1.1.1.1. R&D responsible for its very unique place in company strategy

The place of R&D in company strategy depends, first, on the business sector, the nature of the markets and the company’s competitive positioning and, second, on its degree of globalization. Therefore, the high-technology companies belonging to the “innovation-driven” sectors (as well as pharmacy, aeronautics, energy, electronic, etc.) [GIR 96] make huge investments in R&D, whereas the businesses in mass distribution invest little or no funds in R&D. The nature of the markets also affects the position of R&D in company strategy. For consumer products manufacturers, the R&D strategy will consist of manufacturing better and cheaper than the competitors, by offering either innovative products that better meet consumer expectations or products with new and highly attractive features (e.g. the new digital applications via smartphones or social networks) or by adding a service to the product (such as integrated remote maintenance with the purchase of a printer). For these companies, R&D activity has long been closely linked to decision-making. When dealing with the B2B sector, that is, those geared toward the sale of products to industry, a large part of R&D is performed close to industrial entities, where the industry is located [LEN 02], in order to respond to the needs of cost reduction and to support innovation efforts. This is done by providing “solutions”, on the one hand, and by creating innovative concepts capable of introducing breakthroughs in industrial performance on the other. This is the case, for example, with R&D centers of the cement industry being located near production plants.

The strategy of localizing a company’s R&D activity close to its customers is illustrated by the example of Usinor, now known as ArcelorMittal.

The place of R&D in company strategy also depends on the globalization of the business activity. In order to compete, some companies had no other choice but to globalize. The analysis of globalization provided by the economist Pierre-Noel Giraud [GIR 12] serves as essential reading that helps us understand its effects on the breakdown of the value chain and, in particular, on R&D’s place in globalized enterprises. The Giraud model is based on the division of the world economy into territories separated by borders. It is based on a distinction between “nomadic firms” and “sedentary firms” and on a differentiation between the jobs of a territory that produce goods and services subject to international competition and those producing goods and services protected from this international competition.

Within each territory, protected by borders, people, capital and goods circulate freely, but not always between territories. This concerns human resources in particular. The nomad firms produce and circulate economic objects between territories. They make territories compete in their comparative advantages to make profit, and their decisions on FDI (foreign direct investment) destabilize or stimulate the territory’s economic activities. This is particularly the case with R&D investments. The sedentary enterprises only produce or trade at the national level. Employees competing for the nomadic firms will also be described as nomads. They only compete on a territory if they are competitive, otherwise they are transferred elsewhere. Sedentary or protected employees only compete with one another for the production of goods and services for local use. Thus, the global firm “locates sedentary activities where they must be”, and the nomadic activities “in the territories that offer the best conditions”: low labor costs with high labor intensity and availability of highly qualified scientific staff for research laboratories.

By repeating Giraud’s paradigm, it is clear that R&D’s position is of crucial importance for companies from overseas or nomads, that is, those exposed to global competition, that are on the front line of innovation and product renewal; it is less crucial for “domestic” companies or those on the protected market like mass distribution.

1.2.3.1. The phase of low-intensity globalization of R&D

In the competition of industrial enterprises, the traditional strengths of the Western world existed for decades not only in the technological monopoly of major manufacturing processes and procedures but also in the materials and innovative products. These assets that have led companies to focus on products with high added value have demanded a consistent innovation strategy in order to explore eventual breakthrough innovations which allow the creation of products or more competitive processes. These strategies have meant that over the last century, Western companies have dominated in R&D in many sectors (steel, aeronautics, pharmacy, etc.) and in geographically localizing R&D near the decision-making centers of these firms. The main issue of this first phase was to safeguard scientific and technical knowledge as intellectual capital and only transfer product patents and licenses that are sufficiently standardized to foreign countries.

