Research Policy 28 Ž1999.

251–274

Globalization of R & D: recent changes in the management of

innovation in transnational corporations
a,) b,1
Alexander Gerybadze , Guido Reger
a
Center for International Management and InnoÕation, UniÕersity of Hohenheim, D-70593 Stuttgart, Germany
b
Fraunhofer Institute for Systems and InnoÕation Research (ISI), Breslauer Straße 48, 76139 Karlsruhe, Germany

Abstract

Large multinational firms are the drivers for the globalization of R & D and innovation activities. There was a strong
movement to establish a transnational configuration of R & D between 1985 and 1995. In recent years, however, R & D
strategies and international location decisions have changed substantially. This paper is based on an in-depth analysis of
R & D internationalization in 21 large corporations in Europe, Japan and the US. Our findings suggest that transnational
corporations have tended to consolidate and streamline their organizations since the mid-1990s. Distributed R & D activities
and globally-dispersed innovation processes have resulted in overly complex and unmanageable organizational architectures.
This has induced firms to search for ‘leaner’ and more effective types of managing their international portfolio of innovation
activities. We learned that the spatial distribution of learning and R & D performing activities is something different than the
spatial distribution of coordination and control. Many companies in our sample have adapted a strategy of multiple centers
of learning with one dominant center of coordination. A framework is developed to serve as a basis for analyzing different
patterns of internationalization of R & D and innovation, and for assessing the appropriate mechanisms to coordinate and
control an international network of technological competence centers. q 1999 Elsevier Science B.V. All rights reserved.

Keywords: Globalization; R & D; Transnational corporations; Globally-dispersed innovation processes

1. Introduction searchers and for decision-makers in government. A

Globalization of R & D is a major topic within the
business community as well as for academic re-
) Roberts, 1995a,b.. In recent years, however, R & D
Corresponding author. Tel.: q49-711-459-3249; Fax: q49-
711-459-3446; E-mail: agerybad@uni-hohenheim.de
1
Tel.: q49-721-6809-186; Fax: q49-721-6809-260; E-mail:
re@isi.fhg.de.
particularly strong trend towards the globalization of
R & D began in the 1980s and now, in the mid-1990s,
no end to this process is yet in sight. Large multina-
tional firms are the drivers for the internationaliza-
tion of innovation activities ŽPatel and Pavitt, 1992;
Cantwell, 1994; Nonaka and Takeuchi, 1995;
strategies and international locations decisions of
transnational corporations have changed substan-
tially. This paper attempts to identify these trends,

0048-7333r99r$ - see front matter q 1999 Elsevier Science B.V. All rights reserved.
PII: S 0 0 4 8 - 7 3 3 3 Ž 9 8 . 0 0 1 1 1 - 5
252 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
and to assess their possible impacts on the manage-
ment of transnational innovation.
In our empirical study, we examined the interna-
tionalization of R & D at three levels. First we out-
lined major trends in the international R & D system,
and how the evolution of national innovation sys-
tems may affect multinational firms Žon this aspect,
see Section 3.. In a second step we identified, for
leading technology-intensive corporations, changes
in the management of R & D and innovation and
driving forces for locating R & D and competence
centers abroad ŽSection 4.. Based on these findings,
we developed managerial decision criteria and a
framework for the management of competence cen-
ters, and we describe how this framework is actually
applied in a number of firms Žsee Section 5..
Our study was initially motivated by the aim of
examining deficit areas in research to date, and by
the attempt to diminish these gaps by means of our
own research. The following deficit areas were
identified.
Ø Most studies consist of macroeconomic or sec-
toral surveys on the internationalization of R & D,
while more specific, business-related investigations
with clear implications for managers are insuffi-
ciently represented; correspondingly, there are sev-
eral studies on R & D internationalization by
economists and political scientists, but much less
research from the side of business and management
science;
Ø Regarding the geographical focus of studies,
there is a strong concentration on multinational cor-
porations from the US, and, increasingly from Japan,
while European companies have been somewhat ne-
glected. Within Europe, R & D internationalization
processes of Scandinavian and British firms have
been better documented than related activities of
firms from continental Europe. In our empirical in-
vestigations, we have thus emphasized European cor-
porations more strongly.
Ø Many of the surveys relevant to the subject are
based on a rather ‘traditional paradigm’ of the man-
agement and control of multinational corporations
which does not take sufficient account of the dy-
namic, flexible new organizations and institutional
arrangements; on the other hand, surveys which do
adopt the new paradigm of transnational corporations
Že.g., Bartlett and Ghoshal, 1989; Hedlund, 1993. do
not examine explicitly concrete questions pertaining
to R & D. 2
Ø Most existing studies focus on the R & D labo-
ratory as a unit of analysis. Management of innova-
tion within multinational firms has changed consid-
erably over the last 10 years, and this has resulted in
new organizational forms, stronger cross-functional
integration, and boundary-spanning innovation pro-
jects. Researchers need to adapt their unit of analysis
in order to better understand the new dynamism of
transnational innovation processes. In our paper, we
will thus emphasize more strongly innovation pro-
jects, innovative business units and corporate compe-
tence centers.
2. Research methodology and selected firms
Our research was directed at exploring new trends
in R & D management and R & D-related decision-
making processes within multinational corporations.
We were interested in understanding the driving
forces for R & D globalization, and in exploring more
recent business practices within the most advanced
companies. Our research was empirically grounded,
but more ‘exploratory’ in nature: we concentrated on
a selected group of companies and industries, for
which we attempted to explore key issues and to
generate new hypotheses. The aim during the first
phase of our study was not so much to validate or
apply models, nor to test existing hypotheses or to
generate quantitative, cross-sectional data for large
samples of companies. 3 We proceeded according to
the following investigation plan.
2
The following studies deal more explicitly with the R&D
globalization process: De Meyer and Mizushima Ž1989., De Meyer
Ž1992., Westney Ž1993., Hedlund and Ridderstrale ˚ Ž1994., Ken-
ney and Florida Ž1994., Roberts Ž1995a., Roberts Ž1995b. and
Westney Ž1997.. More recent empirical investigation were pub-
lished by Patel Ž1995., Florida Ž1997., Gerybadze et al. Ž1997.
and Kuemmerle Ž1997.. For a comprehensive survey of R&D
internationalization studies see the work of Reger Ž1997..
3
We have extended our research program since 1997, and we
are presently developing more quantitative and systematic re-
search methods for larger samples of firms during our second
study phase.
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274 253

Ž1. In a first step, we undertook an evaluation of
the core literature on this subject, of database searches
and new empirical surveys.
Ž2. In order to precisely formulate the research
questions and judgements derived from this evalua-
tion, we organized several workshops with Senior
External Advisors Žresearch managers, top managers,
scientists., lasting for half a day each.
Ž3. Following these workshops, the issues to be
addressed by the project team were fined down to
core questions, and a qualified interview guideline
was elaborated which was subsequently tested out in
20 pilot interviews and then adapted.
Ž4. In a series of interviews in 21 companies, a
total of 120 semi-structured expert interviews were
conducted on four levels Žboard member, head of
corporate research, R & D managers within business
units, and project managers..
Ž5. The results obtained from these interviews
were compiled into 21 corporate profiles and six
case studies on innovation projects. In parallel, a
comparative analysis of the profiles and case studies
was performed, based on an inductive structuring
plan.
The results of the survey were presented at three
workshops. The precise stipulations and comments
elaborated at these workshops were incorporated into
the final report and in publications.
The empirical sample consisted of 21 transna-
tional corporations, most of which are engaged in
electronics and information technology, in the chem-
ical and pharmaceutical industry, as well as in ma-
chinery and advanced engineering Že.g., turbines and
aeroengines.. A total of 11 enterprises were included
from Continental Europe, eight from Japan and two
from the United States. For the reasons given above,
we concentrated our investigations on corporations
from Western Europe ŽGermany, Switzerland,
Netherlands. and Japan. The companies were se-
lected according to the following criteria: Ž1. high

