Barriers and Enablers when Transferring R&D Activities from West to China

Assistant Professor Joachim Timlon

Baltic Business School (BBS),

University of Kalmar, S-391 82 Kalmar, Sweden

Niklas Åkerman (Ph.D. student)

Baltic Business School (BBS)

Abstract

Offering a potential for competitive advantage, China has become the most attractive location to which MNCs transfer R&D activities. In research literature transferring barriers as well as enablers are recognized. It is argued that the capacity to absorb and exploit new knowledge from different environments is a key enabler. Emphasis has been placed on organizational learning as well as the specific context of the transfer. However, too little attention has been devoted to how the absorptive capacity is realized and the role of individual’s cognitive structures for organizational learning. The aim of this paper is to explore how learning capacities are developed and exploited in dyadic intra-organizational relationships to overcome transferring barriers of R&D activities from West to China. To accomplish the purpose we use a case study methodology where we describe and analyze the R&D transfer to China at the Danish pharmaceutical company Novo Nordisk. The analysis reveals that a mind-set that favours authoritarian relationship between managers and researchers, a ‘face culture’ and a narrow description of job tasks has negative influence on transferring R&D activities. The analysis also reveals that the use of expatriates as carriers of knowledge building trust through social networking, stepwise increasing the difficulty of research tasks, the creation of a safe learning climate, the use of appreciative feedback for improved communication and the collocation with local authorities and science parks positively influence the transfer process.


INTRODUCTION

Globalization and the increasing demand on technological development cause many MNCs in rapidly changing industries that are dependent on the technological development to seek new technologies and secure more market driven R&D. Increasingly, R&D is becoming more internationalized. For instance, in the pharmaceutical industry almost 40% of R&D is undertaken in other countries than the MNC’s home country (UNCTAD, 2005). In relation to other organizational functions it is the last activity to be internationalized (A. Y. Lewin and Peeters, 2006).

There has been a rapid increase of foreign multinational activities and investments in China during the past decade (Hu and Jefferson, 2008; Li et al., 2007; Miesing et al., 2007; Walsh and Zhu, 2007; Xie and White, 2006; Zhu and Li, 2007). Furthermore, the value added in Chinese industry has increased. During the period 2000-2005 the value added in Chinese industry increased by almost 200% (www.most.gov.cn, 2007). In 2003, the value adding activities essentially revolved around production activities, such as for mass production, whereas in 2006 it also included R&D activities such as design, prototyping and pilot production (Dedrik and Kraemer, 2006; von Zedtwitz, 2004).

China has become the most attractive location to which MNCs transfer much of their R&D activities. According to a survey made by UNCTAD in 2005, about 60% of the asked stated that China is the highest ranked country of interest for R&D locations during 2005-2009. By the end of 2005 there were 750 foreign company owned R&D units present in China of which more than 400 were established after 2004 (jp.fujitsu.com, 2007). Substantial R&D investments have already been made in China and more will be made in the future. Estimations based on the 29 most R&D spending MNCs indicate future R&D investments in the coming years of about 2 billion US dollars (see table 1 in appendix 1).

The major driver for transferring R&D activities to China is to accomplish competitive advantages. However, how to accomplish the competitive advantages are changing. Global integration and local adaptation still is a strategic dilemma for MNCs (Bartlett and Goshal, 1998) which is highly relevant for the internationalization of R&D activities. Traditionally it is argued that competitive advantages are accomplished based on the ability to globally integrate R&D activities and transfer knowledge to geographically dispersed units. However, the source of competitive advantage seems to change from exploiting what is already known and captured in companies’ product portfolios to exploring new knowledge for new products based on the specific market conditions in China (Xie and White, 2006). Altenburg et al. (2006) argue that major reasons for the increasing interest to transfer R&D activities to China are the importance to keep R&D in close proximity to high-potential lead markets. Farris (2007) argues that innovations are not only created abroad and transferred to China, but there is an increase in innovations originating from China that are transferred between Chinese businesses. This is reflected in the number of patents filed by MNCs in China, which has increased at a rate of 22% annually since the amendment in the Patent Law was made in 1992 (Hu and Jefferson, 2008). von Zedtwitz and Gassman (2002) highlight the proximity to other corporate activities and local customers together with tapping into international sources of technology and expertise. Gassman and Han (2004) point to the importance of input-oriented factors, such as getting access to personnel, knowledge and innovation, and performance-oriented factors, such as market-specific development and business-ecological factors, such as governmental policies, persistent growth and peer pressure. Gammeltoft (2005) makes a distinction between six types of motivations for R&D internationalization where market associated motivations: (i) market-driven, i.e. expanding the use of a company’s assets on several markets; (ii) product-driven, relating to supporting local manufacturing; (iii) technology-driven, which is about tapping into foreign knowledge and technology; (iv) innovation-driven to generate new assets; (v) cost-driven, primarily related to the exploitation of differences in factor costs; (vi) policy-drivers concerning requirements or incentives in national regulatory systems. As MNCs perform both strategic and tactic R&D in their Chinese units, China is no longer ‘a simple case just for show’ (Sun et al., 2006). It still seems that R&D activities in China has a huge potential for providing MNCs competitive advantage but instead of simply transferring knowledge developed in West, the issue has become more challenging and more complex.

