7
Already since the early fifties, however, the flow of FDI has developed largely not only but
also to developed countries and the approach has shown clear limits neoclassical
interpretation. Also in the last two decades have gained FDI in R&D.
Despite the increasing internationalization of business activities, innovations are still
concentrated in some geographical regions. FDI in services are biased towards the most
developed economies, underlining the soaring importance of non-material and human assets
in determining business strategies and international competition (UNCTAD Report 2006,
2007).
In the current international environment, characterized by growing technological
complexity and market pressures, knowledge is a crucial source of differentiation and
competitive advantage. It holds, in particular, for multinational enterprises (MNEs), which
take advantage by their ability to transfer and exploit their intangible assets internationally,
within their own organizational structure.
Interestingly, despite the international dispersion of MNEs‟ production and R&D activities,
core technologies are still rooted in the home parent country.
Knowledge-related qualities, such as its public and tacit nature, and scale economies in R&D
may explain why, of the $179.9 billion in R&D expenditures of U.S. MNEs in 2004, 85
percent was accounted for by U.S. parents and 15 percent by their foreign affiliates.
The strategic importance of property rights is another factor that could be add to explain
the phenomenon. Only recently, the internationalization of R&D activities has become a
topic of interest among economists.
The explanation is that R&D has been one of the latest corporate activities to take an
international dimension. This has occurred simultaneously to the growth of developing
economies and to the increase of a more sophisticated demand in those countries.
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Indeed, as long as different local needs require products‟ improvements, multinationals will
move their upstream activities abroad. This let international business experts to foresee that
subsidiaries will play a more important role within the multinational network.
Contrary to traditional beliefs, the subsidiary is no more a mean to exploit home
advantages, but it has become a mean to upgrade a MNE‟s internal knowledge, through its
capability to source local know-how and expertise.
Multinationals have, thus, seen the necessity to distribute differently the resources across
their subsidiaries in order to face the increasing market challenges.
Over the last decade, pressures arising from the rapid technological progress and the
emergence of new markets have also affected the organization of activities within
microelectronics MNEs.
According to many, the fragmentation and dispersion of R&D activities within the industry
has been favored by the standardization of processes and technologies.
The development of more complex and ever-smaller systems have enhanced a further division
of labor, affecting also the organization of the innovation process. But, to what extent do
knowledge intensive companies internationalize their research activities? The convergence of
different technologies on smaller and smaller chips, does require the necessity to integrate
several technological competencies. Thus, it can be inferred that proximity is a critical aspect
as it favors the interaction and communication between human resources.
According to the literature, this is the reason why innovative activities tend to concentrate
within regional contexts.
Over time, two opposite themes have been discussed about the spatial distribution of
innovative activities: on one hand, decentralization is a choice which enable MNEs to
upgrade their knowledge base, on the other, the concentration of resources within spatially
bounded areas enhances major technological improvements.
9
On the basis of these considerations, this thesis aims to investigate how multinational
corporations manage their innovative activities across dispersed subsidiaries.
In order to illustrate the line of research of this work, the first chapter provides a review of
the literature addressing the topics discussed above, while the second conducts a broad
analysis about the current trends characterizing the semiconductor industry.
Finally, the third chapter covers the empirical analysis and underlines the findings of the
research.
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1. The oligopolistic theories
The first neoclassical interpretations of the phenomenon of internationalization has
moved with the theories of oligopolistic markets, because many oligopolistic industries (e.g.
Computers, cars, tires, basic chemicals and petrochemicals, ball bearings, etc..) are highly
characterized the presence of multinational enterprises (MNEs) from the mid-eighties.
The bottom of the multinational enterprise theories are rooted in the theory of oligopoly is
that firms that grow abroad have some type of monopolistic advantage that allows them to
exercise market power and thus achieve extra-profits.
This advantage may result from monopolistic exclusive possession of resources, process
technology, products, trademarks, goodwill, etc.. And it may be long lasting or exhausted
after a certain period, after the company still allowed the multinational first mover advantage.
Among the various theoretical contributions due to this line of interpretation, we begin to
analyze the patterns of Vernon and Hymer, dating to the second half of the sixties and then
introduce some signs strategic approach, developed since the late 70s by Graham.
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1.1 The model of Vernon
Vernon sets his theory known concept (developed by himself) the "product life cycle,
identifying a specific and precise mechanism of the innovative international growth and a
particular direction of flow of international trade.
The idea is that there is a close relationship between the product life cycle, characteristics of
countries and expanding international business.
Vernon begins by noting that the United States are in a particular situation than the rest
of the world.
This is clear when you abandon the idea that knowledge is an asset available to all without
problems. U.S. firms not only have easy access to the most prestigious universities in the
world (as for example more easily than other countries are able to employ staff who worked
at these universities) and thus be better able to perceive the opportunities open by
developments in physics, chemistry and life sciences etc.. are also in direct contact with the
world's most advanced market, then familiar.
This market is characterized by:
i) high level of per capita income of consumers;
ii) abundant capital and high labor costs.
These two characteristics result in very advanced needs from consumers.
Vernon points out that in the '50s and '60s American consumers were cutting edge in
adopting the washing machine or shirts that do not stretch and companies in introducing
automatic machinery replacement work.
The U.S. firms are able to understand the opportunity to transform new knowledge into
new marketable products, before companies in other countries. Communication with
potential market pushes to innovate and develop new products.
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Not by chance the United States and elsewhere have been created the sewing machine,
typewriter, tractor etc..
