The New Geography of Innovation – Asia’s role in global innovation networks

8/7/2019 The New Geography of Innovation Asias role in global innovation networks

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The New Geography ofInnovation

Asias role in global innovationnetworks

Dieter Ernst,

East-West Center, [email protected]
mailto:[email protected]:[email protected]


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Argument

Global innovation networks transform thegeography of innovation.

US firms are key drivers Much of the action now is in Asia (driven

by the resurgence of China and India).

A neglected dimension of Pacific Rimintegration

dearth of data weak foundation for policyadvice


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Questions

1. Innovation processes in transition. What isnew?

2. How important is Asias role? And what forcesare driving Asias network integration?

3. Policy Challenges Will network integration foster decoupling?

Will it reduce entrenched barriers toinnovation in Asia?

Is there scope for sharing the benefits within

Asia and across the Pacific?


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1. Innovation Processes in Transition

(What is new?) Observation (despite poor data):

globally distributed innovation networkscomplement in-house R&D

multiple new locations for innovation areemerging (China, IndiaKorea, Singapore,

Israel, Hungary..)

But: established centers retain dominance

new conflicts over sharing the benefits arise

within Asia and across the Pacific


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Asias Push to Innovate

In 2007, Asia spent US-$(PPP) 436.2

billion on R&D (39% of world total), placingit ahead of the US ($353 billion and ashare of 31%).

With US-$(PPP) 175 billion, China is nowthe second largest R&D investor, after the

US (with $ 353 billion), but ahead of Japan($143.5 billion).


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Asias % share in global R&D spending

2006 2007e 2008p

US 32.7 31.4 30.1Asia 36.9 38.8 40.8

China 13.5 15.6 17.9Japan 13.0 12.8 12.4

India 3.7 3.7 3.7EU all 25.2 24.6 23.9

Battelle 2007


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Persistent U.S.-centric concentration

of the sources of innovation all 15 leading companies with the best record on

patent citations are based in the United States (9

in the IT industry)

The 700 largest R&D spenders (mostly large

U.S. firms) account for 50% of the worlds totalR&D expenditures and >2/3 of the worldsbusiness R&D

> 80 percent of the 700 largest R&D spenderscome from only five countries (United Statesdominates, followed by Japan, Germany, United

Kingdom, France) Dieter Ernst


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Explanation (in progress):

Corporate strategies respond toglobalizing markets (products,

finance,technology, knowledge workers)pressures to improve R&D productivity

Asian upgrading thru innovationstrategies

Enablers (liberalization, ICT, globalization

of higher education) multiple asymmetries (private vs public;

advanced vs emerging economies; largevs small countries)


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Global innovation networks

I. Global companies offshore stages of

innovation to Asian affiliates

intra-firmglobal innovation networks

II. Global firms outsource stages of

innovation to specialized Asiansuppliers

inter-firmnetworksIII. Asian firms construct their own (mostly

intra-firm) networks Dieter Ernst


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2006 Engineer Survey

50% of US respondents (up from 46% in 2005)

report that their company has sent electronics

design work offshore. Job security and unemployment are the

dominant concern of US-based engineers (69%

of respondents), together with offshore

outsourcing (67%).

34 % of Indian respondents report that theiremployers are offshoring high-end hardware

design and software development.

The Electronic Engineering Times


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Intels Global Innovation Network

Location Description

US

(11 labs)

core technology development in Santa Clara,

Folsom and AustinAsia

(7 labs,

moreplanned)

Bangalore (2700 = largest lab outside US),leading-edge processor development

Penang (500), design implementationShanghai (100++) Linux based solutions fortelecom; new applications for emerging markets

Beijing (50++), platform and architecture labIsrael,Russia

Haifa (1400, since 1974), processor research

Nizhny Novgorod (200++): software

Dieter Ernst


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ODM Inter-Firm Network -Notebooks

Tier 1: Flagship

Tier 2: ODM

Tier 3 - Suppliers

Tier 4(and below) - Suppliers

CoreComponentSuppliers

(HDD, Displays,CPU)

CoreComponentSuppliers

(HDD, Displays,CPU)

Dieter Ernst


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New Entrants: Huawei

Kista/Stockholm,Sweden

base station architecture and systemdesign; analog-mixed signal design(RF); algorithms

Moscow, Russia algorithms; RF design

Bangalore, India Development of embedded SW andplatforms

Plano/Texas(Dallas telecomcorridor)

total solutions for CDMA; G3 UMTS;CDMA Mobile Intelligent Networks;mobile data service; optical; VoIP

Dieter Ernst


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2. How important is Asia? And what

forces are driving Asias networkintegration?