PROBLEMATIZATION

The challenges to transfer knowledge in organizations are widely recognized (Gassmann and Han, 2004; Kostova, 1999; Lyles and Salk, 1996; Szulanski, 1996, 2000; von Zedtwitz and Gassmann, 2002). Szulanski (1996) uses the notion of internal stickiness to explore the difficulty of transferring practices within organizations. The term is based on the assumption that the (ease or) difficulty of transferring knowledge is reflected in the cost of transfer that constrains the transfer. However, Szulanski argues that cost is a poor descriptor of difficulty because to decide which portion of the cost of the transfer that actually reflects a difficulty requires a base case, which is likely to be distorted if it is based on past experience in transferring knowledge; and cost might fail to discriminate between problems that are equally costly but qualitatively very different. For instance, problems that involve participants whose attention is not normally required are likely to be remembered as being relatively more difficult to resolve, at least by those who could not cope with them without assistance. Thus, the perceived difficulty of a problem for the individual is what determines his or her reaction to it why problems that participants cannot handle on a routine basis are likely to evoke the greatest overall perception of difficulty and the transfers that involve the most non-routine problems will be perceived as the most difficult.

A pertinent characteristic of knowledge that hampers it from being transferred is causal ambiguity. When the precise reasons for success or failure in replicating a capability in a new setting cannot be determined even ex post, causal ambiguity is present. A major reason for the existence of causal ambiguity is the tacit dimension of knowledge embodied in individual human skills as well as a property of collectively held knowledge. When causal ambiguity exists the outcome is irreducible uncertainty preventing knowledge transfer from being measured. Causal ambiguity also has consequences for a company’s ability to establish and sustain competitive advantage as it may result in uncertain imitability, i.e. ambiguity about the knowledge base on which a competitive advantage is based make any attempt to imitate that strategy subject to uncertainty (Grant, 2008, p. 213). Furthermore, Szulanski (1996) refer to two primary characteristics of the knowledge source that is likely to influence the transfer process; the potential lack of motivation at the sender to share knowledge based on a fear of losing benefits or unwillingness to invest required resources and the risk that the source of knowledge is not seen as reliable resulting in a higher degree of questioning of its knowledge. On the other hand, recipients can be reluctance to participate in knowledge transfer due to a non-acceptance to outside knowledge. Thus, there may be lacking capacity to absorb new knowledge as well as lacking ability to retain the knowledge received.

Szulanski, therefore, suggests that in order to overcome the internal stickiness of knowledge transfer, it might be fruitful “to devote scarce resources and managerial attention to develop the learning capacities of organizational units, foster close relationships between organizational units, and systematically understand and communicate practices” (1996, p. 37). The suggestion is to build on the notion of “absorptive capacity” as initially coined by Cohen and Levinthal (1989) and defined as a firm’s ability to identify, assimilate, and exploit knowledge from the environment where R&D plays a vital role in the acquisition of new knowledge from different external environments. The findings seem to consolidate earlier findings about the role of R&D, for instance, in organizational learning literature (e.g. Kim, 1993). Cohen and Levinthal (1990) extended their research to individual’s cognitive structures and problem solving with the aim of developing an organizational learning processes underlying absorptive capacity, which was re-defined as “the ability to recognize the value of new information, assimilate it, and apply it to commercial ends” (p. 128). In other words, learning capability to assimilate knowledge and problem-solving skills to create new knowledge were requirements for absorptive capacity. In the context of R&D absorptive capacity would then be a set of closely related abilities to evaluate the technological and commercial potential in a particular domain, assimilate it and apply it to commercial ends, thereby enabling a firm to exploit new extramural knowledge as well as to predict more accurately the nature of future technology advances (Cohen and Levinthal, 1994). Consequently they argued that absorptive capacity would enable firms to more accurately forecast technological trends and to take advantage of emerging opportunities before its rivals could recognize them.

