A new EC report, The role and internationalisation strategies of multinational , scrutinises the nature of industrial innovation in Europe. Today, pharmaceuticals and biotechnology, automotive, IT hardware, electronics and electrical equipment are the most internationalised industries. The report is published as part of European Commission DG Enterprise and Industry’s global review of innovation policies. Jointly prepared by the Austrian Institute of Economic Research (WIFO) and the Nordic Institute for Studies in Innovation, Research and Education, it is based on extensive literature survey complemented by new empirical evidence. The lessons from this report may have implications for academic research that is likely to result in technology transfer of research into innovative solutions.

As technologies become more complex, existing multinationals in house capabilities are no longer sufficient and companies have to access complementary technologies. They are therefore restructuring their innovation related activities towards establishing multi-hub networks of research centres to source their knowledge from the locations where they have access to specific cutting edge knowledge. As result, international subsidiaries now fulfil more far-reaching reseeach and development (R&D) mandates than ever before, acting as a competence centre for specific technologies or performing product development.

Looking at the motives and strategy adopted by industry to perform foreign direct investment (FDI) in R&D, the reports points to several key factors. One of the increasingly important factors is the proximity of academic institutions and innovation clusters with start-ups. This criterion complements the need for highly skilled scientific and technical work force. Hence research quoted in the report found that often “global research laboratories” are concentrated on high-wage industrialised countries.

By contrast, the report found, market-related factors, such as growth potential of the market and proximity to suppliers, competitors or lead-user, are dominant in case of “development” activities. Hence, “global development centres” supporting production and marketing activities are, to a substantial extent, located in Eastern Europe and Asia. What is more, the report notes that further decentralisation of innovation activities away from economically advanced countries (i.e. EU, US, Japan) will gain momentum in the years to come in parallel with the process of economic convergence of emerging economies such as China, India and the Asian tigers.

In the future, multinationals will locate innovation activities wherever it is most advantageous and new world centres of technological activity are likely to emerge in some of the “Non-European Low and Middle Income Countries” in Asia. The challenge for Europe is thus to remain an attractive location to innovate, to establish it as a centre of global R&D activities.

FDI matters because, according to findings, the internationalisation of the innovation process strengthens the competitiveness of the receiving economy. There are important indirect impacts from knowledge and productivity spillovers to domestic firms being observed. While the EU has traditionally held a strong position in innovation related FDI, the authors observe a significant decline in the respective inward FDI flows after the financial and economic crisis. Without any doubt, the future of innovation in Europe would very much depend on the capabilities by existing innovation hubs to entice further FDI.

The report’s recommendations relevant to academic research are the following:

• Overcoming research infrastructure weaknesses. Higher investments in research infrastructure, a larger number of researchers/teaching personnel per student and more autonomy of tertiary-level education/research institutions are the key elements to overcome the weaknesses of a large number of European universities.

• Higher education reform. In many countries, education at the higher secondary level is based too much on providing general education, with the effect that there is a deficiency of workers with intermediate skills. A shift from general to more application oriented education could alleviate this problem.

• By and large research in the EU is not excellent. There are a handful of first rate research institutions in the EU, but the large base of research carried out in the EU is still not cutting edge. The problem is therefore not exclusively and not predominantly one of bringing good research results on the market, but of being able to generate leading edge research and development, both, at the level of research institutions and companies and of bringing these to the market.

• Public to private sector researchers. Researchers that leave public research institutions and universities are an important source of know-how for firms. This inter-sectoral mobility very often is also related to cross-border mobility events it is important both, to facilitate the absorption of young academics in industry and to remove international mobility barriers such as the limited transferability of retirement benefits across countries.

• Development and anticipation of new skills. Companies will also require new skills to deal with the internationalised environment, including management of multi-national, multi-cultural projects, remote teams. Cultural factors were found to be important barriers to bilateral FDI in R&D and innovation related activities. To facilitate the adjustment processes offset by increased internationalisation at the labour market re-training and lifelong-learning within firms is important.

• Public R&D investments focused on “grand challenges.” Research shows the importance of public R&D investment and inherent impulses in industrial development. For this reason public spending should be focused on the grand challenges of our time including climate change and loss of biodiversity, security and sustainability of energy, food supply and pandemics. More concerted efforts across the EU are probably needed here to reach the research critical mass. A problem remaining in this context is the fragmented funding of research and development across the EU Member States. There is a need for more practical solutions to pool research and development funds and costly research infrastructures more strongly across EU Member States, especially for research, development and innovation activities aiming at tackling the grand challenges.

Some of these are by no means new. But at the time where choices have to be made due to increased constraints in resources. It is important to bear in mind some of the lessons learned.

Featured image credit: Seth Waite