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Thursday, February 28, 2013

German Innovation through Foreign Subsidiaries


American firms are not the only ones seeking competitive advantages using innovative development in emerging markets. German companies, with fingers in a number of different countries, are trying to better understand how innovation and knowledge based strategies impact their competitiveness. Research helps highlight the competitiveness of German companies in international markets and how this impacts their firm’s ability to compete internationally.

Innovation activities in multinational firms do not live within a vacuum and are subject to and influenced by the environmental impact of its host country. Innovative activities of firms abroad depend on the technological abilities and capabilities of the home country (le Bas & Sierra, 2002).  It is difficult to develop innovation through home grown businesses in emerging markets without the support of the home country.

Information and abilities are transferred from the home country to the host country through the subsidiaries. Research and development, as well as innovation activities abroad, are associated with knowledge-seeking efforts by multinational firms (Ambos, 2005). As such, each contributes to the methodologies organizations use to gain knowledge and convert it to innovative development.

For example, CEOs from both Germany and Turkey said that they will be developing closer ties in energy and innovation development. The Turkish Industrialists and Businessmen’s Association (TUSIAD) and the German Industrialists Federation (BDI) announced new partnerships to help both countries succeed on February 25th, 2013 (Daily News, 2013).  The two nation’s desire increased cooperation in development research, shipping, energy and infrastructure.

Germany being the innovative home country seeks additional opportunities in Turkey which is an emerging economy where costs are relatively low. This partnership helps both countries seek advantages by complementing each other’s strengths. For example, Turkey can gain access to technology and Germany can gain access to cheaper labor. 

Research by Kampik and Dachs (2011) attempted to explore the associations of firm characteristics, host country characteristics, and innovative behavior in German based subsidiaries in Europe. The study administered the communication innovation survey to 2,000 German subsidiaries in 16 countries.  Variables included size, international market orientation, market factors hampering innovation, cost factors hampering innovation and knowledge factors hampering innovation.

Results:

-German firms had more innovative propensity than 15 of 16 countries. The firms contributed to employment and provided new products for market consumption.

-German companies spent more on innovation than other companies in half of the countries studied.

-Company characteristics such as size, research and development, international market orientation, sectoral affiliation are associated with innovation and output intensity.  

-Host countries only mildly contribute to innovation. 

-More innovation is seen in southern and eastern European countries than northern or western countries. This has been interpreted as easier cost of transference of intellectual knowledge to cheaper product outputs in low cost countries. 

-German firms were integrated into their host countries innovative systems and used public funding to further their innovative processes.

Analysis:

German companies are seeking new ways of generating wealth and products. They are looking toward making partnership with cheaper host countries such as Turkey in order to diversify their competitive base and make the implementation of innovation cheaper. German firms are using the host country’s public funding in infrastructure and other sources as catalysts for their own growth and development. The innovative knowledge required to improve products and services will be offered from Germany and used within the host country.

Ambos, B. (2005), Foreign direct investment in industrial research and development: a study of German MNCs. Research Policy, 34(4), 395–410.

Kampik, F. & Dachs, B. (2011). The innovative performance of German multinationals abroad: evidence from the European community innovation survey. Industrial and corporate change, 20 (2). 

le Bas, C. and C. Sierra (2002), Location versus home country advantages in R&D activities: some further results on multinationals’ locational strategies. Research Policy, 31(4), 589–609.

Turkish, German CEOs call for more cooperation on energy and innovation (2013, February 28th). Daily News. Retrieved February 28th, 2013 from  http://www.hurriyetdailynews.com/turkish-german-ceos-call-for-more-cooperation-on-energy-and-innovation.aspx?pageID=238&nID=41870&NewsCatID=345

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