1.2.3.2. The beginnings of internationalization

The 1990s marked a major change, which saw the design and production of products with high technological value being localized abroad mainly in the Triad in a transnational approach. During this period, the presence of companies on international markets was no longer limited to product marketing, but included their R&D activities. It then involved, on the one hand, expanding the design processes by leveraging specific areas in the world that had a high scientific concentration such as the clusters located most often in the large Western-based cities. These areas also attracted the main global investment in R&D. On the other hand, it involved being able to break down the design of technological products into independent parts, in particular, in the areas of electronics, biotechnologies and information systems, with the objective of eventually entrusting them to subsidiaries abroad or to partners in these countries. It was during this second period that open innovation strategies developed [CHE 03], which highlight the importance for enterprises to build a wealth of expertise from networks to advance innovation via “global networks of open innovation” [SAC 08].

Access to networks of expertise based in overseas territories was also analyzed/considered by Jacquier-Roux and Paraponaris [JAC 11] as an opportunity for the enterprises “to benefit from tacit knowledge that we can only grasp by having a presence and by penetrating networks already in place in the area”. This tacit knowledge, which can equate to the intellectual capital of the firm [NON 95], is at the heart of exploratory learning and the processes of innovation. The problem with establishing an R&D center overseas is allowing researchers to participate in networks of co-production of tacit knowledge, such as social networks or institutional research networks, and the co-production of codified knowledge that constitutes patenting.

1.2.3.3. Localization of R&D in emerging countries

Since the early 2000s, the localization of R&D activities in emerging countries has been developing. The division of labor between countries that are the intellectual designers and the hard-working manufacturing countries is no longer sustainable. The emerging countries where industry is developing rapidly are investing in their education and research system to become innovative (China, India, etc.)

This third phase of globalization of R&D has the following multiple objectives:

• – to take advantage of the scientific and technical development potential observed in several regions and in several sectors (information systems in India, biotechnologies and pharmacy in China);
• – to benefit, initially, from a scientific and technical workforce cost well below that in the West;
• – to ensure the relay for the development of enterprise activity, particularly since the economic crisis of 2007–2008, where Western growth has slowed considerably, in countries where growth is being maintained with regard to the period at a rate of 5–8% per year;
• – finally, to strengthen the design capacity of Western firms with the aim of creating products that are specifically dedicated to emerging countries, as has been observed in the pharmaceutical industry, where large companies such as Novartis or Astra Zeneca have established R&D centers in China first, to advance research on diseases such as gastric cancer or hepatitis, and in India second, to engage in research on tuberculosis.

The Nestlé group has, for its part, established an R&D network everywhere in the world linking the upstream research centers, including that of the headquarters in Vevey, Switzerland, and development centers that are closest to the markets (see Figure 1.1).

1.2.3.4. Toward reversed innovation?

The tendency toward the localization of R&D in several countries through “hubs” is an evolution that has been witnessed in recent times. This is where they connect with different local players that are universities and other local research centers, clusters and the local public authorities, organized in an ecosystem that favors innovation and creates links in the field of innovative exchanges, training or research. The motivation here is multifaceted. There is the economic logic of drawing closer to those markets where economic growth is now taking place. There is also the need for proximity with prestigious academic and research organizations and training institutions to capture innovation and identify the talent. Finally, there is a need for identification of a fabric of small entrepreneurial firms to identify opportunities for technological development or uses to fuel innovative projects.

The concept of “reverse innovation” appears in this period [IMM 09] upon the initiative of General Electric President J Immelt. While he advocated for this strategy from the 1990s onward and successfully implemented it in his own company, he also considered that it is almost inevitable for all the other industrial enterprises. From his point of view, the Western companies will need to develop the entire design process in emerging countries in order to successfully compete with “champion” companies of these countries, which are better placed to propose products, including technological ones, on world markets. The consideration of the constraints of these countries, their limited access to resources and their vast economic needs proposes new avenues for designing new products by capturing needs and local uses and then attempting to develop global products that could potentially be successful on world markets.