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2005 Survey of the worlds largest R&D

spenders China is the 3rd most important offshore

R&D location (after the US and the UK)

India is 6th and Singapore 9th

China is the most attractive location forfuture foreign R&D, ahead of the US andIndia

Leading global corporations also intend toexpand their offshore outsourcing of R&D

to Asian firmsUNCTAD World Investment Report 2005


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EIU 2006 Survey

India and China are the 2nd and 3rd

most important offshore R&D location(after the US and ahead of the UK)

Leading global corporations considerIndia, the US and China to be the

best overseas locations for futureR&D


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Systemic nature of driving forces

return-on-investment must exceed risk-adjustedmarket average reduce development cost

demand: proximity to Asias markets and global

factories exploit Asian markets for knowledge workers

(from labor cost arbitrage to external sourcing of

complementary innovative capabilities) global markets for technology facilitate

innovation offshoring

Asian policies: tax and financial incentives;combine liberalization with proactive and flexibleindustrial and innovation policies

Dieter Ernst Interviews with 120 companies in the US, Asia and Europe


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China Market

largest market for telecom equipment (wired &wireless) (test bed for 3G)

ditto for semiconductors and handsets (launch

market) 2nd largest market for cars

Lead market for digital CE (#2)

Leading export market for US, Japan, Taiwanand Korea

bottom- of-the-pyramid markets for less over-engineered products and services withsubstantially lower costs of acquisition andoperation

Dieter Ernst


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Annual Cost of Employing a Chip

Design Engineer* (US-$), 2002Location Annual Cost

Silicon Valley 300,000

Canada 150,000

Ireland 75,000

Taiwan


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Wadhwa 2007


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China growth of science & engineeringPhDs 70% of the 23,500 PhD degrees in 2004 are

in S&E between 1995 and 2003, first year entrants

in science and engineering PhD programs inChina increased six-fold, from 8,139 to48,740

China w i l l p roduc e m ore S& Edoc t orat es t han t he US by 2010NBER - Freeman, 2005


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3. Implications and Policy Challenges

Will network integration foster

decoupling? Will it reduce entrenched barriers to

innovation in Asia? Is there scope for sharing the benefits

within Asia and across the Pacific?


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Will network integration foster decoupling?

Trade : Will reliance on triangular trade giveway to an Asianization of trade and investment,centered on China?

Ta lent poo l : Can Asian countries replicatethe US model of attracting top talent from theglobal market for knowledge workers?

Innovat ion sys t em : Can Asian universitiesbecome trend-setters in reforming innovationsystems?

Innovat ive c apab i l i t ies : Can Asian firmsenter the global innovation race as sources ofnew technology and global standards?

Dieter Ernst


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Strategic Dilemma for Asias emerging

knowledge economies Innovative capabilities continue to lag

substantially behind industry leaders

Reducing the gap will take time.

Is network integration a poisoned chalice?

Or is it a catalyst for reducing entrenched

innovation barriers?

Dieter Ernst


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Network integration A Poisoned Chalice?

global firms compete for Asias limited talent

pool (brain drain)

weak linkages with local universities

limited knowledge sharing

reverse knowledge transfer (institutional

arbitrage)

bridgeheads for platform leadership strategies

IP barriers


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Network integration a catalyst for reducinginnovation barriers?

pressure to upgrade technological andmanagement capabilities and skill levels of

workers exposure to leading-edge technology and (tacit)

knowledge about technology and management

catalyst for reforming national innovationsystems (?)

links with markets and financial institutions access to intellectual tools and sources ofknowledge


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Avoid the commodity price trap

Just competing as lower-cost R&D

contractors may leave them in alow-margin commodity price trap.

Asian firms need to create unique

products and solutions, addressing

important user needs that incumbent

market leaders have neglected.


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Innovation Strategies Matrix

II: mission-based

complex technologysystems (space,military, energy,

environment, climate)

IV: global market

leadership technology leadership

technology

diversification

I: bottom-of-the-

pyramid innovation(essentials for lower-tier urban markets and

rural poor)

III: Global R&D factory

(contract support andR&D services)

R&D

intensity

high

low

Global integrationlow high

Dieter Ernst


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Shar ing t he benef i t s?