Table 1
R & D intensities and R & D internationalization within our samplea
Rank Company R & D intensity Share of foreign Industry
1993 in percent Ž%. R & D 1993 in percent Ž%.
1 Siemens 9.2 28 electrical engineering
2 IBM 7.1 25 computers
3 Hitachi 6.7 2 electrical engineering
4 Matsushita Electric 5.7 12 consumer electronics
5 ABB 8.0 90 electrical engineering
6 NEC 7.8 3 telecommunications
7 Philips 6.2 55 electrical engineering
8 Hoechst 6.2 42 chemicalrpharmaceutical
9 Sony 5.8 6 consumer electronics
10 Ciba-Geigy 10.6 54 chemicalrpharmaceutical
11 Bosch 6.7 9 Electrical engineering
12 Roche 15.4 60 chemicalrpharmaceutical
13 Mitsubishi Electric 5.2 4 electrical engineering
14 BASF 4.5 20 chemicalrpharmaceutical
15 UTC 5.4 5 advanced engineeringraeroengines
16 Sandoz 10.4 50 chemicalrpharmaceutical
17 Sharp 7.0 6 consumer electronics
18 Kao 4.6 13 chemicalrcosmetics
19 Eisaj 13.2 50 chemicalrpharmaceutical
20 Sulzer 3.4 27 advanced engineering
21 MTU ca. 25 – advanced engineeringraeroengines
a
The companies were ranked with respect to their annual R & D expenditures.
Source: Database on International R & D Investment Statistics ŽINTERIS. and ISI Database on International Research and Innovation
Activities ŽISI-DORIA..
254 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
internationalization rate, 4 Ž2. above-average R & D
intensity and Ž3. strong innovation-orientation as
compared to other companies in the industry. 5 Table
1 gives an overview of the corporations studied.
The 21 companies chosen are among the leading
R & D-performing industrial firms worldwide. Many
of them are technology leaders in their specific
businesses, and they are far advanced in terms of
R & D internationalization. Four of the 10 enterprises
with the highest R & D expenditures in the world
ŽSiemens, IBM, Hitachi and Matsushita. and one-
third of the 50 most important corporations with the
highest R & D expenditure were included in our sur-
vey. A total of 16 of the 21 enterprises spend more,
some considerably more, than one billion US$ on
R & D per year. The enterprises included in the study
have an above-average intensity of R & D ŽR & D
expenditure as a proportion of turnover. of 8.3%.
Most of them are characterized by a high R & D
intensity at the corporate level, or at least one of
their business units is very R & D intensive. 6
Regarding R & D internationalization measured as
the share of foreign R & D, the companies selected
show a great variety: foreign R & D ratios range
between 3% ŽNEC. and 90% ŽABB.. Companies
from smaller European countries have attained rela-
tively high foreign R & D shares, while Japanese
firms Žwith one exception. still invest a dominant
share of R & D at home.
3. Trends in the internationalization of R & D:
tendencies in the 1990s
Since the early 1980s, the extent of international-
ization of R & D has increased considerably, both in
4
This was measured by foreign-to-total-operations ŽFTO. ratios
for turnover and R&D expenditures.
5
This qualitative evaluation and selection of ‘innovation lead-
ers’ was derived as a result of workshops with senior external
advisors.
6
Examples for a very high R&D intensity at the corporate level
are Roche Ž15%., Eisaj Ž13%. and Ciba-Geigy Ž11%.. Several
other firms spend less than 10% of turnover for R&D at the
corporate level, but display very high R&D intensities at the
business level. As an example, Sulzer Medica invests more than
10% of its turnover for R&D, while the average ratio for Sulzer is
only 3.4%.
quantitative and in qualitative terms. During earlier
periods of global expansion Žthe 1960s and 1970s.,
multinational corporations first built up foreign sales
and manufacturing operations in foreign countries. In
later phases Žlate 1970srearly 1980s., efforts were
directed towards supporting foreign subsidiaries with
complementary design and development capabilities.
Although initially, foreign R & D locations were lim-
ited to application engineering, and to the adaptation
of product and process technologies to host country
requirements, there was a clearly recognizable trend,
since the mid-1980s, towards strengthening R & D in
foreign locations. The formation of more advanced
national innovation systems as well as more sophisti-
cated markets in the OECD countries has resulted in
polycentric learning environments, and multinational
companies were increasingly extending their R & D
and competence portfolio on a global scale. Foreign
locations became more involved in exploration and
advanced development, as opposed to exploitation
and adaptation of centrally-developed, home-coun-
try-based technologies.
3.1. Factors driÕing the internationalization of R & D
This change has resulted in a new paradigm of
transnational innovation, that is significantly differ-
ent from the more ‘traditional view’ of R & D inter-
nationalization. This ‘traditional paradigm’ can be
characterized by a one-way technology transfer:
product concepts and technological knowledge bases
are generated in one dominant home base, and are
later replicated in other peripheral locations; this
process may be interpreted as outward learning, or
as exploitation of knowledge Žtypically involving
primarily flows of information from the center to the
periphery..
In striking contrast to this traditional view, the
new paradigm of transnational innoÕation is charac-
terized by:
Ø intense market and technology interaction;
Ø multiple centers of knowledge Žat several geo-
graphical locations.;
Ø cross-functional learning Žintegrating several
functions and segments along the value chain.;
Ø a combination of inward and outward learning, as
opposed to one-way information transfer;
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
Ø reverse and interactive technology transfer, both
between different geographical locations, as well
as between organizational units Žfunctions, busi-
ness units..
This new paradigm of transnational innovation
builds on multiplicity and dispersion of competen-
cies on a global scale, both research and
technology-supply-related, as well as end-user- and
demand-induced. Developments in science and tech-
nology have led to the transition to a polycentric
structure of national research and innoÕation sys-
tems. Until the end of the 1970s, the situation was
largely characterized by the dominance of one single
center for research and innovation in the world Žthe
centers for important fields of technology were
mainly the USA and, for some particular areas such
as polymer chemistry, Western Europe.. However, it
is now true to say that, for each important field, two
or three centers of excellence have crystallized out in
the ‘Triad countries’. These are engaged in a forceful
technological and industrial competition, in which
rankings may change quite rapidly. Because of this
development, the leading enterprises that conduct
R & D need to have a presence in more than one
center of R & D and innovation; they have to estab-
lish sufficiently stable and reliable structures at the
prime centers of science and technology in order to
increase their ‘absorptive capacities’ ŽCohen and
Levinthal, 1990., and be in a position to react as
quickly as possible to dynamic changes in relative
location advantages.
The proliferation of national innovation systems
and knowledge centers at various locations through-
out the world has strengthened the incentives of
multinational enterprises to go for ‘global sourcing’
in the area of research and technology. As part of the
formation of global technology procurement sys-
tems, corporate learning takes place in several dis-
tributed knowledge centers. But distributed R & D
capabilities are just one factor; new types of organi-
zation and network externalities in advanced markets
and manufacturing environments play an increas-
ingly important role. Corporate R & D and innovation
strongly builds on inducements from high-end mar-
kets and manufacturing systems; these inducements
drive innovation activities in several locations in the
world, and can also lead to significant changes in the
home country of a transnational firm.
255
Corporations want to learn ‘outside-in’, i.e., from
foreign locations to the center, and from advanced
applications to their R & D base. This process of
‘inward learning’ requires to be present at the most
advanced locations; transnational firms must be en-
gaged in option-seeking activities in R & D, ex-
ploratory marketing and advanced manufacturing. 7
But monitoring of geographically-dispersed opportu-
nities must be complemented by an internal process
of competence building and leveraging. Large
transnational firms need to establish efficient internal
mechanisms for the transfer of knowledge 8 and for
the transformation of options into successful busi-
nesses. These mechanisms contribute to speeding-up
the conversion of knowledge into marketable prod-
ucts, and their integration with advanced manufactur-
ing systems, to enhanced interactivity between mar-
kets and research systems, and to the effective intra-
corporate integration of multiple centers of learning.
3.2. Continued decentralization Õs. greater integra-
tion of control?
The new paradigm of transnational innovation
leads to new forces of lateral organization both
within large corporations, as well as across institu-
tional boundaries. Our investigation has concentrated
on exploring new modes of organizing intra-corpo-
rate innovation processes. As outlined in Fig. 1, the
focus of our paper addresses primarily issues of
managing transnational innovation processes within
large corporations. We are concerned
Ø with international R & D location decisions and
with criteria for site selection;
Ø with the formation of competence-centers resp.
centers of excellence; and
Ø with new coordination mechanisms for integrat-
ing globally distributed innovation activities.
Based on our exploratory research program in 21
large corporations, we argue that firms continue to
7
See the works of Kogut Ž1991., Stopford Ž1994. and Dunning
Ž1996. for this new view of option-seeking international invest-
ment within multinational firms.
8
These internal mechanisms for the transfer of knowledge are
at the center of the new research on ‘knowledge transfer’ and
innovation within transnational corporations. On this aspect, see
for instance the works of Bartlett and Ghoshal Ž1989., Hedlund
Ž1993. and Nonaka and Takeuchi Ž1995..
256 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274