More recently, the notion of absorptive capacity has been re-examined and re-defined, giving the underlying resources and organizational processes as well as the specific context in which it occurs more emphasis. Zahra and George (2002) argue that absorptive capacity is a set of knowledge-based capabilities embedded in routines and processes for acquiring, assimilating, transforming and exploiting knowledge. Furthermore, they claim that absorptive capacity reflects a dynamic capability as it involves the ability to reconfigure the firm’s resource base in the face of changing market conditions, more specifically two subsets of potential absorptive capacity – capabilities to acquire and assimilate knowledge, and realized absorptive capacity – capabilities to transform and exploit knowledge. Todorova and Durisin (2007) argue that feedback loops capture the dynamic aspect of absorptive capacity. Focusing the external dimension of the diversity of knowledge sources, Phene, Fladmoe-Lindquist and March (2006) argue that a firm’s ability to exploit valuable knowledge from different contexts depends not only on its R&D capabilities but also on the external context in which the knowledge is located; knowledge from different geographical and technological contexts may hamper the firm’s absorptive capacity. Lane, Koka and Pathak (2006) argue that externally held knowledge is utilized through three sequential processes: (1) recognizing and understanding potentially valuable new knowledge outside the firm through exploratory learning, (2) assimilating valuable new knowledge through transformative learning, and (3) using the assimilated knowledge to create new knowledge and commercial outputs through explorative learning.

However, although it is recognized in the literature that absorptive capacity has a technological and economical potential in different domains and contexts that can be realized it says relatively little about how the realization of absorptive capacity occurs and manifests in an organization. Realization of absorptive capacity seems to occur through organizational learning processes, in which recognition and understanding of valued information as well as feedback processes play an important role. However, recognition, understanding and providing feedback are unique human characteristics. With few exceptions (e.g. Argote and Ingram, 2000; Minbaeva et al., 2003) the literature lacks an integrative approach on knowledge transfer that balances a human and an organizational perspective. Although organizational knowledge is founded on individual knowledge the descriptive organizational learning processes place too little attention on how learning occurs on and is mediated to different levels giving too little attention to individuals’ cognitive structures as done by Cohen and Levinthal (1990). Furthermore, although it is recognized that absorptive capacity could be seen as a dyad-level construct the principles of learning in dyadic relationships is still at a rudimentary state, as denoted by other authors (e.g. Minbaeva et al., 2003). In other words, the literature says relatively little about how to foster close relationships between organizational units in order to promote organisational learning. Thus, there is a need to develop a better understanding of the organizational learning processes needed to institutionalize knowledge transferred between two intra-corporate units as well as developing an understanding of the prerequisites of a dyadic relationship.

The overall aim of this paper is to add to the existing literature on knowledge transfer essentially regarding the dynamic aspect of absorptive capacity. More specifically, our aim is to explore how learning capacities are developed and exploited in dyadic relationships to overcome internal stickiness, leading to successful knowledge transfer that realizes economic and technological potentials. We will seek to accomplish this by describing how R&D activities in Western parent MNCs are transferred to recipient Chinese subsidiary.

The analysis is divided into the content and process of the transfer. Regarding the content of the transfer, our point of departure is the resource-based view and the notion of organizational capability that captures the embedded nature of knowledge in terms of principles for performing certain kinds of activities, such as R&D activities. Successful knowledge transfer manifests through the institutionalization of organizational capabilities (Kostova, 1999). Since the principles are accompanied by cognitive elements by which they are described and made sense of we argue in favour of using the term cognitive structure, rather than knowledge as it is a more encompassing concept for describing the content of the transfer. We therefore argue that successful knowledge transfer also manifest in institutionalization of the cognitive structures accompanying a certain organizational capability. Furthermore, aligned with the argument of Minbaeva et al. (2003) that not only ability but also motivation need to be present in order to optimally facilitate the absorption of knowledge from other parts of the MNC we examine the drivers of motivation on organizational level. We recognize three different kinds of potential benefits and argue that the accomplishment of mutual value that makes both parties better off is the key driver of knowledge transfer. In other words, institutionalization is linked with the motivation to participate in knowledge transfer. For the parties to accomplish the benefits by developing new organizational capabilities they need to collaborate and learn from each other.