Reverse innovation implies a fundamental revision of the design strategy of enterprises in developed countries centered on the research and development of hi-tech products destined for consumers with high purchasing power. In contrast to the traditional design of R&D, it proposes a more frugal technology design and less intensive design engineering [MID 17]. It is a “bottom-up” innovation process.

Reverse innovation is also the mirror image of the strategic management model formulated in the 1990s: “think global, act local” or “glocalization” that wanted enterprises to develop a global R&D strategy aimed at supplying local markets with a holistic engineering design. Since then, companies that rely on reverse innovation have developed the opposite approach: “think local, act global”, illustrated by L’Oréal’s R&D policy, for example, in which it is no longer about designing global products for global markets, but about starting with product innovations made in emerging countries to make them global and distribute them globally adding to them where necessary through technological improvements that may be necessary in more mature markets.

In the example of the Kwid, the R&D know-how from markets other than those of the manufacturer’s country of origin (in this case, India) were taken into account, regardless of the innovation practices of the head office and with a global perspective furthermore. This program has also been analyzed as being “symbolic of a return to a transnational model” – like that of the 1990s – as described above [DOZ 12].

1.3.1.1. Innovation and technology transfer: a different approach to globalization

Since the end of the 1990s, China has moved gradually away from its image as “the world’s first workshop” to establish itself as a power in the area of innovation and research. According to the OECD, Chinese expenditure in R&D increased from 0.6% to 1.98% between 1995 and 2012 (in percentage of GDP), while the number of researchers increased by 77% over the same period. China is far from being behind or inferior to the West in terms of techniques (as we often naively imagine). It has therefore become, according to some observers, an “R&D nation” for foreign economies, which are no longer reluctant to set up their poles of competitive clusters there. For the record, Europe and the United States dedicated 2.07% and 2.79% of their GDP, respectively, in 2012, to R&D expenses.

In the area of R&D, the case analysis of Western enterprises, both French and German, who have a local presence shows that the objectives of setting up in China are not limited to a quest for cost reduction. It is about creating qualified teams for research activities. For this reason, the number of publications, patents and students in China has significantly increased in recent years. It is necessary to be located in growing markets, where new consumer practices are likely to emerge. Finally, it is also useful to take advantage of the “outside critic”, who is offset and potentially innovative, which could be provided by a research team working on the other side of the planet. The sectors that invest in the R&D clusters in China are mainly the high-tech ones (telecoms, automotive equipment, transport and energy, etc.). A study conducted by Allouche et al. [ALL 08] showed how setting up the R&D activities of companies such as Orange and Schneider Electric was an effective strategy in their approach to innovation. Nevertheless, for most European companies, the strategy has instead been up until now to keep the latest technological developments so as not to surrender them when setting up in China. In fact, in the areas that could be considered as strategic for the Chinese economy (aeronautics, defense, railway transport, etc.), the dominant model for Western enterprises was to transfer the most “underrated” technology to China in order to control innovation and advances in research and development. This strategy has long been preferred by companies such as Alstom, particularly in the 2000s, which, after having established an engineering team in the field of transport in China, quickly removed it due to the fear of providing Chinese teams with the mastery of the new technology developed in the field of rail transport and transport signals: the enterprise’s R&D policy was that there should be no center for R&D in China that would work on the core business, a strategic choice that was deeply rooted in the company culture until July 2010. When the transfer was necessary, rules were applied to the developed products for the protection of intellectual property. These were very specific for each party in the joint venture. At the same time, German and Canadian manufacturers Siemens and Bombardier, which have adopted the opposite strategy, that is, the acceptance of R&D technology transfer to the Chinese, gained an enviable position on the Chinese market.

In the field of agri-food, other strategies in the area of R&D could be identified; this is the case of companies like Lesaffre, for which the question of the technology transfer is no longer the real question.

Setting up an R&D center in China is not just about technical capacity. This strategy must also consider cultural and human capital dimensions. Like the entities developed by Chinese employees in this context, R&D centers “off-shored” by Western companies are often neglected.

