Chaisung Lim College of Business

Slide 1: Chaisung Lim College of Business, Konkuk University, Seoul, KR

Slide 2:Changing distribution of R&D sites 186 companies from 19 countries 17 sectors with a combined R&D spend in 2004 More than us 76 billion $. Booze Allen Hamilton and Insead Changing distribution of R&D sites 186 companies from 19 countries 17 sectors with a combined R&D spend in 2004 More than us 76 billion $. Booze Allen Hamilton and Insead

Slide 3:In spite of globalisation of production and marketing activities of MNCs, R&D activities are concentrated in home countries (Patel and Pavitt 1991) Science and technology as the source of competitiveness in home countries Globalisation of R&D activities by early 1990s: concentrated in Triads (Elder, Meyer-Krahmer and Guido 2002) Recent expansion of R&D centers in East Asia? raises questions on previous arguments MNC R&D activities are expanding beyond Triads to Asia MNC R&D abroad is expanding (Chen[???] 2006; Gassmann and Zedtwitz 1999; Torbjorn Fredriksson 2006; UNCTAD 2005)

Slide 4:1. Globalisation of R&D activities Possible reasons for expansion of FDI R&D centers in East Asia Evolved global production network (Ernst 2002) From production to design and R&D Expansion of market due to high economic growth in East Asia Asian students returning from the US: enhanced R&D capability Collaboration among partners, remotely, through internet (Chen 2004) More opportunities for division of labor in R&D or knowledge-intensive engineering between Western countries and East Asian countries Competition among global firms for standards in ICT Competition of global partnership for specific standards by major ICT firms Mobile phone or X box example: East Asian country firms join in partnership with Western mobile phone standard leading companies by engaging in production and R&D of mobile phones of specific standards

Slide 5:2. Factors influencing global positioning of R&D The factors influencing positioning of R&D centers in the world are complex (Reddy 2000) MNC positioning of R&D activities across world depends on country environments (Archibugi and Michie, 1995; Archibugi 1999; Patel and Pavitt 1998) Influential relevant market factors are: Accessiblity to market and size (Beise and Belitz 1999; Dougherty et al. 2003; Kummerle 1999; Gao 2000), Necessity to interact with market, localisation of products to local situation (Hiroda 1993; Florida 1996; Dobson 1999; Cornet and Rensman 2001; Hakanson 1992; Narula 2000; Kumar 2001)

Slide 6:Human resources for scientific R&D and technical expertise in a specific area In the case of science-intensive R&D activities, human resources in universities and research institutes are important for attracting MNCs FDI R&D for access to knowledge through participation in communities of scientists (Chiesa 1995; Dambrine 1997; Voelker and Stead 1999; De Meyer and Mizushima 1989; Florida 1996; Kummar 2001) The allocation of R&D to country with expertise in specific technological field (Beise and Heike 1999) 2. Factors influencing global positioning of R&D

Slide 7: Manufacturing Production experience and capability (Fors and Zejan 1996; Gao 2001) Proximity to supplier and manufacturing capacity (De Meyer and Mizushima 1989; Beise and Belitz 1999) Existence of competitive industry Positioning of R&D activities in a specific field in the country�s area of specialization: Cantwell and Harding(1997), Patel and Vega(1999) Positioning R&D activities in a country where level of R&D is much more advanced (Cantwell and Janne 1999) For utilizing externalities of intensely populated firms in a specific cluster (Cantwell and Piscitello 2002; Carrincazeaux, Lung and Rallet 2000) 2. Factors influencing global positioning of R&D

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Slide 9:3. Expansion of FDI R&D activities in Korea over the last decade Expansion of the number of FDI R&D centers (with more than 10% equity share) number of new R&D centers (1998-2003) > number of R&D centers established before 1998. (Bok et al. 2006; Kim 2004) Factors that suggest potential expansion of R&D activities in Korea Human resources for manufacturing and product development (process engineering) in competitive export industries Returning students who studied abroad : Korean students occupy one of the highest rankings in their share among all the foreign students in the US (Chen 2006). Continuous market growth: �not-low� economic growth Technical expertise in ICT sector: a country specializing in ICT sector (one of the industries of high R&D globalisation) Factors that suggest negative increase in FDI R&D activities in Korea In spite of increase in number of FDI R&D centers, R&D activities may decline if FDI R&D centers emerge as a result of acquisition by foreign firms (UNCTAD 2005) Deglobalisation of MNC R&D activities (Patel and Pavitt 1991)

Slide 10:4. The last decade in Korea- a good case Radical policy shift and FDI rush after the financial crisis in 1997. Rapid expansion of number of foreign R&D centers Does increase in number of R&D centers reflect globalisation of R&D activities as �a world phenomenon�? Anything new in FDI R&D activities over the decade?