Fig. 1. Our focus of research on R & D globalization within transnational corporations.

decentralize and co-locate diverse search and option
seeking activities; but these companies attempt
nonetheless to remain as hierarchical and integrated
as possible, when they transform options into suc-
cessful, large and growing businesses. The transna-
tional configuration observed for some companies in
the late 1980s, may have become somewhat overem-
phasized. During our empirical investigations be-
tween 1994 and 1997, we were not able to discern a
stronger movement towards the ‘transnational solu-
tion’ ŽBartlett and Ghoshal, 1989; Hedlund, 1993..
By contrast, companies during the mid-1990s have
tended to reintegrate their corporate control activities
even though operational search activities remained
globally-dispersed. Our interpretation is that large
corporations try to pursue coherent integration strate-
gies while still maintaining multiple learning centers.
They continue to build up foreign R & D, exploratory
marketing and advanced manufacturing systems
abroad, which, however, often remain under full
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
control of the corporation’s headquarter. More or
less tight corporate integration strategies go hand-
in-hand with the establishment and nurturing of R & D
units and product development capabilities at several
different locations in the Triad countries.
Tight-coupling and integrated control may, to
some extent, be complemented by loose-coupling
and networking. Many large multinational firms thus
enhance their absorptive capacities through a portfo-
lio of collaborative projects and networks. Through
R & D cooperations and strategic alliances, which
have greatly increased in number since the mid-
1980s, leading international technology enterprises
have created new solutions that allow for the rapid,
flexible networking of institutionally or regionally
scattered centers of competence Žcf. Sydow, 1992;
Gerlach, 1993; Gerybadze, 1995.. These include var-
ious new forms of distributing R & D activities and
competencies between suppliers, customers, as well
as universities and research institutes. An increasing
number of these consortia is transnational. As out-
lined in Fig. 1, however, this topic of cooperative
projects and R & D consortia will not be explicitly
dealt with in this paper.
Both strategies of going beyond borders, how-
ever, the building-up of intra-corporate, though re-
gionally distributed R & D structures, and the embed-
ding into worldwide R & D cooperations and strate-
gic alliances, have resulted in increasing problems of
coordination. Even in the age of global information
and communication systems, the effective manage-
ment of numerous R & D units and spatially scattered
projects across geographical, cultural and institu-
tional boundaries is no trivial matter. Experiences
with the growing coordination problems of globally
distributed R & D consortia have led to new consoli-
dation efforts both by international corporations and
by decision-makers in the area of national science
and technology policy. After the initial, euphoric
phase of transnational R & D, this has led once again
to more centralized restructuring in several well-
known international corporations Že.g., Ford, General
Motors, Hoechst..
3.3. Fiscal R & D consolidation and restructuring
This organizational consolidation is associated
with a fiscal consolidation of R & D observed in
257
almost all the OECD countries between 1991 and
1996. Both public institutions and private firms are
increasingly coming up against the barrier of the
financeability of R & D. In the advanced industrial-
ized countries, a share of 3% of R & D expenditures
as a percentage of GDP constitutes a sort of ‘sound
barrier’. In many industrialized nations, this indicator
has been flat or even decreasing. 9
Even the large multinational corporations are hav-
ing difficulty in keeping pace with the ‘R & D race’,
and in financing from private sources extremely high
ratios of R & D. 10 Most large firms were emphasiz-
ing corporate restructuring, business process redesign
and cost efficiency between 1991 and 1996, and this
has resulted in severe restrictions for R & D invest-
ment and innovation. Even though there are some
signs for a more recent upturn in business R & D
spending, this may not reverse the dramatic struc-
tural changes in R & D management and finance
encountered during the first half of the 1990s. 11
Both in public institutions and in private firms,
this fiscal consolidation has resulted in a severe
restructuring, and in rather short-sighted solutions: a
stronger application orientation and a corresponding
limiting of fundamental research was observed in
many large corporations between 1991 and 1996.
This has led to a weakening of central research, and
has resulted in a much stronger business-unit orienta-
9
US R&D expenditures as a percentage of GDP dropped from
2.8 in 1990 to 2.5 in 1996. Figures for Germany indicate a decline
from over 2.8% in 1990 to 2.3 in 1996. France and the UK went
down from 2.4, respectively, 2.2 to 2.1 in the same period. Even
Japan encountered some difficulties in going beyond this ‘sound
barrier’ of 3%. The only exception is Sweden which raised this
share to 3.6% in 1995 Žbased on Main Science and Technology
Indicators, OECD Ž1998...
10
A R&D intensity equivalent to 10% of turnover, or an annual
R&D expenditure which considerably exceeds the value of annual
cash flow, may lead to severe financial problems. For a critical
review of the ‘R&D arms race’, see the work of Von Braun
Ž1995.. The only exception are research-intensive pharmaceutical
firms, for which shareholders expect high values from extremely
high R&D investment ratios.
11
The more recent data on the R&D scoreboard for the world’s
leading 300 companies indicate an increase of corporate R&D
expenditures in 1997. Private investments are currently outpacing
public R&D expenditures. Except for the US, where the Federal
Government has increased its R&D spending, the overall level of
national R&D expenditures remains rather flat.
258 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
tion ŽRoussel et al., 1991; Gerybadze et al., 1997..
This applies at least to the majority of large, R & D-
performing enterprises in Western Europe and the
USA. Japanese enterprises pursue a strategy which is
somewhat different, but are likewise confronted with
strong financial restrictions. 12 In the area of pub-
licly financed R & D in particular, fiscal consolida-
tion has led to extensive changes in Western Europe,
the USA and Japan. In the area of basic research, at
universities and public research institutes, changes in
fiscal and policy priorities have led to ‘short-winded-
ness’, and to a deterioration of basic research capa-
bilities.
3.4. Changing interface between ‘basic’ and ‘ap-
plied’ R & D
This undermining of basic research comes at a
time when more and more international businesses
build on significant advances in fundamental knowl-
edge. Innovations in pharmaceuticals, electronics,
materials and energy require tremendous investments
in basic research. What is ‘basic’ and what is ‘ap-
plied’ is often difficult to discern, and the relation-
ship between basic research, deÕelopment and inno-
Õation is undergoing a lasting change ŽIansiti, 1993;
Nelson, 1993, Chap. 1.. Enterprises are increasingly
thinking in terms of integrated process chains of
innovation. Basic research, too, is a cornerstone in
these process chains, and for this very reason needs
to be organized with strong interfaces to advanced
manufacturing and exploratory marketing. Of neces-
sity, the traditional institutional separation of basic
research, applied research, development, production
and application needs to be overcome. Leading re-
search centers as well as the big multinational firms
are increasingly gaining their competitive edge from
a close, undistorted linkage between research, ad-
12
The impacts of financial restrictions on the extent, emphasis
and financing of research formed part of our survey Žon this
aspect, cf. Gerybadze et al. Ž1997... The change in the relationship
between central research and development in the divisions ob-
served by Roussel et al. Ž1991. has been re-examined in the
benchmark survey by Roberts Ž1995a,b., who reaches more de-
tailed conclusions.
vanced manufacturing and lead marketing. Integrated
product development processes, simultaneous engi-
neering and the cross-functional integration spanning
R & D, marketing and product and production are the
core topics of innovation management Žcf. Wheel-
wright and Clark, 1992; Iansiti, 1993; Leonard-Bar-
ton, 1995; Nonaka and Takeuchi, 1995..
These trends in innovation management and inter-
national R & D are giving rise to very decisive
changes in the management within corporations Že.g.,
coordination of transnational, multidisciplinary pro-
jects. as well as between independent firms Žnew
forms of joint R & D projects.. Firms experiment
with new unconventional forms of mixed modes at
the interface between basic and applied R & D, as
well as between private and public knowledge. The
analysis of globally distributed product development
and innovation also leads to a re-consideration of the
traditional views of science and technology policy.
Multinational firms are no longer simply ‘optimiz-
ing’ production machineries in search for low-cost
locations. Rather, the knowledge-creating company
is gaining more and more importance, searching for
options at the leading intelligence centers of the
world, and converting these as fast as possible into
successful new businesses ŽBartlett and Ghoshal,
1989, 1990; Hamel and Prahalad, 1994; Stopford,
1994; Dunning, 1996.. Globally active enterprises
are becoming more mobile and very selective with
respect to their choice of ‘lead locations’. Science
and technology policy, on the other hand, has to
create substantial options, and fertile grounds for
global learning and for the enhancement of local
knowledge pools.
4. Driving forces for locating R & D and compe-
tence centers abroad
Most large multinational corporations are under-
going lasting changes regarding their selection of
locations and the management of R & D. Managerial
changes will affect the way we analyze R & D and
innovation activities. R & D units may no longer be
as easily decomposed, as was the case in the past.
Most existing studies, however, still investigate the
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274 259

