Describe how the globalization of the world economy is affecting new-product development within the international business firm.
Firms that successfully develop and market new products can earn enormous returns. Examples include Du Pont, which has produced a steady stream of successful innovations such as cellophane, nylon, Freon, and Teflon (nonstick pans); Sony, whose successes include the Walkman, the compact disc, the PlayStation, and the Blu-ray high-definition DVD player; Pfizer, the drug company that during the 1990s produced several major new drugs, including Viagra; 3M, which has applied its core competency in tapes and adhesives to developing a wide range of new products; Intel, which has consistently managed to lead in the development of innovative microprocessors to run personal computers; and Apple with its string of hits, including the iPod, iPhone, and iPad.
In today’s world, competition is as much about technological innovation as anything else. The pace of technological change has accelerated since the Industrial Revolution in the eighteenth century, and it continues to do so today. The result has been a dramatic shortening of product life cycles. Technological innovation is both creative and destructive.27 An innovation can make established products obsolete overnight. But an innovation can also make a host of new products possible. Witness changes in the electronics industry. For 40 years before the early 1950s, vacuum tubes were a major component in radios and then in record players and early computers. The advent of transistors destroyed the market for vacuum tubes, but at the same time it created new opportunities connected with transistors. Transistors took up far less space than vacuum tubes, creating a trend toward miniaturization that continues today. The transistor held its position as the major component in the electronics industry for just a decade. Microprocessors were developed in the 1970s, and the market for transistors declined rapidly. The microprocessor created yet another set of new-product opportunities: handheld calculators (which destroyed the market for slide rules), compact disc players (which destroyed the market for analog record players), personal computers (which destroyed the market for typewriters), and cell phones (which are replacing landline phones).
This “creative destruction” unleashed by technological change makes it critical that a firm stay on the leading edge of technology, lest it lose out to a competitor’s innovations. As explained in the next subsection, this not only creates a need for the firm to invest in R&D, but it also requires the firm to establish R&D activities at those locations where expertise is concentrated. As we shall see, leading-edge technology on its own is not enough to guarantee a firm’s survival. The firm must also apply that technology to developing products that satisfy consumer needs, and it must design the product so that it can be manufactured in a cost-effective manner. To do that, the firm needs to build close links between R&D, marketing, and manufacturing. This is difficult enough for the domestic firm, but it is even more problematic for the international business competing in an industry where consumer tastes and preferences differ from country to country.28 With all of this in mind, we move on to examine locating R&D activities and building links between R&D, marketing, and manufacturing.
THE LOCATION OF R&D
Ideas for new products are stimulated by the interactions of scientific research, demand conditions, and competitive conditions. Other things being equal, the rate of new-product development seems to be greater in countries where
• More money is spent on basic and applied research and development.
• Underlying demand is strong.
• Consumers are affluent.
• Competition is intense.29
Basic and applied research and development discovers new technologies and then commercializes them. Strong demand and affluent consumers create a potential market for new products. Intense competition among firms stimulates innovation as the firms try to beat their competitors and reap potentially enormous first-mover advantages that result from successful innovation.
For most of the post–World War II period, the country that ranked highest on these criteria was the United States. The United States devoted a greater proportion of its gross domestic product to R&D than any other country did. Its scientific establishment was the largest and most active in the world. U.S. consumers were the most affluent, the market was large, and competition among U.S. firms was brisk. Due to these factors, the United States was the market where most new products were developed and introduced. Accordingly, it was the best location for R&D activities; it was where the action was.
Over the past 20 years, things have been changing quickly. The U.S. monopoly on new-product development has weakened considerably. Although U.S. firms are still at the leading edge of many new technologies, Asian and European firms are also strong players, with companies such as Sony, Sharp, Samsung, Ericsson, Nokia, and Philips driving product innovation in their respective industries. In addition, both Japan and the European Union are large, affluent markets, and the wealth gap between them and the United States is closing.
As a result, it is often no longer appropriate to consider the United States as the lead market. In video games, for example, Japan is often the lead market, with companies such as Sony and Nintendo introducing their latest video game players in Japan some six months before they introduce them in the United States. In wireless telecommunications, Europe was long considered to be ahead of the United States. Some of the most advanced applications of wireless telecommunications services were pioneered not in the United States but in Finland where, until recently, wireless penetration rates were much higher than in the United States. However, it often is questionable whether any developed nation can be considered the lead market. To succeed in today’s high-technology industries, it is often necessary to simultaneously introduce new products in all major industrialized markets. When Intel introduces a new microprocessor, for example, it does not first introduce it in the United States and then roll it out in Europe a year later. It introduces it simultaneously around the world. The same is true of Microsoft with new versions of its Windows operating systems.
Because leading-edge research is now carried out in many locations around the world, the argument for centralizing R&D activity in the United States is not as strong as it was three decades ago. (It used to be argued that centralized R&D eliminated duplication.) Much leading-edge research is now occurring in Asia and Europe. Dispersing R&D activities to those locations allows a firm to stay close to the center of leading-edge activity to gather scientific and competitive information and to draw on local scientific resources.30 This may result in some duplication of R&D activities, but the cost disadvantages of duplication are outweighed by the advantages of dispersion.
For example, to expose themselves to the research and new-product development work being done in Japan, many U.S. firms have set up satellite R&D centers in Japan. U.S. firms that have established R&D facilities in Japan include Corning, Texas Instruments, IBM, Procter&Gamble, Pfizer, Du Pont, Monsanto, and Microsoft.31 The National Science Foundation (NSF) has documented a sharp increase in the proportion of total R&D spending by U.S. firms that is now done abroad.32 For example, Bristol-Myers Squibb has 12 facilities in five countries. At the same time, to internationalize their own research and gain access to U.S. talent, many European and Asian firms are investing in U.S.-based research facilities, according to the NSF.