Thus, as regards the plastic, its development in Germany may be associated with lack of
raw materials and therefore the perception of German companies in particular need strong
domestic market.
Overall, the assumptions of the model is that U.S. manufacturers are probably the first to
notice the opportunity to introduce new products to consumers and to replace high-income
job.
In addition to cost factors, localization forces are powerful communication problems with
the market and external economies, the latter understood as access to sources of new
knowledge and human capital advanced.
In summary, the model proposes a dynamic location on four stages.
In the first phase (introduction of the product on the market) the product was introduced in
the market's most advanced country, is new and not standardized. Its design is still
uncertain, as in the case of the first cars, the first affirmation of the metal bodywork.
The techniques of production are in a fluid state, and cost optimization is a problem that
does not yet exist. There is much uncertainty about the final size of the market on the efforts
that will be rivals for grab on product specifications that will prevail.
It 's more important to the company the ability to be flexible, to experiment with different
models and materials and learn, not to optimize. The price elasticity of the product is low and
the cost differences still matter little. Instead an important location that facilitates immediate
communication with the market and so the firm first comer will be located in it, soon
followed by local imitators.
Then in the second phase (development) states a basic standard, although this does not
mean uniformity as it can multiply the types and variants of the product (for example, says
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the car with metallic body, but at the same time the market is divided in different segments of
the sports cars, small engines, etc...) demand grows rapidly. Decreases the need for flexibility.
Researching and state economies of scale, the cost problem becomes significant. Reduces the
uncertainty even though there is still no real price competition.
Begins to manifest a demand for the product in other countries, those with higher income and
more like the United States in terms of high labor costs.
It then begins to export, in theory up to that, assuming that capacity is fully utilized to meet
the domestic market, the combined costs of transportation plus the marginal production
costs are lower than average production costs in markets where exports.
When they become higher, it becomes convenient to invest overseas.
If domestic production capacities are fully employed, the comparison between average costs
than transportation costs for domestic production and average costs for foreign production,
since even in the country of origin for export would need to build a new plant.
The advantages and disadvantages to increase production sites depends largely on the
scale of economy of scale (relative breadth of the market).
For example, Otis Elevator has started early to invest abroad, given the high costs of product
transportation (elevators) and mounted negligible economies of scale. The strength of patent
protection for the first comer comes into play.
If it is weak and there is threat of entry by foreign investors, this may push to cross the border
direct investment.
Finally, remember that the more technology is subject to cumulative advantages and
learning curves, the more the advantage of the innovative grows and is perpetuated in
relation to potential competitors and imitators, whose entry should try to delay.
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In the third stage (maturity) the domestic sales are stable, while the size of foreign
markets continue to grow produce locally to enable efficient, exploiting economies of scale.
The costs become important and growing strength of capitalist processes.
Moreover, the imitative processes is also strengthened by foreign countries, making it
possible to enter the field of local producers, because governments may introduce measures
to discourage imports and encourage domestic production.
Overall, then grow significantly incentives and reasons to invest abroad. The innovative
company, to maintain its market share and defend against potential entrants invest in
downstream of the supply chain (marketing, support and maintenance) and replace with the
production of exports in foreign markets, transfer their technologies process.
However, since new entries are made of local producers, however, will also create export
flows from the second-comer countries (Europeans) to other countries (other European) or
the United States itself.
Finally, the fourth and final stage (decline), the demand for the product is out and growth
is everywhere stable or declining; imitative processes are now complete, both in the country
of origin in foreign countries, and technology is all ages, standardized and fully accessible to
local imitators.
At this stage firms decentralizing production (at least for the more labor-intensive stages) in
countries where the inputs have lower cost.
Therefore, if the first three phases, the target is represented by countries with
consumption patterns similar to those of the country of origin of the multinational, now the
IDE is targeted primarily towards underdeveloped countries and / or developing. At this stage
the first comer country becomes a net importer.
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Alternatively, it may happen that the company abandon entirely the product market in
question to implement an innovative and offer new substitute products, allowing traces of
the same process based on oligopolistic advantages.
The life cycle of the product has long been the interpretative model of FDI best-known
and generally accepted and in fact has contributed greatly to the understanding of the
processes of international growth of U.S. companies, at least along the course of the sixties,
when the U.S. were by far the main source of global innovation process and FDI, mainly
taking the form of greenfield investment (i.e. the construction of new production facilities).
This model explains well such as what happened in microelectronics.
In the late fifties the U.S. was the undisputed leader in the industry and invaded the
European market via exports (second phase).
Beginning of this decade, to prevent the process of catching-up to Europe and to avoid a
reckless policy of licenses, which could enhance the growth of European producers, major
U.S. companies created its own factories in the old continent (ex. Texas Instruments in Great
Britain, France and Italy, Signetics and National Semiconductor in Scotland, France,
Motorola, etc..) (third phase) in the same period but had no success trying to penetrate the
Japanese market with unit operating subsidiaries directly, because of the defense policy of
the domestic made by the Japanese government.
In the seventies, compared with imitative processes much faster than in the past because
of the gradual maturation of the field (the last radical innovation, the microprocessor, dating
back to 1971) and growth of European manufacturers (Siemens and Philips) begins to
manifest a tendency to keep costs low through decentralization of the assembly stage (the
one with the highest intensity) in the south-east Asia (Taiwan and Singapore to Texas
Instruments, National Semiconductor in Hong Kong, Motorola Korea ) and the subsequent
re-importation of finished products in developed countries (fourth phase).
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