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Should we lament the delocalization of European production (and R&D) centres?

At the latest INNO-Grips workshop on disruptive innovation (Brussels, 24/1/2012), one of the issues addressed was the question: "if European firms open up an R&D centre in Asia, then it is likely that production centres will follow (or vice versa), and this should be avoided". Although in essence it is easy to agree on this statement (as a European), it is also necessary to look at the underlying logics and drivers of the eventual causalities in play, and assess whether the behaviour as such may simply follow from business rationales and can therefore hardly be disapproved. Another thing is whether the public sector can take actions to curb this behaviour.

by Bart Kamp
Head of Orkestra's strategy department, Spain

February 9th, 2012

It is becoming increasingly obvious that companies do not go abroad anymore solely for tapping into lower costs of production factors or for the fact that foreign markets grow faster. In fact, it is becoming more and more typical that they (also) go abroad to places they consider to be more inspiring or advanced in terms of demand conditions and therefore form a better environment for coming up with innovations. This implies that if they do not go to such places, they may start lagging behind in terms of innovativeness and that can ultimately hurt their overall competitiveness. In the end, although not in all cases, going abroad may therefore be vital to preserve (part of) a company's activities back home. Consequently, the choice of going abroad (and whereto) can become a matter of weighing opportunity costs.

This kind of looking abroad for new ideas, putting them into practice overseas and eventually transferring them to a company's home market is a practice that is often called "reverse innovation". Among others Siemens and Vodafone have had success stories with this formula.

The former implies that companies can get to a point where they turn foreign markets into places for production (see the highly interesting blog of Prof. M. Dröscher at the INNO-Grips site on this topic), but also into loci for innovation activities. On the one hand, this may be due to the fact that they may –in terms of available engineers, cost-wise and idea-wise – be very fertile places. On the other hand -and especially if products are not commodities or bulk issues, this may stem from the need for customization and local responsiveness, which also induces the set-up of continent-specific innovation/R&D structures.

Although, as a European we would rather see that Europe maintains a stronghold on R&D and production; locates such business functions “at home” and uses these assets to direct worldwide business structures; the trend of spreading company assets and competences over the world is arguably inherent to the creation of multinational enterprises (MNEs) as such. And with regard to the management of MNEs, loads of theories and practices on how to orchestrate intra-firm cross-border corporate structures and functions have been around since decades (see e.g. Bartlett and Ghoshal, Managing across borders, 1989, Forsgren, Holm and Johanson, Managing the embedded multinational, 2005, or classical works from Dunning, Buckley and Casson), illustrating further that this is a phenomenon that goes a long way back.

In a way, we may also be in a kind of pendulum situation: whereas Americans put up a lot of shops after World War II in Europe and even transferred or erected production and R&D centres here dedicated to the design and manufacturing of products specific for the European market as a way to gain ground here (which many European policy makers and citizens off course warmly welcomed), now we are witnessing how Europeans (and Americans) do the same in Asia and Latin America. And maybe in the near future, Chinese or Brazilian companies will do their part to aim for a stronger position vis-à-vis European customers (and as a consequence integrate more into European industrial and R&D systems). The former is not to say that off-shoring trends away from Europe are good news, but just like nature needs to find a new equilibrium after a disaster takes place, also the (European) economy needs to find a new balance or shift back to normal after it undergoes a shock to the system.

Evidently, instead of a laissez-faire, laissez- passer stance (or to wait for the moment that e.g. the Chinese and Brazilians invest just as much as European -and American- firms do over there); a middle way could be to “convey” ideas and human resources from such countries to Europe. Especially as one can not expect every SME from Europe to be able to open a branch location or R&D activity in Asia (or anywhere else in the world for that matter).

In addition, one could consider making use of restrictive IP laws and patent validations on products and technologies developed elsewhere, or to work with procedures as per the REACH regulations, to favour European-made products and or of products in compliance to European standards, which thus might foster that a considerable part of value chains is installed on European territory.

All together: if we acknowledge that it is important for European companies to keep up with developments outside their home base and to source product ideas from abroad; then what public actors or public-private partnerships can consider doing is investing in infrastructure and linkages to bring overseas insights to them and to connect European SMEs and the like to innovative hotspots around the world. In this regard, f.i. the China strategy of the German Fraunhofer Society and the financing on behalf of the Christian Doppler Gesellschaft of research laboratories at Universities abroad which are co-funded by Austrian companies are interesting initiatives to convey market and technology insights from foreign (Asian) markets back home. Provided that this info is disseminated well among local SMEs and that they are able to take up market opportunities abroad, this may be a way to support SMEs in their innovation and internationalization journeys without “obliging” them to set up vast own structures everywhere in the world.