres of Excellence for
Drug Discovery (CEDD) to help bridge the gap
between discovery and development activities.
Table 2 seeks to take a more prospective look at
what new forms of R&D unit may emerge over
the next 1020 years. Some units have already
emerged in their nascent form such as shared
research facilities, exemplied by SEMATECH
in the United States in the semiconductor re-
search eld, or R&D bridging units, already
highlighted in the case of GSKs CEDDs.
Firms have to operate much more exible and
permeable R&D structures. The R&D boundaries
of the rm have become much more open and
uid (Pisano, 1990). The increasing complexity of
R&D organisation is, however, not just in terms
of organisational forms, it is also in terms of how
rms organise their human resources (HR) within
the context of R&D. Companies are increasingly
having to operate Extended Internal Labour
Markets (EILM). These EILM are associated
with a core group of R&D workers with stable
jobs surrounded by a more uid periphery made
up of temporary workers or those on secondment
from specialist contract service rms specialising
in scientic and technical services or in providing
specialist contract workers (Lam, 2005). The core
and periphery model is, however, a uid organi-
sational structure that responds to changes in the
rms labour demands. R&D staff capable of
performing gatekeeping and boundary spanning
functions are seen as crucial in maintaining the
organisational and cultural coherence of these
more uid, permeable R&D structures.
3.7. Emergence of new R&D actors
Although the main growth in R&D over the past
decade has been in private, business-level R&D,
we should not ignore the emergence of new R&D
actors within the research and innovation system.
Although most studies focus on the traditional set
of actors involved in R&D, such as rms, uni-
versities and public or government research estab-
lishments, there is an increasing number of more
diverse set of more hybrid R&D organisations.
These represent a much wider and more varied
type of R&D facility, often involving new combi-
nations of publicprivate partnerships, such as
the Institute for One World Health.
However, despite this growth, we remain woe-
fully ignorant of what might be termed the
ecology of R&D of our respective national re-
search and innovation systems. We need to rectify
this if we are to help manage the overall national
system of innovation, as well as to help advice and
support rms themselves.
Table 2. New forms of R&D organisation: a prospec-
tive vision
New organisa-
tional form
Description
1. Shared
laboratories
Where two organizations share
the same research laboratory to
work on the same research
topics, for example:
(a) a rm and another
organisation, such as university
research group or public
research establishment unit; or
(b) two rms together (customer
or supplier, for example). Large
(multi-rm) shared facilities are
already common, such as the
creation of SEMATECH in the
United States in 1987.
2. Pico R&D
establishment
Very small R&D unit set up in a
particular part of the rm (for
example, factory) to work on a
specic set of research or
development issues.
3. Transitory
R&D unit
A limited life R&D unit, similar
to a pico R&D establishment,
often to resolve a specic
research or technical problem.
4. Automated
R&D factory
Virtually un-manned R&D unit
undertaking highly automated
research and test procedures;
results are remotely monitored
and supervised.
5. Consumer
engaged
research unit
Facility to work directly with key
consumers, either personal or
industrial consumers (the latter
case may be linked to 1 above).
6. R&D bridging
unit
To aid bridging the research and
development divide within
R&D or the R&D and
production side. Becoming
more established.
New directions in R&D
r 2008 The Author
Journal compilation r 2008 Blackwell Publishing Ltd
R&D Management 38, 3, 2008 249
4. Conclusions
What do all these current and prospective changes
mean for R&D and for R&D managers? How does
it help explain the paradox of continued growth in
R&D despite the apparent low esteem and value
placed upon R&D by rms? Undoubtedly, the
worldwide growth in R&D has been spurred by
the very rapid increase in research capacity parti-
cularly in China and India, and also in Brazil and
the smaller economies of east Asia, including
Taiwan and Korea. These countries, and the com-
panies within them, need R&D to meet their
objectives of successful expansion and growth.
More particularly, the answer lies in the fact that
successful rms (and nations) still nd R&D highly
valuable. For these rms (and nations), R&D still
delivers in terms of generating value added in terms
of new and improved products, services and pro-
cesses. More particularly, at the individual project
level, R&D projects meet the risk/value return that
the company has specied, despite the overall scepti-
cism that senior management may have about R&D
actually delivering adequate results. At the national
level, governments also still see R&D as an impor-
tant part of the innovation infrastructure to make a
national systemof innovation successful and in terms
of becoming a proper Knowledge-based Economy.
This is, moreover, not solely in direct terms. R&D
aids the absorption into a rm or an organisation of
knowledge and technology from outside. Employing
R&D workers also has signicant local and regional
economic and employment multiplier effects. They
also have a wider cultural and social signicance. In
short, R&D workers are good people to have in an
area; they create signicant spillover effects in the
rest of the economy. However, at both the rm and
the national level, we still remain poor at adequately
measuring the benets of R&D.
Acknowledgements
This paper arises out of funding by the UK
Economic and Social Research Council (ESRC)
through ESRC Centre for Research on Innova-
tion and Competition (CRIC) centre-related
funding (Grant Number ESRC M549285002)
and Manchester Business School. The views ex-
pressed are of the authors alone.
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Notes
1. All prices are in US$. Unless otherwise stated.
2. It is estimated here that there were at least 4 million
people employed in R&D worldwide in 2006. In
addition to the United States with 1 million, Japan
had some 676,000 workers in 2001 and China some
811,000 in 2002 (although OECD estimate this to be
only 443,000).
3. See Commission of the European Communities
(2002; 2003)
4. After adjusting for ination.
5. As measured by mean spatial concentration
indexes.
6. Covering ISIC categories 5099.
7. This, however, has been a concern as far back as the
late 1980s when the Commission of the European
Communities (1989) estimated that the United
States would face a shortfall of 500,000 scientists
and engineers by 2010.
8. This is being extended further with, for example,
the European Commission now using the
term Research, Development and Innovation
(R, D&I).
Jeremy Howells is Professor and Executive Direc-
tor of the Manchester Institute of Innovation
Research (MIoIR) and Head of the Innovation
Management and Policy (IMP) Division at Man-
chester Business School, University of Manche-
ster. He received his PhD from the University of
Cambridge. He has published in the International
Journal of Technology Management, Pro-
metheus, R&D Management, Research Policy,
Science and Public Policy, Service Industries
Journal and Technology Analysis and Strategic
Management. His current research interests are
on R&D outsourcing and offshoring, industry-
academic links, service innovation and technol-
ogy transfer. His research has been funded by UK
Economic and Social Research Council (ESRC),
the Engineering and Physical Sciences Research
Council (EPSRC), the European Commission,
OECD, the European Science Foundation,
UNIDO and UNCTAD.
Jeremy Howells
252 R&D Management 38, 3, 2008 r 2008 The Author
Journal compilation r 2008 Blackwell Publishing Ltd