Slide 11:5. Radical policy shift after the financial crisis Background Korea before financial crisis: had solid rate of accumulating technological capability at time of financial crisis in 1997 After financial crisis: faltering a little, Korea continued accumulation of technological capability in the manufacturing sector

Slide 12:Very radical policy shift to attract FDI among NIEs: from passive (Japanese model) to aggressive Governmental policy shift: FDI as cushion against further financial crises Governmental policy swing to attract FDI the Foreign Investment Promotion Act of 1998 : reduction in regulation of FDI, tax exemptions and incentives for foreign investment free economic zones : 2003 Incheon, Busan and Gwangyang. Investor support center (later, Invest Korea) as a center for supporting FDI The opinion poll on foreign companies changed from the negative to positive The opinion poll on foreign companies changed from the negative to positive

Slide 13:Inflow of FDI investment and increase in number of foreign R&D centers Expansion of FDI Four-year (1998-2002) influx of foreign investment, $35 billion in actual inflows more than double amount received during previous 35 years � FDI for utilizing market opportunities and production capabilities

Slide 14:Inflow of FDI investment and increase in number of foreign R&D centers Expansion of FDI Four-year (1998-2002) influx of foreign investment, $35 billion in actual inflows more than double amount received during previous 35 years � FDI for utilizing market opportunities and production capabilities

Slide 15:Policy drive for R&D hub for North East Asia (2003) : to attract foreign R&D centers by providing incentives through various ministerial attempts Some company R&D centers as a result of governmental efforts including visits by top government officials: for example, Intel Examples of new policies cash grant to support personnel cost of FDI R&D centers (MOCIE) matching R&D fund for R&D in ICT sector KICOS (Korea Foundation for International Cooperation in Science and Technology) as an organisation to facilitate international cooperative research and attract foreign R&D centers (mainly public).

Slide 16: Foreign R&D centers as a result of governmental efforts

Slide 17:5.1 Policy characteristic Policy target: education and training, employment encouragement of R&D activities No target group: FDI group in general Main policy means: tax incentives, cash grants, R&D support Various ministries involved

Slide 18:5.2 Policy details Supply of land for FDI firms

Slide 19:5.2 Policy details

Slide 20:6. Current Status of Foreign R&D centers More than half foreign R&D centers set up after financial crisis 54% respondent firms with less than 10-year history: Bok et al.(2006) with 76 surveyed FDI R&D centers (with more than 10% equity share) are less than 10 years old (see also Slide 13 ) R&D activities for domestic market 65.8% manufacturing firms� R&D results (out of 76 R&D centers) are for domestic market (Bok et al 2006) No patent applications abroad : 78.0% of 150 FDI firms surveyed in 2004 (Chang et al 2006) No patent applications even in Korea : 33.3% of 150 FDI firms surveyed in 2004 (Chang et al 2006) mainly R&D for components (50.0%) and materials (31.6%) out of 76 R&D centers by Bok et al. (2006)

Slide 21:R&D activities by Koreans utilizing Korean manufacturing capability R&D activities of FDIs in Korea taken from report on 168 FDI firms (KOITA 2007) Utilization of manufacturing and development capability: development of products and technogy(75.0%), improvement of existing products(16.1%) 85.7 % own manufacturing factory

Slide 22:Reliant on Korean R&D staff Foreign R&D centers with foreign R&D staff 27.4%, average number of foreign R&D staffs 3.3 Major role of FDI R&D center : independent research 34.5%, research in collaboration with headquarters 38.7%, localisation of R&D results developed from headquarters (10.1%), technical support or partial role for R&D of headquarters (12.5%) R&D of FDIs for sales oriented, shorter R&D? R&D of Korean multinationals for applied research to pure research, longer research (Cho et al. 2003) Most active FDI R&D activities are in industry where Korea�s competitiveness is High the top 25 FDI firms (with more than 50% equity), in terms of patent applications (1990-2005), which account for 90.0% (27,558 out of 30,622) of total FDIs Mainly (21 out of 25 firms) from transportation equipment (automobiles) and electronics (Lim 2007)