globalization of R & D at the functional level, i.e., 4.1. Internationalization patterns differentiated by
by analyzing location decisions and integration country-of-origin
mechanisms for geographically dispersed R & D lab-
oratories. 13 According to our observations in 21
Internationalization strategies depend furthermore
corporations, new ways of organizing R & D and
on the country-of-origin of corporations, on the in-
innovation will affect our research design and the
dustry resp. product group, and on firm-specific
way we analyze and measure innovation activities.
factors such as corporate culture and predominant
Greater emphasis on cross-functional integration and
managerial and organizational practices. With re-
lateral organization, as well as greater interactivity
spect to the country-of-origin, the firms in our sam-
between R & D, production and marketing, will affect
ple can be classified into four groups.
research methodologies and the choice of the basic
Ø R & D-driven global players from small Euro-
unit of analysis. We have thus analyzed the global-
pean countries. This group includes enterprises from
ization process from three different angles.
Ž1. The ‘traditional view’ of globalization of the small but highly developed European countries in
which the size of the national R & D base is clearly
R & D function and of research laboratories within a
limited from the outset; multinational firms from
firm Žthe unit of analysis being the R & D lab ..
Ž2. The globalization of cross-functional business these smaller countries are forced to actively partici-
pate in foreign research pools Žfor example, Philips,
processes such as the product generation process,
ABB, Ciba, Roche, SandozrCH..
new venture management etc. Žthe innoÕation resp.
Ø Companies from large European countries with
the project being the unit of analysis..
Ž3. Finally, the globalization of competence cen- a predominant technology base in their home coun-
try. Many corporations in Germany, France and the
ters, defined by generic technologies Že.g., biotech-
UK, particularly in the machinery, transportation,
nology. or product groups Že.g., aeroengines.. In this
and electrical engineering sector still tend to concen-
last case, the competence center is the relevant unit
trate a significant part of their research in the country
of investigation.
of origin Že.g., Siemens, Bosch and Daimler–Benz.;
Globalization strategies and patterns of interna-
chemical and pharmaceutical firms in these large
tionalization should be considered separately for each
countries, on the other hand, are significantly differ-
basic unit of analysis. Globalization strategies based
ent: they have attained a high proportion of foreign
on R & D are different from globalization strategies
R & D Že.g., Hoechst..
for cross-functional business processes, which again
Ø For most large Japanese firms, the internation-
are different from globalization strategies for compe-
alization of R & D and innovation has not progressed
tence centers. Our investigations show that transna-
very far as yet. Corporations such as Sony, Sharp,
tional corporations pursue the following approach.
Hitachi, NEC and Mitsubishi Electric all still have
Ø In a first step, they define the basic decision-
foreign R & D ratios well below 10%. Kao and Mat-
making unit, for which a coherent strategy and clear
sushita have values of only slightly more than 10%. 14
responsibility can be attributed.
Ø US corporations, based on their strong national
Ø In a second step, they define the centerŽs. of
research base, are less internationalized with respect
gravity for this unit at a global scale; this center of
to R & D investments than European firms, but more
gravity is typically the location where critical knowl-
active abroad than Japanese firms. Published data
edge and key resources are located, and where the
highest value-added is generated.

