The Role of the Multinational in the Innovation Ecosystem

In the interview to the Open Innovation newsletter, Professor Eduardo Vasconcellos (FEA /USP), talks about “The Role of the Multinational in the Innovation Ecosystem”, discussing Research and Development, Innovation Centres, Frugal and Reverse Innovation, Open Innovation and Global Networks of Innovation.

Eduardo Vasconcellos

Eduardo Vasconcellos professor FEA/USP

Wenovate: What is the difference between R&D and Innovation Centres?

Eduardo Vasconcellos: R&D is a strategic component for innovation since it creates a bridge between science, available in international publications; and the development of new products, processes and services. Nevertheless, the results of any R&D activity still need to go through new steps in order to be available in the market. This process as a whole is called innovation, which could be technological, but also managerial. Since the last century, many subsidiaries of multinational companies in Brazil have R&D Centres, such as Rhodia, Pirelli, 3M, among others. More recently, companies have set up Coordination Units in the process of innovation, integrating R&D, Engineering, Marketing, Manufacturing, etc. In some cases, the R&D itself handles the coordination of an innovation process. Cristalia is an example.

Wenovate: In the last years emerging countries as Brazil have attracted R&D of foreign multinational companies. To whom or what would you attribute this change?

Eduardo Vasconcellos: The global crisis that started in the US in the past decade has affected Europe and has put Brazil in an advantageous position (until recently), attracting capitals and investments of multinational companies. The size of the Brazilian market, together with the image of an emerging country, has contributed. For instance, in the automotive industry, the automakers have extended R&D in Brazil, to a certain extent because it is the 4th largest market in the world for vehicles. Moreover, some government projects such as the “Pre-salt” have created expectations, attracting various companies to Rio de Janeiro. When the government used the Pre-salt project to boost related industries, emphasizing the development of local technology, many companies felt confident in installing R&D Centres in Rio, which is the case of IBM, for instance

Besides that, Brazil is increasingly seen as a centre of competency in various areas, which is quite stimulating for the installation of R&D Centres. In certain areas, such as the exploitation of deepwater oil and agriculture, we are among the best. Embraer has a partnership with Boeing to study the fuel of the future, associated to the fact that Embraer was the first aviation company to design and sell planes using ethanol as fuel. The first car that runs on ethanol was designed and built by FIAT’s Brazilian subsidiary. Also, it should be known that an important contribution comes government programmes to stimulate R&D activity.

Wenovate: What is the role of those R&D Centres in the Brazilian ecosystem?

Eduardo Vasconcellos: Initially, the role was modest, supporting the sales unit in complex projects that require explanation to buyers, as well as supporting the manufacturing area, adjusting the process to the national context. A more advanced stage includes the development of new products and processes based on technological platforms of the headquarters. The last stage includes the development of new technologies, taking the leadership within the company as a global centre in these areas, including being more competent than the headquarters. For instance, the Brazilian subsidiary of Pirelli Cables was the world leader in submarine cables and the Brazilian subsidiary of Rodhia is the world leader in intelligent fibres optical system.

There are cases in which the role of the subsidiary R&D Centre is to use the different competencies of the individuals and technological infrastructure of a country, without going through all the stages previously explained. This is the case of R&D Centres of Philips in Germany and the US.

Wenovate: In this context, what is “frugal innovation” and “reverse innovation”?

Eduardo Vasconcellos: Those are relatively new concepts, still being consolidated in its definition, without a consensus in the literature yet. “Frugal innovation” is the innovation focused on meeting the needs of a market in a less developed country. For instance, GE has created a portable device to do electrocardiography in poor regions with no electricity. P&G changed the packaging of its soap to allow its use in poor areas of Brazil where clothes are washed by the river, where cardboard packaging would not be possible.

When “Frugal Innovation” is used in a developed country, it is called “Reverse Innovation”. For instance, the device used to perform electrocardiography in India was also used in the USA.

Wenovate: What is the new role of the innovation centres of multinational companies present in emerging countries in a context of open innovation and of global network of innovation?

Eduardo Vasconcellos: There is a clear trend towards decentralization of R&D for several reasons. A study of the Boston Consulting Group lists: a) decrease of R&D costs; b) access to expertise; c) development of products, processes and services tailored to local markets; d) governmental requirements, among others. Open Innovation enables the access to science and technology infrastructure, emerging companies, suppliers and local customers, multiplying the potential for innovation.

A survey conducted by The Economist examined the main countries in which companies would invest in R&D outside headquarters in the next 10 years. China came first (39%), followed by USA (29%), India (28%), UK (24%), Germany (19%) and Brazil (11%).

The development of R&D networks are facilitated by information and communication technologies, which enable long-distance meeting and exchange of large files with great speed. For example, the design of the group of Embraer 170-190 jets was developed based on intelligent software and virtual reality, integrating a thousand engineers, 600 of which were from Embraer and 400 from 16 partnered companies located in different regions of the world. Embraer was the first company to use this type of software in the aeronautical sector.

The Figure below shows the decentralization of R&D at 3M:

ed028_ent_3M

Source: 3M

It is not always fruitful to decentralize R&D. There are many cases of companies that have decentralized in excess and then turned back, as there are cases of excessive centralization. The new role of subsidiaries, i.e., of contributing to the business outcomes, depends on facing certain challenges, such as:

a) Understanding the decision making factors to know when it is worth developing in a subsidiary instead of the headquarters;
b) How to coordinate  the various R&D centres around the world to reduce duplication and increase synergy;
c) How to deal with cultural diversity;
d) How to delineate organizational structures to enable transnational R&D projects;
e) How to seize the opportunities of open innovation in several countries, in a shared and coordinated way;
f) How to use knowledge management to constantly evaluate the process, make adjustments and learn with mistakes and successes.

To make those issues even more complex, the appropriate degrees of centralization versus decentralization are not constant, varying depending on the business, the global context, the evolution of markets, scientific and technological evolution in several countries; etc.

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