The analyses conducted in several of these R&D centers [LEB 12] reveal a profound gap between the innovation vision of head office and the Chinese vision, which is manifested by a lack of understanding. Therefore, Chinese researchers and engineers at an Orange center for research and technology monitoring complained about the lack of follow-up given to their projects and innovation proposals. The Chinese business models do not have the same conditions for success as the business models in Europe, and it is more difficult for them to convince and to argue with their head office the merits of a research or development project.

In addition, the favored organization of work practices that are based on matrix teams in which the different stakeholders of a project are separated by great distances complicates even more the business processes or even slows down the decision-making process. This is another discrepancy between the understanding of the authority of the parent company/head office and the understanding of the authority in China. For many Chinese designers, research and innovation have become common in Chinese companies and are needed as a free local practice of Western know-how. The Chinese five-year plans 2006–2010 and 2011–2015 for science and technology and innovation development are in this respect an important investment aimed at lifting China to the rank of technological nation.

In German enterprises, the position with regard to technology transfer differs significantly from that of French enterprises. Despite the very real risk of illegal transfers, Germany has relied on a relatively early scientific and technological cooperation with China, embodied by the signing, in 1978, of a bilateral government agreement. The following year, China and Germany decided to discuss the German standardization (DIN): the diplomatic business trips of technical specialists and economic representatives increases significantly, such that over time, many of the standards of the German model have been adopted in China. A new method of cooperation on projects is put in place, followed soon after by an institutional cooperation that leads to the creation of centers of bi-national research in 2004 and 2005. The Federal Ministry of Education and Research worked in partnership with the Chinese Ministry of Science and Technology as well as with the Chinese Ministry of Education.

In addition to intergovernmental scientific collaboration, German private not-for-profit research organizations developed a direct cooperation with their Chinese partners; therefore, the Sino-German Center for the promotion of research (Deutsch-Chinesisches Zentrum für Wissenschaftsförderung) managed jointly by the German Research Foundation (Deutsche Forschungsgemeinschaft, GFR) and the National Natural Science Foundation of China came into being in Beijing. The Fraunhofer Institutes have furthermore opened two research centers in partnership with the High Technology Research and Development Center of the University of Astronautics and Aeronautics in Peking: the Sino-German Joint Software Institute (JSI) in Peking and the Sino-German Mobile Communication Institute (MCI) in Berlin. The Max Planck Institute created in turn, in 2005, a Center for Computational Biology in Shanghai, in collaboration with the Chinese Academy of Sciences. The Leibniz Community have been working since 2004 on setting up a network linking its own institutes, the research institutes in China and its industrial partners, in order to be able to separate, distinguish and test biologically active substances coming from plants from traditional Chinese medicine. Finally, the Helmholtz centers work in cooperation with an extended network of major Chinese institutions, especially in matters of the environment, health and energy.

At present, many German companies view China as a market of strategic importance. According to these companies, the evolution of the European economy will depend on the success of positioning in this market, among other elements. This is particularly true in light of the very rapid technological progress made by China, which results from a proper innovation effort or a technology transfer taking place. The presence of German companies on the Chinese market is therefore crucial to preserving German and European competitiveness as well as to developing joint standards.

Consequently, for the German companies, technology transfer should not be a “problem” because “the only risk that can threaten the competitiveness and innovation of the German economy lies in a possible shortfall in the domestic innovation and research policies. The fact that China launched a set of programs to rise to the rank of technological nation then became widely known. However, evaluations of their true progress differ. For Germany, this can only be an incentive to preserve their competitive advantage and our capacity for innovation on two levels: due to the proactive attitude of the businesses involved and through the creation of a supportive political environment by the state. However, under no circumstances can Germany rest on its laurels – “the competition never sleeps” [STÄ 10].

Therefore, we can see that European, French or German companies planned the transfer of Western technology with a great deal of delicacy: ensuring, for example, the fragmentation of know-how in the organization and processes, including the management of IT, knowing how to identify the main risk sources and always keeping control of key skills.