13
See, for instance, the works of De Meyer Ž1992., Cheng and
Bolon Ž1993., De Meyer Ž1993., Granstrand et al. Ž1993., West-
ney and Frost Ž1996., as well as the work of Florida Ž1997.. They
all concentrate on the R&D laboratory as the unit of analysis.
14
The only exception in our sample is Eisaj, which is strongly
active in basic research, and has pursued a strong global orienta-
tion in order to access the most sophisticated research pools
abroad.
260 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
Fig. 2. Proportion of foreign research and development in selected enterprises in Western Europe, the USA and Japan.
indicate a proportion of foreign R & D spending of
8–12%. 15
A benchmark survey on strategic management of
technology practices in multinational firms published
at MIT, in collaboration with PA, addressed the
internationalization of R & D. A total of 244 R & D-
intensive corporations in the US, Western Europe
and Japan, were asked in 1992 how the foreign part
of their R & D had developed over the past 3 years,
and how it would foreseeable develop over the next
3 years. As shown in Fig. 2, European firms have the
highest proportion of R & D abroad Žabout 30%—but
15
Patel Ž1995. has estimated a share of foreign R&D of 8% for
249 US firms, based on US patent applications differentiated by
location of inventor. This figure appears to be underestimating the
actual percentage of R&D performed abroad within US firms.
with some bias on intra-regional R & D investment
within Europe., followed by US and Japanese
firms. 16 Firms from all three of the Triad regions
have increased their share of foreign R & D in the
last few years and will be further increasing this ratio
in future. This result confirms the firm-specific state-
ments in our empirical survey: in the period from
1980 to 1995, all the enterprises analyzed, without
exception, increased the share of their R & D abroad.
16
Roberts Ž1995a,b. recommend to exclude intra-European R&D
investments in order to compare foreign R&D ratios for US,
European and Japanese firms. Even if intra-European R&D invest-
ments are excluded, however, the average European FTO ratio for
R&D is considerably higher than for US and Japanese firms;
many European firms have invested significant shares of R&D in
North America.
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
4.2. New motiÕes for locating R & D and competence
centers abroad
Most empirical studies and available statistical
data measure globalization processes for the R & D
function, and can only be used as a proxy for the
other two units of analysis Žinnovation projects resp.
lateral units, competence centers.. To analyze global-
ization at the process or competence level, we need
to pursue in-depth case studies within corporations.
Our empirical investigations indicate that there is a
continuous trend for internationalization at all three
levels, which may be counterbalanced within some
companies and for some periods Žsee particularly
Section 4.2..
The degree of internationalization of research,
product development and innovation—measured by
indicators such as the proportion of R & D expendi-
ture and R & D employees abroad, the number of
R & D units, the amount of international patent appli-
cations, and by various FTO ratios 17 —has increased
in the 1980s and 1990s in most of the large R & D-
intensive multinational corporations. Further efforts
towards globalization and tendencies to allocate R &
D abroad are explicitly included in business policy
and R & D strategy for the second half of the 1990s.
The motiÕes for establishing R & D units abroad
and the main factors in selecting locations have been
examined in earlier empirical studies with a some-
what different focus. 18 These studies emphasize
market characteristics Žsizerattractiveness of foreign
markets, combined with the need to adapt product
variants to country-specific situations., as well as
R & D-specific location factors Že.g., the desire to
access a local talent pool.. Most of these studies,
however, are driven by factor cost resp. factor avail-
ability considerations related to the R & D function.
17
Empirical research on the internationalization process of
multinational enterprises typically uses FTO ratios Žindicating the
share of FTO.. These are only insufficiently recorded for the
internationalization of R&D, and had thus to be determined in the
course of this study on the basis of data from individual compa-
nies.
18
On this aspect, see particularly the overview in the work of
Cheng and Bolon Ž1993. and also in the works of Teece Ž1976.,
Ronstadt Ž1977., Mansfield et al. Ž1979., Lall Ž1980. and Kogut
and Zander Ž1993..
261
Our interviews, as well as more recently published
investigations emphasize the knowledge and option
generating capacities of foreign locations, and dy-
namic interaction effects between R & D, lead mar-
keting and advanced manufacturing.
In our survey on the R & D internationalization
process in 21 corporations, we asked the following
question: ‘‘what are the driving motives for pursuing
R & D activities and product development projects in
foreign countries, and according to which criteria do
you select the most appropriate locations?’’ The
following answers were given particularly often, and
these indicate that intangible, knowledge- and
value-related considerations have become much more
important than quantitative, cost- and efficiency-re-
lated factors.
Ž1. Multinational corporations locate R & D, first-
of-all, in the most dynamic and forward-driving mar-
kets. They emphasize the motive of acquiring im-
pulses for innovation processes through presence on
the spot, learning in lead markets and adaptation to
sophisticated customer requirements.
Ž2. The knowledge-generating process is moving
closer to the revenue-generating process. Conse-
quently, R & D is located close to the ‘point-of-sale’,
at places where cash-flow is generated, and where
new product concepts can be tested according to a
‘probe and learn process’.
Ž3. The formation of dominant designs and stan-
dards plays an increasingly strong role for many
high-tech products. Active presence in locations
where regulatory conditions, licensing procedures and
standardization agreements facilitate rather than con-
strain the innovation process, is a major driver for
performing innovation abroad. Specific regulatory
environments provide impulses for innovation; firms
can explore and build capabilities, that can later be
successfully transferred to other locations. Early par-
ticipation in ‘regulatory niche’ countries allows for
first-mover advantages on the world market.
Ž4. For certain complex and sophisticated new
products, close linkage between R & D, advanced
manufacturing and an efficient supplier network are
decisive. Several companies highlight the motive of
integrating high-quality production and simultaneous
engineering. Effective integration of R & D and man-
ufacturing leads to greater advantages of time, qual-
ity, flexibility and cost.
262 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
Ž5. Finally, research intensive companies in par-
ticular fields Že.g., genetic engineering, advanced
solid-state physics etc.. emphasize the access to
unique resources and leading research results and
talents in particular centers of excellence with a
strong international reputation.
4.3. Dynamic Õalue driÕers more important than cost
considerations
Qualitative factors and dynamic upstream–down-
stream interactions are increasingly driving R & D
location decisions. Dynamic ‘ value drivers’ appear
to be more important than static cost considerations.
Firms in our survey emphasize option-seeking in-
vestment and transnational learning processes along
the whole value-added chain Žresearch, development,
production, integration into supply chains and logis-
tic networks, marketingrsales and customer interac-
tion..
A useful indicator for measuring these qualitative
learning and innovation relationships is the relative
value of knowledge generation activities as a per-
centage of value-added within the firm. Although
there are few accurate methods for measuring or
quantifying this parameter, more and more enter-
prises are conscious of the strategic value of these
intangible assets and activities. For most high-tech
firms in our sample, 20–40% of value-added may be
attributed to knowledge-generating activities. 19
The key determinants driving the internationaliza-
tion process for R & D and innovation activities can
thus be summarized.
Ø The relative importance of knowledge genera-
tion as a constituent of value-added in the corpora-
tion, compared with the proportion of value-added
contributed by manufacturing and assembly.
Ø The distribution of highly-advanced scientific
and technological knowledge bases, for which
‘centers of gravity’ and critical assets are often
strongly concentrated at ‘unique locations’.
19
Even though traditional accounting practices do not consider
these intangible factors, more and more corporations are trying to
quantify their knowledge-generating activities. As an example,
Toshiba assigns a share of 40% of corporate value-added to the
generation of knowledge, and Asahi Glass a share of 28%.
Ø The global distribution of customer-related
knowledge pools and of country-specific conditions
for learning from advanced users. This factor can be
measured by the degree of differentiation of cus-
tomer requirements, by product differentiation and
by the extent of change in customer requirements
and product characteristics in different countries.
Ø Finally, the extent of internationalization of
R & D and innovation activities is strongly affected
by opportunities and restraints for decomposing
knowledge-generating activities across locations.
This will depend on industry—as well as product-
specific characteristics of interaction between R & D,
manufacturing and marketing, as well as on the
degree of modularity resp. decomposability between
functions.
Some industries and product groups will display a
high internationalization profile based on these four
determinants, while others are still characterized by a
rather low internationalization profile. Industries with
a high R & D internationalization profile are the
chemical and pharmaceutical industry, consumer
electronics, information technology and telecommu-
nications. For these R & D intensive industries,
knowledge bases, customer requirements and regula-
tory requirements are highly differentiated across
countries. Firms gain comparative advantage by si-
multaneously being active in several centers of learn-
ing.
Industries with a still rather low R & D interna-
tionalization profile, by contrast are those in which
production and assembly activities are the main con-
stituents of value-added and in which research, prod-
uct and process development, as well as manufactur-
ing are still relatively easily decomposable. This is
still true for mechanical engineering and for the
automotive industry. Even some R & D-intensive
global industries such as aerospace, semiconductors
and software are not very far advanced with respect
to their globalization of R & D activities. Homoge-
nous global product designs together with a strong
concentration of R & D capabilities in one major
location Žoften the US. still restrain the international-
ization process for high-value activities. Even in
these latter industrial sectors, however, the increas-
ing importance of knowledge, increasing product and
service differentiation, the influence of information
