Innovation networks in an era of globalization
The discussion so far reflects a common approach to examining the state of innovation by developing comparative methodologies that rank countries in terms of their innovative capability. This approach is particularly dominant in Western writing about innovation in China: for example, one recent report concludes that China is a ‘fat tech dragon’, where much greater innovation inputs have not been translated into effective high-tech outputs. Analysis of indicators such as spending on R&D as a percentage of GDP (Figure 1) and total researchers in employment per thousand total employment (Figure 2) tends to suggest that China still lags considerably behind major research-heavy economies. On the other hand, the country performs well in outputs of technical and scientific papers, and patent applications and grants (figures 3 and 4). Moreover, senior US officials have increasingly talked about Chinese innovation and industrial capacity in terms of ‘threats’ to the US, particularly given a shift to the ‘America First’ policy under President Trump.
Figure 1: Gross expenditure R&D as a percentage of GDP
Figure 2: Total researchers in Full Time Equivalent (FTE) per thousand total employment
Figure 3: Trend in patent applications for the top five offices
Figure 4: Trend in patent grants for the top five offices
What these approaches do not take account of is the transborder nature of innovation in an era of globalization. This needs to be understood in order to evaluate further the current state of innovation connectivity between the EU and China, and the future prospects of this relationship. The fundamental concept here is networks, namely the idea that innovation is achieved most effectively and efficiently when those engaged in innovation are connected not just within national borders but across them. As President Xi said in 2012, the ‘development of science and technology requires extensive international cooperation. Science and technology have no nationality.’ Or as stated in the 2012 science, technology and innovation (STI) strategy report produced for the EU, ‘the overall principle should be to allow and encourage “the best and brightest” to participate in projects, regardless of their geographical location.’
One of the consequences of the recent phase of globalization has been the geographical fragmentation of production to incorporate multiple locations across many different countries, a process that has been facilitated by the digitization and modularity of production processes. These production networks have enabled the proliferation of specialized firms and accelerated product cycles, permitted flows within and among firms and across geographical boundaries, and facilitated disruptive innovation. China has played an important role in these processes of globalization: following the launch of ‘reform and opening up’ by Deng Xiaoping in December 1978, parts of China and some Chinese firms gradually became incorporated into regional and global production networks or value chains; this process accelerated from 1992, and again with the country’s entry into the World Trade Organization in 2001. The result has been China’s integration into much of globalized production, and the development of an extensive manufacturing ecosystem, which – as noted above – has enabled it to perform well in production-related and efficiency-driven innovation.
There have been some similar structural trends in the globalization of industrial innovation. As with manufacturing, industrial innovation has become geographically dispersed, but there are important differences. Unlike in manufacturing, where supply chains feature firms with multiple ownership brought together by ‘system integrator’ firms at the top, ownership of innovation networks has remained concentrated. The role of multinational corporations (MNCs) has been central to this, as they manage ‘highly diversified, highly internationalized research networks which they … own’.
In areas of innovation that take place outside corporate structures, transborder networks are also important, and university research is increasingly based on collaboration between experts based in different parts of the world. Again, there are concentrations in particular institutes, especially in capital-intensive areas of research, and in many cases established research institutes or universities in developed economies continue to occupy leading positions in these innovation networks. In most fields, for example in Sino–German innovation relations, ‘the scientific gap between Chinese and German companies is still large. So effectively, it is German (or foreign) companies who are responsible for the majority of co-invented patents of Chinese and German inventors.’ One estimate shows that in 2005 European firms conducted over 40 per cent of their R&D overseas. As the authors of that study put it, challenging though this may be:
In this interconnected world, the incentives to engage in international knowledge exchange are aligned in mature industrialized countries and emerging market countries despite their different levels of development and their differing degrees of sophistication of their stocks of scientific and technological knowledge. Each country has its own specific types of differentiated expertise and forms of knowledge. Many innovation opportunities now depend on moving new applications across both industries and markets, including between markets with different proportions of high-income and low-income consumers, and with different challenges for innovation. Therefore the policy agenda must be to move away from the inward-looking approach of techno-nationalism towards a philosophy of mutual or shared interest in protecting and sustaining the entire international ecosystem of technological knowledge, which reaches well beyond any individual country or place.
Global innovation networks have also been driven by the need to tap into cross-disciplinary knowledge. First of all, products and services are integrating more technology from multiple sectors. Car manufacture, for example, no longer primarily depends on mechanical engineering techniques, but also includes electronics, computer-control, audio-visual systems, network linked intelligence, and other designs and facilities to enhance user experience. The mobile phone is today much more a multi-purpose computer than just a telephone. Secondly, there is increasing scope for knowledge disciplines to learn from one another. For example, analyses of backward citations of patents (which indicate where the knowledge of the relevant patent comes from) across a wide range of technological areas show that a growing number come from other fields of knowledge.
As technology and innovation become ever more globally networked, involving a diverse range of players, the innovation capabilities of MNCs in many sectors have also evolved.
Global innovation networks therefore more often engage a diversity of technology and innovation players. In the past, MNCs undertook most of their R&D in-house, often in their headquarters. But given the need to tap into new sources of knowledge and ideas from different disciplines and in different markets, it is proving more effective for them to collaborate with a variety of players, including customers, suppliers, SMEs, research institutes and, increasingly, start-ups. MNCs’ subsidiaries around the world, having access to different external knowledge networks as well as internal knowledge networks within their parent MNCs, could also specialize in different ways of accumulating and exploring various categories of knowledge. For example, a study of MNC subsidiaries in the pharmaceutical industry in Germany showed that, given the expanding complexity of knowledge, MNCs are more frequently using the international internal knowledge networks of subsidiaries for incremental knowledge-building within the same field, and their subsidiaries’ local external knowledge networks for transferring more technologically complex knowledge.
As technology and innovation become ever more globally networked, involving a diverse range of players, the innovation capabilities of MNCs in many sectors have also evolved. They have to become more effective integrators of multi-sector, multi-level technologies, ideas and innovations across different parts of the world. The ability to integrate hardware, software and services is also important and highlights an important dimension of the competitive edge of MNCs in a world of globalized innovation.