1. Chinas resurgenc e Japan; Taiwan; Korea; ASEAN2. Ind ia s resurgenc e India-China; South Asia; East Asia

3. Redef in ing t r iangu larre la t ionsh ips US-Japan-China US-China-India


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US-Asia division of labor in innovation -Scenarios

Hierarch ica l : selective and tightlycontrolled offshoring of lower-end innovationtasks and capabilities

Complementary : U.S.-led global innovationnetworks combine system integrationcapabilities in the United States with lower-

cost offshore development of intellectualproperty

Unequa l in t e rdependenc e : architecturalinnovations and new standards aredeveloped both in the US and in Asia, but theUS will continue to shape the terms of

interdependence Dieter Ernst


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EWC Innovation Research

1. Innovation System Dynamics in the Global

Knowledge Economy - A Comparative

Analysis of Leading Asian ExportEconomies

2. Globalization of Knowledge Work - Why ischip design moving to Asia ?

3. Governing the Global Knowledge Economy:

Mind the Gap! (with David M. Hart, George

Mason University)


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EWC innovation publications(1)

Ernst, D., 2007, Beyond the Global Factory Model:Innovative Capabilities for Upgrading Chinas IT Industry,International Journal of Technology and Globalisation(MIT)

-, 2007, Can Chinese IT Firms Build InnovativeCapabilities Within Global Production and R&DNetworks?, in: China's Quest for IndependentInnovation(M. Gong Hancock, H. S. Rowen, and W. F.

Miller, editors), Shorenstein Asia Pacific ResearchCenter and Brookings Institution Press

-, 2007, Innovation Offshoring - Root Causes of AsiasRise and Policy Implications, in :Multinational Corporations and the EmergingNetwork Economy in the Pacific Rim(Palacios, Juan J.,ed.), London: Routledge. Co-published with the Pacific

Trade and Development Conference (PAFTAD)


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EWC innovation publications (2)

Ernst, D., 2006, INNOVATION OFFSHORING: Asias Emerging Role in

Global Innovation Networks, East-West Center Special Report, incooperation with the U.S. Asia-Pacific Council, Julyhttp://www.eastwestcenter.org/fileadmin/stored/pdfs/SR010.pdf

- , 2005, Complexity and Internationalisation of Innovation: Why is Chip

Design Moving to Asia?, in International Journal of InnovationManagement, special issue in honour of Keith Pavitt, Vol. 9,1: 47-73

-., 2005, Limits to Modularity - Reflections on Recent Developments in ChipDesign, Industry and Innovation, Vol. 12, No.3: 303-335

-., 2005, The New Mobility of Knowledge: Digital Information Systems andGlobal Flagship Networks, in: R. Latham and S. Sassen (eds), DigitalFormations. IT and New Architectures in the Global Realm, published forthe U.S. Social Science Research Council, Princeton University Press,

Princeton and Oxford -., 2005, Pathways to innovation in Asias leading electronics-exporting

countries - a framework for exploring drivers and policy implications,International Journal of Technology Management, special issue onCompetitive Strategies of Asian High-Tech Firms"; Vol. 29, 1/ 2: 6-20
http://www.eastwestcenter.org/fileadmin/stored/pdfs/SR010.pdfhttp://www.eastwestcenter.org/stored/misc/Complexity.pdfhttp://www.eastwestcenter.org/stored/misc/Complexity.pdfhttp://eastwestcenter.org/stored/misc/Limits_Modularity.pdfhttp://eastwestcenter.org/stored/misc/Limits_Modularity.pdfhttp://www.eastwestcenter.org/stored/misc/New_Mobility.pdfhttp://www.eastwestcenter.org/stored/misc/New_Mobility.pdfhttp://www.eastwestcenter.org/stored/misc/Pathways_to_Innovation.pdfhttp://www.eastwestcenter.org/stored/misc/Pathways_to_Innovation.pdfhttp://www.eastwestcenter.org/stored/misc/Pathways_to_Innovation.pdfhttp://www.eastwestcenter.org/stored/misc/Pathways_to_Innovation.pdfhttp://www.eastwestcenter.org/stored/misc/New_Mobility.pdfhttp://www.eastwestcenter.org/stored/misc/New_Mobility.pdfhttp://eastwestcenter.org/stored/misc/Limits_Modularity.pdfhttp://eastwestcenter.org/stored/misc/Limits_Modularity.pdfhttp://www.eastwestcenter.org/stored/misc/Complexity.pdfhttp://www.eastwestcenter.org/stored/misc/Complexity.pdfhttp://www.eastwestcenter.org/fileadmin/stored/pdfs/SR010.pdf

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