Rice University | Explore Rice

5/15/2007

Research@Rice

Although multinational companies see the incentives and opportunities for investing in R&D in emerging markets, many fail to recognize or mitigate the potential hazards. New research from Rice University’s Jesse H. Jones Graduate School of Management says that instead of realizing the much-hoped-for benefits of globalization, companies can end up with technology losses, financial disappointments and a lagging position in a changing competitive landscape.

If you invest in joint venture R&D in an emerging country, how can you actually benefit from it? That question was at the center of a unique research study conducted by Anthea Zhang and Haiyang Li, assistant professors at Rice University’s Jesse H. Jones Graduate School of Management, together with their colleagues Michael Hitt from Texas A&M University and Geng Cui from Lingnan University of Hong Kong. Their study, which has been accepted for publication by the Journal of International Business Studies, is one of the few to explore the links between international joint ventures and R&D outcomes.

"The number of multinational companies (MNCs) involved in R&D globalization continues to grow," said Zhang. "The reasons for this trend -- lower costs, untapped markets, and competitive pressures -- are understandable. But there are hazards you must mitigate, and not everyone is doing it the right way."

One of the biggest hazards the study identified is technology leakage. Zhang and Li had assumed that if an MNC had majority control of a joint venture, that control would offer enough protection in emerging countries with weak international property rights laws. But, Zhang said, the findings were surprising. "Contrary to our expectations, ownership percentage alone does not influence the success or protection of international joint venture investments."

However, the team’s research, which focused on China, does suggest that majority ownership is indeed a necessary half of the equation. The other critical piece is market focus. According to Li, if MNCs focus solely on the local market, they’ll soon have local imitators. The better choice is to export their products to the international market. "From our observations in China, benefits from R&D occur only when a majority control ownership structure is combined with an export market focus."

The presence of MNCs in China has certainly changed the competitive playing field, something that Zhang and Li expect to eventually see in India and other emerging markets. "In China, you don’t just compete against Chinese companies," said Li. "The U.S. is competing against other entrants, earlier entrants, from Europe and Japan. The more entrants, the more they will affect each other and the local economy."

Li points to China’s burgeoning auto industry. Just about every auto industry leader in the world, including GM, has facilities and a vested interest in China. "In recent years, GM’s growth has been coming from overseas sales, not domestic. If you want to be a dominant player globally, you have to take care of the emerging markets. You have to understand your customers there. You have to do your research and development there."

Because so many global automakers operate in China, the Chinese can leverage this competition and look for the best partners. So if one company will not share its technology, they can look for a partner that will.

The notion of competition facilitating technology spillover is something Zhang and Li are examining in a follow-up project. "How does the entrance of MNCs affect productivity and growth of local functions? How do their strategies link to local firm outcomes? We don’t know yet, but we are very interested in a direct test of this spillover effect," said Li.

It’s still a learning process for MNCs and their R&D efforts, added Zhang. But local firms can learn from the process as well, and they have a lot to teach the MNCs. "If this is done right, the spillover will go both ways; global companies can be successful, and so can the local firms."

Ultimately, Zhang envisions a new competitive landscape, even more evolved than the one created by competition among U.S., European and Asian companies. The winners, she said, will be those companies that understand this evolution. No one can afford to have a narrow mind. "It’s important to remember that 10 years from now, the emerging markets will no longer be emerging; they will be established themselves. Several already can be considered emerging giants. We can expect that some local players today will be key global players tomorrow."

For additional information, contact Anthea Zhang, Haiyang Li or Laura Hubbard of the Jesse H. Jones Graduate School of Management.