technology, as well as the requirement of simultane-
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
ity in research, design and production may tend to
step up the process of internationalization in the
1990s.
4.4. Greater geographical dispersion or strong con-
centration on few competence centers?
The internationalization of R & D is not necessar-
ily associated with a universal scattering and global
distribution of innovation activities. While more and
more knowledge-generating activities tend to be per-
formed abroad, these tend to be concentrated at few
highly advanced locations within the Triad countries.
Economists pointed out repeatedly that the pool of
technological knowledge is very unevenly distributed
ŽMachlup, 1962; Kuznets, 1966; Teece, 1981.. With
increasing sophistication of markets and research
systems, this inequality tends to increase. The more
advanced and differentiated the area of competence
that an enterprise wishes to acquire, and the more
important its links with complex knowledge Že.g.,
research, production competence, customer-related
knowledge., the fewer high performance centers
qualify at a global level. Most of the companies
distinguish between:
Ø leading-edge or ‘pre-eminent’ locations; only one
or two centers in the world classify as such;
Ø advanced locations Žtypically the major markets
and research systems in the developed countries.;
Ø less developed locations, i.e., less sophisticated
and non-dynamic markets and research systems.
The most sophisticated business processes, R & D
activities and areas of expertise, which require pres-
ence in the leading-edge locations, tend to be con-
centrated at one pre-eminent center. Other, less ad-
vanced business processes and functions, by contrast,
are increasingly sourced out to the second and third
tier locations. Large transnational corporations are
thus restructuring their portfolio of activities, and
they tend to concentrate their most strategic and
prestigious projects at a few very advanced locations.
They are incurring high costs for the scanning, eval-
uation and selection of the most sophisticated centers
of excellence, for the building-up of networks and
for the coordination of tasks with other groups and
locations.
This proposition of a greater concentration of
R & D and innovation activities at a few leading
263
locations is somewhat in contrast to the literature on
the transnational firm ŽHedlund, 1986; Bartlett and
Ghoshal, 1989; Hedlund, 1993.. While during the
period 1985 to 1994, an increasing number of firms
may have set up R & D laboratories and product
development activities at different locations in the
world, many firms in our sample mentioned that this
has often led to duplication and inefficiency. After
gaining experience of becoming a ‘transnational in-
novator’, with all its advantages as well as disadvan-
tages, an increasing number of firms are now at-
tempting to reach greater coherence and efficiency
for their global portfolio of innovation activities. As
a result, the second half of the 1990 may be de-
scribed as an on-going process of internationalization
accompanied at the same time by an even more
consistent concentration, and refocusing.
As a consequence, when deciding on locations for
their R & D and innovation activities multinational
firms pursue the strategy of establishing a few global
centers of learning at precisely those places where
the best conditions worldwide are to be found for the
particular product segment or field of technological
expertise. They are no longer satisfied with locations
that will enable them to ‘just about keep up’ with the
technology race, but deliberately search for the
unique centers of excellence. The key criteria for this
choice of ‘first class locations’ for the innovation
process are the following.
Ž1. What location has the most advanced status of
development worldwide and the best reputation in a
certain field of research? Where are the best loca-
tional factors for sustained research excellence to be
found?
Ž2. Where do R & D activities require strong in-
ducements from highly sophisticated lead markets
and customer requirements, and where can these
activities receive sustained impulses for further lead
performance?
Ž3. Where, on a worldwide basis, can the greatest
potential for value-generation be exploited, i.e.,
where do high-margin customer groups and manu-
facturing units generate the cash flow for leading-
edge research, while at the same time determining
the quality of the research?
Ž4. Where is it possible to exert influence on
regulatory regimes and dominant designs by partici-
pating in research consortia and standardization net-
264 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
works, consequently gaining early mover-advantages
in the worldwide innovation race?
Ž5. Where are the most advanced and innovation-
driven competitors, and at which locations does the
type and intensity of competition stimulate the search
for successful new businesses and sustainable inno-
vation?
The evaluation and selection of these ‘lead loca-
tions’ do not take place at a high level of aggregation
Že.g., for an industry such as ‘electronics’., but are
typically carried out at the level of the strategic
business unit ŽSBU; e.g., pharmaceuticals for the
treatment of the central nervous system., or for a
particular field of technology Že.g., the technology
for TFTrflat panel displays.. For each product seg-
ment or technology, only one or two global centers
of excellence will emerge as ‘attractors’, capturing
the attention of researchers and top managers within
the most advanced multinational firms.
5. A new framework for analyzing R & D global-
ization within transnational firms
R & D and innovation activities continue to be
performed at an international level, but greater inter-
national dispersion of activities does not necessarily
lead to greater decentralization of ownership and
control. Corporations want to benefit from multiple
centers of learning on a global scale, but they tend to
concentrate ownership and control of their most criti-
cal resources in only one country, or in a very small
number of competence centers. The following frame-
work may serve as a basis for analyzing predominant
patterns of globalization, and to assess the related
coordination and control issues in transnational cor-
porations.
5.1. Four generic types of transnational R & D and
innoÕation
According to our illustration in Fig. 3, we distin-
guish between two generic innoÕation regimes: dy-
namic, fast-cycle businesses on one hand, and less
dynamic, slow-cycle businesses on the other side.
Multinational firms are typically active in several
businesses. If these businesses are similar, we may
focus on the predominant types of innovation and
their dynamics at the corporate level. If, by contrast,
business units within a firm are characterized by
different regimes, a detailed analysis at business unit
level will be required. The two innovation regimes
described in Fig. 3, represent polar cases and may be
further subdivided into different sub-classes. We have
found it useful, to distinguish between the following.
Ø Dynamic, fast innoÕation regimes, on the left
hand side in Fig. 3. These are characterized by high
R & D intensities, fast innovation cycles and a rela-
tively strong importance of breakthrough innova-
tions; typical examples are semiconductors, optoelec-
tronics or personal computers.
Ø Less dynamic, slow innoÕation regimes. Many
less dynamic businesses Žsuch as civil engineering,
steel manufacturing or shipbuilding. are character-
ized by low R & D intensities, comparatively slow
innovation cycles, and by the predominance of incre-
mental innovation.
Our empirical study has been focused on corpora-
tions and strategic business units characterized by
dynamic, fast innovation regimes Žas illustrated by
the shaded area in Fig. 3.. However, some of the
large, multiproduct firms in our sample Že.g., ABB,
Hitachi, Siemens, Sulzer, UTC. are active in differ-
ent industries, and in diverse businesses character-
ized by dissimilar innovation regimes. In those cases,
we have mainly concentrated our analysis on the
more dynamic, innovation-intensive business units
within these firms.
If firms are active in very dynamic, fast-cycle
businesses, there are strong incentives to secure di-
rect and undistorted access to the most critical re-
sources. The core questions to be addressed by man-
agers will be: what are the most valuable resources,
where in the world are these located, and why is it so
critical to secure proximity to resource bases. Dy-
namic, fast innovation regimes have often been de-
scribed synonymously with ‘science-based’ and
‘technology-push’ types of innovation. Our study
shows that this connotation is no longer valid; while
some dynamic business segments can still be consid-
ered as ‘science-based’ Že.g., biotechnology., an in-
creasingly large share of dynamic businesses are
characterized by patterns of lead market induced
innovation, and by novel ways of demand articula-
tion ŽVon Hippel, 1988; Kodama, 1995.. Compara-
tive advantages of firms in these businesses are built
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
Fig. 3. Four generic types of transnational R & D and innovation.
on the effective coupling of lead marketing, R & D
and innovation. Typical examples of lead market-
driven innovation are consumer electronics or
telecommunications. We have found it useful to
clearly distinguish between these two clusters of
dynamic innovation processes as outlined in Fig. 3,
because both types are characterized by completely
different sources for comparative advantage, and
firms need to pursue completely different sourcing
and location strategies.
For science and research-based innoÕation Žsee
left hand side in Fig. 3., corporations are critically
dependent on excellent R & D resources and talent
pools Že.g., genetic engineering or artificial intelli-
gence.. Leading researchers and world-class research
laboratories are the most sought-for critical assets.
For those types of innovation, it is important from
the corporate point-of-view, whether the company is
based in a large country with a powerful and ad-
vanced research capability in the particular fieldŽs.,
or whether there is only a small, less-developed
265
R & D base in the home country. According to these
characteristics, we may distinguish between the fol-
lowing two generic types of transnational science
and research-based innovation.
5.1.1. Type A
The corporation needs to get access to advanced
R & D and is located in a large, highly developed
home country with strong R & D capabilities in the
particular field. Typical examples for this type are
US biotechnology or semiconductor firms; they will
have no strong incentive to locate significant parts of
R & D abroad.
5.1.2. Type B
The corporation is dependent on excellence in
R & D, but is located in a small country andror in a
country with a less developed R & D capability in the
particular field. Distributed R & D laboratories of
Ericsson from Sweden, Philips from the Netherlands
in consumer electronics, or Roche from Switzerland
in pharmaceuticalsrbiotechnology are examples for
266 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
this type B. All these firms have strong incentives to
locate critical parts of their research base abroad.
For other dynamic, fast-cycle businesses, access
to research capabilities is less critical than the pres-