Slide 28:7.2 FDI with decreasing R&D trends

Slide 29:7.2 FDI with decreasing R&D trends

Slide 30:8 Case : Toray Saehan Saehan, formerly part of Jeil Hapseom (Samsung Chaebol group) Saehan produces display film for LCD and PDP as a first-tier subcontractor to Samsung Electronics In 1999 Japanese company Toray acquires Saehan, creating Toray Saehan in order to have manufacturing basis in Korea. Saehan�s R&D institute was abolished because Toray Saehan was not supposed to have R&D function With continuous success of Samsung Electronics� LCD and PDP TV in world market, Toray Saehan was under pressure to react to constantly changing specifications with high quality from Samsung Electronics

Slide 31:8 Case : Toray Saehan Order sizes expanded and the size of production line in 2007 has increased to 6 times that of 1999. Demand for high quality with constantly changing specifications?need for local R&D for close speedy interaction between Samsung Electronics and Toray?demand became high? Toray did not have technological capability to meeet demand from Samsung Electronics?local R&D For example, demand to reduce number of display films to increase film brightness?demanded R&D for luminosity, population of film molecule, morphology (related to status of molecule�s movement) R&D institute was established by absorbing some of film manufacturing human resources (2002). With the successful performance of development activities, R&D activities expanded. R&D staff increased from 19 (2002) to 47 (2007) All Koreans

Slide 35:9. Case : GM DAT Daewoo automobile formed in 1983 as an acquisition from Sinjin Automobile by Daewoo Chaebol group. In 2002, became GM DAT as an result of acquisition by GM GM�s strategy : GM DAT specializing in small and medium car R&D center turned into FDI R&D center Export expansion due to continued success of previously developed small car model (Matiz and its derivative model) and newly developed car models (Tosca and Winstorm in 2005) high productivity and low cost : production line producing multiple car models in a single line and automated automobile component production system GM DAT became headquarters for development of the platform for small cars (2005) and platform for compact car (2006) GM Strategy: architecture for the world by spacialised org. or (subsidiary) of GM GM DAT develop its own models GM Strategy: GM at a region or a nation develops its own models on the basis of the architecture supplied for the world

Slide 37:Successful performance of export of GM DAT cars: majority of products exported Expanded R&D for architecture of small cars, car models and components.

Slide 38:10 Conclusions What happens after the policy shift in the financial crisis? The evidence does not show that Korea has grabbed opportunities provided by �globalization of R&D activities� (expansion of R&D activities of FDIs in Korea) In spite of FDI rush, the increasing rate of FDI R&D activities remains minimal the increasing rate <the increasing rate of domestic firms the majority is R&D for local market not for international market Very few companies involved in �new to the world� R&D activities Any new pattern over a decade? Emergence of FDI R&D centers which carry out �new to the world� R&D in specialized field with increased R&D trend Dynamic companies: The first-tier company in supply relationship with Korean MNC as world class manufacturer Cases of entry of green field investment in setting up R&D centers as a branch of R&D organisation�s headquarters after initiation of R&D hub policy: Siemens, Intel (withrawn later) Traditional model : Korean firm acquired by foreign firm carries out R&D for manufacturing either independently or through communication with headquarters R&D for domestic market

Slide 39:5 Conclusions Further improvements in policy approach needed Systemic environments for foreign R&D center R&D activities in the strategic area of Government�s main policy

Slide 40:10 Conclusions R&D activities of FDIs and the characteristics of NSI. Findings support the view that multinationals tend to concentrate major R&D activities in home country (Pavitt and Patel 1991; Patel 1996) R&D abroad confined to peripheral activities or activities for utilizing local capabilities Shorter R&D decline after foreigners� acquisition Multinationals behave in accordance with characteristics of the NSI in which they are investing (Archibugi and Michie, 1995)

Slide 41:10 Conclusions Human resources and market as main factor attracting foreign R&D centers? Korean FDI R&D centers for utilizing manufacturing human resources for local market ? Not active R&D activities in Korea What can be expected for other countries� foreign R&D centers?

Slide 42:10 Conclusions Are the policy means appropriate means? Cost related governmental policy means : tax incentives, cash grants� Not influential factor for positioning R&D centers Discrimination against domestic firms� R&D centers Mismatch between governmental policy means and the factor influencing R&D positioning: government emphasizes provision of incentives, FDI needs human resources Conflicts between policy objective and factor influencing positioning of foreign R&D centers Government wants spillovers with little cost ? FDI does not want spillover without benefits