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

Innovative Companies Localized into Regional Hubs

Innovation is becoming a concept that nations hope to foster as their financial situations become more dire. Research in national innovation helps to highlight how the concepts of regional hubs can help further this development by creating hives of innovative knowledge sharing. Companies don’t work within isolation and often share knowledge, people, and ideas throughout a region. Research into the development of the pharmaceutical industry furthers this concept of demographic influence.

Innovation is a necessary component of organizational growth and development. Theoretical and empirical literature helps establish an understanding that innovation responds to consumer demand (Schmookler, 1966). In other words, that as customers have needs they desire to be fulfilled, organizations will often develop products and services to meet those needs. The stronger the feedback loop the more likely such customer to company interaction will lead to new innovative insights.

All innovation requires knowledge. This knowledge comes from past experiences, sharing information, new research, education, market needs, and communication. The knowledge that is derived from market and consumer demand and is often difficult to codify in concise terms that can be applied appropriately (Polanyi, 1966). Without strong analysis and customer research it is difficult to determine what consumers are looking for in order to develop these new products and services.

This difficulty in codifying needs into concise terms means that such understandings often are derived from multiple pathways as a result of local communication. It seeps into the organizations in an amebic fashion. Those firms that operate on a local level have a better understanding of the tacit needs of their customers (Kogut, 1993). It is through constant communication with customers and the local market that such needs and solutions finally become crystallized. 

In innovation there is also a pull and push strategy in much the same manner as there is in marketing. Demand pull from the market helps to shape innovative investments (Schmookler, 1966). As customers create needs, organizations will naturally respond to those needs. Furthermore, there is also technology push that comes from the science, learning, research, knowledge, manufacturing and production. Such inventions create a frontier by which new products and services can create markets (Griliches, 1995).

To see how this push and pull strategy, combined with local knowledge, creates innovation it is possible to look at those cities and counties that have a disproportionate amount of new market offerings. Technology organizations create a spillover influence in their regions that offers an opportunity for shared development (Feldman, 2000). In essence, the transferring of people, information, culture, and knowledge among a hub of businesses creates innovative synergy in the area. 

The research conducted by Fabrizio & Thomas (2012) helps solidify this understanding of innovative locality. The research used a panel dataset of new molecule innovation from the 56 largest pharmaceutical firms in nine different countries between 1992 and 2001. The study focused on analysis of the parent and sub-firms that reside in local markets even though they have international presence for their products. They reviewed 1,085 new market offerings from 1980 to 2001 trying to canvas innovation within the industry. They analyzed these findings with technology data and local information to come to a pattern of innovative development.

Results:

-Accumulated technical knowledge by measuring organizations patents determines innovation.

-Knowledge of the market also determines the pattern of innovations created. 

-Systems of organizations, culture, and similarity of industries in local regions impact innovation.

-The use of open innovation, networks, and knowledge sharing processes encourages innovation.

-There are no international pharmaceutical innovations only national ones that make their products available on the international markets.

-The local and national culture has an impact on the likelihood of innovation.

-It is recommended that innovative organizations establish themselves with the local market to understand consumer needs and develop new products.

The results shed light on the overall development of innovation within nations. Organizations that are innovative work best when located in a hub of like companies. The knowledge sharing among market members furthers the development of new ideas and concepts. Nations can foster this innovative process by developing such hubs similar to technology organizations in Silicon Valley or automotive manufacturing in the Detroit area. Furthermore, the national and regional culture also impacts the success of developing new innovative products for global market presence.

Fabrizio, K. & Thomas, L. (2012). The impact of local demand on innovation in a global industry. Strategic Management Journal, 33.

Feldman MP. (2000). Location and innovation: the new economic geography of innovation, spillovers, and agglomeration. In Oxford Handbook of Economic Geography, Clark G, Feldman M, Gertler M (eds). Oxford University Press: Oxford, UK; 373–394.

Griliches Z. 1995. R&D and productivity: econometric results and measurement issues. In Handbook of the Economics of Innovation and Technological Change, Stoneman P (ed). Blackwell: Oxford, UK; 52–89.

Kogut B. 1993. Country Competitiveness: Technology and the Organizing of Work . Oxford University Press: New York.

Polanyi M. 1966. The Tacit Dimension. Doubleday: Garden City, NY.

Schmookler J. 1966. Invention and Economic Growth Development. Harvard University Press: Cambridge, MA.
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