ence in lead markets and the learning from dynamic
customer–supplier interactions. Innovations in the
fields of consumer electronics, factory automation,
instrumentation, advanced engineering, energy or
medicine are strongly driven by the interplay of lead
markets, regulation, and customer–supplier relation-
ships. The most critical assets for the innovation
process are the downstream-related complementary
factors; companies need to build up an effectiÕe
coupling of lead marketing with R & D and innoÕa-
tion. 20 Demand patterns are driving investment be-
havior which in turn influences the selection of new
technologies. Corporations active in those fields are
dependent on excellence in lead marketing and on
closeness to the most demanding customers.
While learning from lead markets can occur at
any location in the world, it appears to be most
crucial for the long-term success of a corporation,
whether its top management can transform market
stimuli into a sustainable business. Headquarters have
to be involved in decision-making, top managers
have to understand the new businesses and their
risks, and they have to mobilize the appropriate
resources ‘just-in-time’. The type and coherence of
innovation management will thus crucially depend
on the cultural as well as functional distance between
the corporate headquarter and the lead marketŽs.. 21
In our empirical investigation, we found it useful to
distinguish between the following two types of
transnational innovation.
5.1.3. Type C
The corporation can benefit from proximity to a
world-class lead market, and can establish an effec-
20
An increasing number of innovation researchers emphasize
these concepts of ‘lead-user-marketing’ ŽVon Hippel, 1988., ‘de-
mand articulation’ ŽKodama, 1995., or ‘probe and learn innova-
tion’ ŽLynn et al., 1996..
21
This geographical proximity argument has been emphasized
by Burenstam-Linder Ž1961. and Vernon Ž1966., and is a major
theme in the new literature on the ‘geography of innovation’ Žsee
the works of Audretsch and Feldmann Ž1996. and Gersbach and
Schmutzler Ž1996...
tive coupling of lead marketing, R & D and innova-
tion in the home country. Most of these high-end
activities can be performed close to the corporate
headquarter, at least within the same nation state.
Examples here are Sharp or Toshiba in the flat panel
display market in Japan, which still constitutes the
major lead market for LCD products and applica-
tions.
5.1.4. Type D
The corporation is strongly dependent on access
to a foreign lead market. Due to the limited size of
its home country andror the level of market sophis-
tication, the firm is forced to perform critical func-
tions abroad. Demand articulation and corporate re-
source allocation will be geographically, and often
functionally, separated. A typical example here are
European flat panel display manufacturers, which
were the original innovators, but which became criti-
cally dependent on a thriving foreign lead market.
5.2. Types of companies and their dominant patterns
of transnational innoÕation
Most R & D and innovation activities performed
abroad within the sample of companies studied can
be classified according to these two determinants,
i.e., by the type of innovation pursued, and by the
location of critical resources Žwhether critical assets
are concentrated at home or abroad.. Some compa-
nies primarily pursue science and research-based pat-
terns of innovation Že.g., biotechnology research.,
and they tend to locate their R & D labs close to the
best talent bases, whether they are found at home or
abroad Žsee the left hand side in Fig. 4.. Type A
innoÕation is characteristic for large firms with a
powerful R & D infrastructure at home. A typical
example are advancements in human genome re-
search, where the US, based on funding by the
National Institute of Health, has attained a world
leadership position. US pharmaceutical and health
corporations would have little incentive to go abroad
for access to scientific results and research talents in
this field.
This is different for transnational corporations
from small countries such as Switzerland, Sweden or
the Netherlands. All Swiss corporations in our sam-
ple ŽCiba-Geigy and Sandoz, now being renamed
Novartiy as well as Roche. have made strong inroads
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
Fig. 4. Types of companies and their dominant patterns of transnational innovation.
into US-based biotechnology research. The same was
true for corporations from larger countries ŽGermany
and Japan., who felt that the research infrastructure
or regulatory conditions were less developed at home
than in the US. Both types of corporations pursued a
B-type strategy.
Apart from a few research-driven fields, an in-
creasing number of corporations follow the strategy
of locating R & D and innovation activities near the
most dynamic markets and customer groups. Innova-
tion strategies of types C and D emphasize down-
stream activities and the effective coupling of lead
marketing with R & D and product innovation. Firms
are forced to follow the most demanding and innova-
tion-oriented customers. Some firms can concentrate
on localized search for lead customers at home, but
this will be constrained by the size and sophistication
of the home market Žsee the right hand side in Fig.
4.. Companies from large countries with a highly
developed lead market and a strong R & D base at
home find a suitable climate for innovation and
267
concentrate most of their activities close to the head-
quarter. This is the case for the majority of LCD
innovations at corporations like Sharp, Hitachi or
Canon. United Technologies concentrates most of its
aeroengine development within the US. A significant
share of R & D and innovation of German firms in
the fields of automotive supply, mechanical engi-
neering or energy is still pursued in Germany. C-type
innoÕation primarily involves the setting-up of one
or two dominant R & D and innovation centers in the
home country, and the effective linkage of R & D and
product units. Innovation activities abroad are often
just a supplementary activity.
This is different for corporations based in small
countries, as well as for companies from large coun-
tries with lead market deficiencies. Innovative com-
panies from Europe that are active in optoelectronics
or semiconductors perform a significant part of R & D
and innovation activities in the lead countries, i.e., in
Japan or the US, depending on the specific business
segment. A D-type innoÕation strategy requires to
268 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
concentrate major investments and capabilities out-
side the home country. Very few companies in our
sample have demonstrated a strong track record with
D-type innovation activities.
5.3. EffectiÕe coordination of distributed centers of
learning within multinational firms
Since the mid-1990s, transnational corporations
have tended to consolidate and streamline their orga-
nizations. Distributed R & D activities and globally-
dispersed innovation processes have resulted in
overly complex and unmanageable organizational ar-
chitectures. This has induced firms to search for
‘leaner’ and more effective types of managing their
international portfolio of innovation activities. We
learned that the spatial distribution of learning and
R & D performing activities is something different
than the spatial distribution of coordination and con-
trol. Many companies in our sample have adapted a
strategy of multiple centers of learning with one
dominant center of coordination. For many compa-
nies this implies to select as few centers as feasible,
if possible, only one.
Two criteria are determining coordination modes
and location decisions for the establishment of ‘lead
centers’.
Ø Some multinational firms are ‘ value-driven’:
they attempt to locate a center as close as possible to
the greatest source of value creation. This can be
attained by locating an activity close to leading
research centers within an advanced national innova-
tion system. Alternatively, centers of learning can be
established close to dynamic lead markets.
Ø Other multinational firms are more ‘control-
minded’: these tend to locate the primary center of
innovation as close as possible to the corporate
headquarter. While ideas for new projects may be
generated elsewhere, a central unit close to headquar-
ters has tight control of the integrated innovation
process: information about value-creating projects is
validated from a corporate point-of-view, and is
transformed into effective programs in consistence
with corporate strategy.
In some situations, particularly if corporations
from a very advanced country pursue innovation
strategies of types A and C, these two criteria can be
fulfilled simultaneously. In other cases Žparticularly
for innovation strategies of types B and C., value-
driven and control-minded location strategies are
incompatible, and management then tends to com-
promise by allowing for multiple centers with over-
lapping responsibilities.
Based on our observations in 21 multinational
firms, we have developed a framework for guiding
organization decisions and criteria for the selection
of primary centers of learning and control. In this
framework, the international configuration of R & D,
of lead markets and managerial capabilities leads to
particular innovation strategies. In the next step, we
sketch out dimensions of an organizational architec-
ture, for which each generic type of transnational
innovation determines the choice of the most appro-
priate coordination mechanisms.
Organization design and the selection of coordina-
tion mechanisms appears to be rather straightforward
for A- and C-type innovations. The dominant locus
for value creation, be it a world-class research capa-
bility Žtype A. or a lead market Žtype C. is always
close to the corporate headquarters. In the case of
science and research-based innovation, a leading-
edge research center with strong ties to the corporate
center and centralized decision-making is often suffi-
cient. Continuous innovation is enhanced through a
research-type corporate culture. Corporate technol-
ogy platforms and R & D committees are centered in
the home country, and support the effectiveness of
the R & D program.
C-type innoÕations require stronger cross-func-
tional integration and a more stringent system
focus 22 across the value-chain. Most critical func-
tions and managerial capabilities for systems integra-
tion are located within one dominant country. The
establishment of cross-functional teams, the arrange-
ment of internal quasi-markets and contractual agree-
ments between units or functions poses no serious
problems Žsee the upper right hand box in Fig. 5..
Globally dispersed portfolios of critical assets will
lead to more serious coordination problems than if
22
Cross-functional integration has been explicitly described in
the innovation literature ŽWheelwright and Clark, 1992.. System-
focused R&D and its effectiveness have been outlined in the
works of Iansiti Ž1993, 1998..
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
Fig. 5. Generic types of innovation determine the choice of the appropriate coordination mechanism.
critical resources and activities can be controlled in
the home country. If there are multiple centers of
learning, how can their activities be best coordinated
in one prime center? For type B innoÕation strate-
gies, firms need to get access to critical assets abroad;
