The Role of International Business in the Global Spread of Technological Innovation

1. The Role of International Business in the Global Spread of Technological Innovation John Cantwell, Rutgers Business School and Editor-in-Chief of the Journal of International Business Studies

2. Some questions • What is the role of globalization (trade and inward FDI) in the emergence of new countries as significant producers of new technology? • How does globalization relate to technological catch-up at different stages of development? • See Suma Athreye and John Cantwell, Creating competition? Globalisation and the emergence of new technology producers, Research Policy, Vol. 36, no. 2, March 2007, pp. 209-226 John Cantwell NJ Business Forum presentation

3. A current controversy • A consensus had been about that nobody can 'do another Korea (or Japan)', let alone a US or a Germany - but the recent evidence of China and India have begun to shed doubt on this • The basis for the earlier view has been the conventional development focus on trade policy issues, amidst a tightening of WTO rules and IPR enforcement strategies John Cantwell NJ Business Forum presentation

4. But what else has changed? • The conventional wisdom ignored an increasing international spread of scientific establishments, and localized science-technology connections in the process of corporate capability creation • It also ignored the role of international production fragmentation, outsourcing, and global production networks (GPNs) • GPNs widen knowledge dispersion and facilitate the emergence of new knowledge-creating nodes John Cantwell NJ Business Forum presentation

5. Origins of our study • GPNs are still at an early stage in macro terms, but the rapid growth of foreign-owned MNC R&D facilities in China and India represents a new trend • We have found a reversal of the earlier trend towards a rising cross-country concentration of technological resources, and we examined how globalization has been connected to this shift • We looked at the impacts of both trade and FDI on the international location of technological activity John Cantwell NJ Business Forum presentation

6. FDI and trade • Even market-seeking FDI has always tended to be positively related to both home and host country trade • As FDI has become more internationally integrated in the form of GPNs the positive association with trade (and jobs) has been reinforced – the share of intermediate product trade has risen sharply John Cantwell NJ Business Forum presentation

7. GPNs and trade • The greatest barrier to trade today is inventory holding costs, rather than protectionism or transport costs • Keane and Feinberg have shown that improved technology and logistics including just in time (JIT) systems explain much of the rapid growth in intra-firm trade: American Economic Review, Dec 2006, Vol. 96, no. 5, pp. 1515–58 John Cantwell NJ Business Forum presentation

8. A closer association • So as MNCs innovate and gradually develop better systems to manage international business networks, trade increases within their GPNs • But this in turn feeds back into increased FDI, and so an ever closer association between FDI and trade John Cantwell NJ Business Forum presentation

9. Two stages of development • In an earlier stage of technological catch-up firms rely on simpler capabilities, small firms may play a more prominent independent entrepreneurial role, and there is less international knowledge connectedness - reflected in licensing revenues • Higher levels of technological development require sustained international knowledge interdependencies, and are generally needed to become a significant inventive source of patents John Cantwell NJ Business Forum presentation

10. Globalization and early development • Openness to product trade is likely to be helpful to attaining earlier stages of development (a capacity to create simpler knowledge-based outputs that can be licensed), since openness provides potential access to markets for higher quality products • Inward FDI is less likely to matter for earlier phases of development (countries becoming sources of licensing revenues), for which the growth of technology trade matters more John Cantwell NJ Business Forum presentation

11. Globalization and more mature development • An expansion of inward FDI is more likely to matter for higher stages of development (countries becoming sources of patenting), as it fosters the international knowledge connections on which more complex technologies depend • MNCs require local capabilities and infrastructure • FDI facilitates the consolidation of higher level capabilities, even though it isn't usually the means by which lower level capabilities are initially built John Cantwell NJ Business Forum presentation

12. Evidence across countries • Two indices of the technological ability of nations are their share of international licensing revenues, and of the foreign origin patents issued by the USPTO • The Herfindahl index of concentration of licensing revenues or patent shares across countries is a summary measure of the extent of unevenness in the varying technological ability of nations at any point in time John Cantwell NJ Business Forum presentation

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14. Our findings • Increasing inward FDI (existing international knowledge connectedness) leads to the emergence of new higher level technology producers capable of patenting • For earlier level development associated with the emergence of new licensors, greater openness to trade is helpful, but what matters most is the opportunities created for new participants by the growth of IP markets (see over), and the fragmentation of production (GPNs) John Cantwell NJ Business Forum presentation

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16. Conclusions for earlier catch-up • In the earlier stages of capability development, catch-up tends to rely mainly on a localized and indigenous learning that isn't closely interconnected with current knowledge creation elsewhere in the world through FDI • But it has been stimulated by more informal institutional channels for IB connections, such as trade, subcontracting, and especially the recent growth of IP markets John Cantwell NJ Business Forum presentation

17. Conclusions for later catch-up • In the later stages of catch-up in higher order types of innovative activity, acquiring sufficient absorptive capacity to join existing international knowledge networks by attracting an expansion of FDI (an extension of MNC networks) is more likely to be a precondition John Cantwell NJ Business Forum presentation

18. Geography of earlier catch-up • In GPNs, the middle stages of value chains (assembly) may migrate to emerging market economies, assisting migration of simpler innovation reliant on basic capabilities, with the support of trade and GPN connections • See Mudambi: Journal of Economic Geography, July 2008, Vol. 8, no. 5, pp. 699-725 • In this case innovation is more widely geographically dispersed ('the world is flat') John Cantwell NJ Business Forum presentation

19. Geography of later catch-up • By developing basic capabilities firms in emerging market economies can lay the basis for more technical capabilities, and hence may be able to begin to move up or down along the value chain • In this phase, the local embeddedness of subsidiaries evolving towards competence-creating activities can become a driver or support for the development of an innovation system into more advanced capabilities • In this case innovation is more clustered in key poles of development ('the world is spiky') John Cantwell NJ Business Forum presentation