they often have to organize R & D as a network of
multiple research laboratories with comparable repu-
tation at different locations in the world. This re-
quires effective global team management; team
members with different cultural as well as educa-
tional background have to be socialized and inte-
grated, This can partly be attained through an effec-
tive corporate research mission and technology strat-
egy. In addition, corporations with strong perfor-
mance in type B innovation often display coherent
corporate cultures, and they often emphasize corpo-
rate visions, ‘mental maps’, and globally integrated
technology portfolios. In contrast to the more opti-
mistic description of transnational R & D and innova-
tion in the works of Bartlett and Ghoshal Ž1989. and
Hedlund Ž1993., however, we found only few com-
269
panies in our survey that succeeded in maintaining
global research cultures and networks. In most cases,
firms concentrate their best research activities in a
very small number of ‘lead laboratories’. 23
Finally, serious coordination problems arise for
type D innoÕation strategy. Companies have to man-
age innovation processes across organizational enti-
ties Žbridging functions or business units., and across
national borders simultaneously. Transnational firms
involved in this ‘dual challenge’ tend to reduce
complexity through more or less stringent control
mechanisms: while maintaining multiple centers of
customer-related learning, they try to control dis-
tributed innovation activities as tightly as possible in
one prime center. For D-type innovation, this lead
center does not need to be close to the corporate
23
See the works of Gerybadze et al. Ž1997, Chaps. 6 and 7. and
Kuemmerle Ž1997..
270 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
headquarter. Transnational firms often establish an
effective business unit or a new division in the
leading country of the world. Effective cross-func-
tional integration has to be established within the
foreign lead market; furthermore, the innovative for-
eign units must maintain close ties with headquar-
ters. With the business drivers and the core team
members outside the home country, the prime factor
for success will be that the corporate center under-
stands the dynamics of the business, and that it is
capable and willing to mobilize enough critical re-
sources. A few large firms, primarily from Europe,
have effectively transferred worldwide responsibility
to a business unit located outside the home country.
Even though such a solution is proposed in the
management literature, however, it is not a very
common or even preferred solution in top manage-
ment circles.
6. Conclusions and implications
Our research on ‘R & D and Innovation in
Transnational Corporations’ has outlined some sig-
nificant changes, with profound implications for cor-
porate management, for R & D and innovation policy,
as well as for further management research. Man-
agers in many transnational corporations tend to
redirect their efforts towards a more cohesive ap-
proach of global specialization and ‘balanced re-
centralization’. Many corporate functions and activi-
ties may still remain geographically dispersed; coor-
dination and control of R & D and innovation, how-
ever, is increasingly kept within one prime center of
ownership and control. Innovation policy and man-
agement research will have to respond to these new
patterns.
6.1. Managerial implications
The framework of analysis proposed in Section 5,
may serve as a useful tool for structuring organiza-
tion design and location decisions. Managers are
concerned with the following questions:
1. where is the major driver and the center for value
creation for the innovation process?
2. how are critical resources dispersed over geo-
graphical locations, and how can we best control
the most critical assets?
3. what is the most appropriate organizational solu-
tion, which secures effective control and coordi-
nation of multiple centers of learning?
Our framework suggests four generic types of
innovation strategies, each leading to different coor-
dination requirements and organizational solutions.
Innovation strategies are, to a large extent, influ-
enced by the opportunities for learning, by value-
drivers and by the critical asset base within the home
country of a multinational firm. Corporations that
want to maintain multiple, geographically-dispersed
centers of learning are forced to develop coherent
coordination capabilities. For each of the four inno-
vation strategies, firms need to design and implement
appropriate coordination mechanisms; these can be
determined on the basis of the proposed diagnostic
tool, with the overall objective to keep organizations
‘lean’ and effectively integrated.
6.2. Public policy implications
The observed changes and our proposed concepts
will also affect innovation policy, which has overem-
phasized supply-side R & D capabilities in the past. 24
Since R & D resources tend to be only one, often less
important driver of global innovation, more emphasis
has to be placed on downstream-related processes,
effective national lead markets, and on the enhance-
ment of national systems of demand articulation
ŽKodama, 1995.. Furthermore, national policy has to
prevent simple ‘me-too strategies’, and has to em-
phasize sustainable national leadership positions,
based on R & D capabilities, dynamic national firms,
effective clusters of business activity, as well as on
dynamic lead markets. Fig. 6 may serve as a useful
characterization of innovation policy in response to
the four different types of innovation.
National policies directed at strengthening re-
search and the national innovation system are viable
only inasmuch, as a country can maintain a true
leadership position Žstrategy A., and if companies
located in this country can appropriate substantial
24
For a more detailed critique, see the works of Branscomb
Ž1993., Kodama Ž1995. and Gerybadze et al. Ž1997, Chap. 7..
 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
Fig. 6. National innovation policy in response to dominant types of innovation.
returns. Many countries in Europe or Asia, particu-
larly smaller countries, are better advised to pursue
innovation strategies of type B: while still strong for
some specialized areas of science and technology,
they need to focus on very few niches. In these
highly-specific areas of expertise, dynamic national
firms with strong foreign marketing and innovation
activities can develop dedicated, home-country-based
competence centers. If appropriately chosen and de-
veloped, such dedicated capabilities can even attract
R & D of foreign multinationals.
Traditional, research- and supply-based innova-
tion policies, are somewhat restrained if the center of
value-creation is more downstream. If the effective
coupling of lead marketing and innovation is the
‘name of the game’ Žsee the right hand side in Fig.
6., governments are better advised to develop and
support national lead market capabilities. A few
large, highly-developed countries Žthe US, Japan, the
larger European nations. can effectively develop
strategy C-type innovation policies, and may then
271
position themselves as a prime center of learning for
national as well as for foreign firms.
Strategy D Žlower right box in Fig. 6. is more
appropriate for highly developed smaller countries
Že.g., Scandinavian countries, Netherlands, Switzer-
land, and some Asian countries.. They can develop
niche strategies for particular lead markets in se-
lected fields. Apart from such niche strategies, inno-
vation policy of type D would emphasize intelligent
user strategies, learning from abroad and reverse
knowledge and capital transfers from foreign lead
markets.
6.3. Implications for further research
Finally, we would like to suggest more theoretical
as well as empirical research on the globalization
process of R & D and innovation. Additional research
should address the following topics.
272 A. Gerybadze, G. Reger r Research Policy 28 (1999) 251–274
1. Are we correct in suggesting a discernible new
phase of R & D and innovation management in
multinational corporations? What are the predom-
inant patterns and the driving forces during the
second half of the 1990s. What is the influence of
stronger consolidation and tighter budgetary as
well as managerial restraints, on the management
and organization of international R & D.
2. More research should address the ownership and
control issues for knowledge and for the most
valuable intellectual resources within multina-
tional firms. Where and why do firms concentrate
ownership and control of the most valuable intel-
lectual resources? How does this concentration of
intellectual property affect corporate responsive-
ness, i.e., the ability of a firm to control the line
of opportunity Žfor future business., as opposed to
the mere exploitation of the line of authority Žfor
today’s business.?
3. More research would be needed to substantiate
our resource-based framework for analyzing inter-
national management and location decisions
within multinational firms. Is this model useful
for guiding managerial decision-making, and is
the proposed algorithm compatible with empirical
findings? How are firms in different industries
and from different countries using this or related
frameworks?
4. We should emphasize more solid empirical re-
search and validation, particularly more cumula-
tive, empirically grounded research, and a further
refinement of suitable methods. More research at
the level of SBU or the competence center, and at
the project level within transnational corporations
is needed; too many empirical investigations are
still characterized by corporate-level generaliza-
tions Že.g., generalizations such as ‘transnational
innovation at IBM’ as opposed to ‘transnational
innovation within IBM’s microprocessor busi-
ness’..
5. Finally, we would propose more research on suc-
cessful forms of managing centers-of-competence
or centers-of-excellence within multinational
firms. Where and when do these firms establish
lead centers with world product responsibilities
resp. global technology responsibilities at loca-
tions outside the home country? Under which
conditions are these foreign centers-of-com-
petence really effective in implementing major
innovations and large, important business units?
Our on-going research activities at the Center for
International Management and Innovation and at the
Fraunhofer Institute for Systems and Innovation Re-
search will address these issues further, based on
empirically grounded studies. This requires effective
international networking, and an open exchange of
research findings among scholars working on related
topics. Therefore, we are grateful for any idea or
suggestion, and we would highly appreciate the ex-
change of research results.
Acknowledgements
This contribution is based on a 3-year research
project on R & D and innovation management in 21
large, multinational firms. This project was carried
out jointly between the Fraunhofer Institute ISI in
Karlsruhe and the Center for International Manage-
ment and Innovation in Stuttgart-Hohenheim. The
first phase was sponsored by the Federal Ministry of
Education, Science, Research and Technology in
Germany. We are currently extending this research
program to cover a larger sample of corporations.
The authors are indebted to the three anonymous
referees for their helpful comments on the earlier
version of this paper.
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