Does International Research and Development Increase Patent Output

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Strategic Management Journal

Strat. Mgmt. J.

,

26

: 121–140 (2005)Published online 28 October 2004 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.436

DOES INTERNATIONAL RESEARCH ANDDEVELOPMENT INCREASE PATENT OUTPUT? ANANALYSIS OF JAPANESE PHARMACEUTICAL FIRMS

JOAN PENNER-HAHN

1

* and J. MYLES SHAVER

2

1

School of Business Administration, Wayne State University, Detroit, Michigan,U.S.A.

2

Carlson School of Management, University of Minnesota, Minneapolis, Minnesota,U.S.A.

Internationalizing research and development is often advocated as a strategy for fostering thedevelopment of technological capabilities. Although

ﬁ

rms conduct international R&D to tapinto knowledge bases that reside in foreign countries, we argue that in order to bene

ﬁ

t frominternational R&D investments

ﬁ

rms must already possess research capabilities in underlying or complementary technologies. We examine the international R&D expansion activities, researchcapabilities, and patent output of 65 Japanese pharmaceutical

ﬁ

rms from 1980 to 1991. We

ﬁ

nd that

ﬁ

rms bene

ﬁ

t from international R&D only when they possess existing research capabilities inthe underlyingtechnologies. In additionto re

ﬁ

ning our understandingof when internationalR&Denhances

ﬁ

rm innovation, our results integrate asset-seeking and asset-based theories of foreigndirect investment. Internationalizing R&D to tap into foreign knowledge bases is consistent withasset-seeking theories of foreign direct investment, while the contingent nature by which

ﬁ

rmsbene

ﬁ

tfrom internationalR&D is consistentwith asset-basedtheoriesof foreigndirectinvestment and the notion of absorptive capacity.

Copyright

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2004 John Wiley & Sons, Ltd.

INTRODUCTION

The internationalization of research and devel-opment (R&D) is increasingly recognized as animportant

ﬁ

rm strategy in many industries. Firmsinternationalize their R&D activities to gain accessto knowledge and capabilities available in othercountries. Thus, internationalizing R&D is anexample of the type of foreign direct investment(FDI) that several authors have termed asset-seeking (Kogut, 1991; Wesson, 1999). This isin contrast to the more traditional view of FDIas an asset-based activity (Buckley and Casson,1976; Caves, 1982; Dunning, 1998). Here, a

ﬁ

rmpossesses some advantage, generally intangible in

Keywords: international R&D; patents; pharmaceuticalresearch; absorptive capacity; foreign direct investment

*Correspondence to: Joan Penner-Hahn, School of BusinessAdministration, Wayne State University, 5201 Cass Avenue,Detroit, MI 48202-3030, U.S.A. E-mail: jdph@wayne.edu

nature, which is further utilized by internationalexpansion.Internationalization of R&D has become impor-tant in recent years in response to the perceivedincrease in technological sophistication through-out the world and to the existence of speci

ﬁ

cexpertise in particular countries or regions. Com-panies reach outside of their domestic bound-aries to acquire technologies and technologicalskills (e.g., Nelson, 1993). Much of the cur-rent literature advocates internationalizing R&Din order to acquire new skills and technologies(e.g., DeMeyer, 1992; Komaran and Goodman,1993). However, we know little about if, orwhen,

ﬁ

rms that internationalize their R&D activ-ities enhance their technological capabilities. Ourcontribution stems from the examination of thisissue.We argue that the establishment of internationalR&D activities is often not suf

ﬁ

cient for a

ﬁ

rm

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2004 John Wiley & Sons, Ltd.

Received 8 May 2000Final revision received 7 July 2004

122

J. Penner-Hahn and J. M. Shaver

to acquire desired skills and technologies. Just asentering a country that has a large consumer mar-ket is no guarantee for successful manufacturing-based FDI, entering a market that has a uniqueknowledge base is no guarantee for successfulR&D FDI. Consistent with the notions of asset-based FDI as well as that of absorptive capacity(Cohen and Levinthal, 1990), we propose that theacquisition of skills and technologies is contingenton the investing

ﬁ

rm possessing underlying tech-nological capabilities that foster the acquisition of skills and technology.There are two types of capabilities that webelieve aid

ﬁ

rms in successfully acquiring newskills and technologies through international R&D.First,

ﬁ

rms with strong existing research activitiesin the underlying technologies will be better ableto absorb and put to use the skills and technolo-gies they are exposed to in their international R&Dactivities. Second,

ﬁ

rms that possess research skillsin technologies complementary to the skills andtechnologies they are exposed to in their interna-tional R&D activities will be better able to adaptthe new technologies to their use. By comple-mentary technologies, we mean technologies thatare necessary for the commercial development of another technology or science base as in the senseproposed by Teece (1986).To test our arguments, we investigate the inter-national R&D activities and pharmaceutical patentoutput of

ﬁ

rms in the Japanese pharmaceuticalindustry for the years 1980–91. We measure

ﬁ

rms’research capabilities in the underlying technolo-gies by previous pharmaceutical patents. Becausemost of the international R&D activities estab-lished by these

ﬁ

rms were focused on biotech-nology, we measure

ﬁ

rms’ research capabilitiesin complementary technologies as previous fer-mentation patents. As we discuss shortly, fer-mentation technology is complementary to manybiotechnology applications because it is the pro-cess by which many biotechnology products areproduced.We

ﬁ

nd that international R&D increases phar-maceutical patent output. However, this is only for

ﬁ

rms with existing capabilities in the underlyingtechnologies. Firms without existing capabilitiesin the underlying technologies do not bene

ﬁ

t frominternational R&D. We do not

ﬁ

nd evidence that

ﬁ

rms with capabilities in complementary technolo-gies bene

ﬁ

t more from international R&D com-pared to

ﬁ

rms lacking these capabilities. Moreover,we

ﬁ

nd that

ﬁ

rms with greater existing capabilitiesin the underlying technologies have higher futurepharmaceutical patent output. We also

ﬁ

nd in manyspeci

ﬁ

cations that

ﬁ

rms with greater capabilitiesin complementary technologies have higher futurepharmaceutical patent output.Our

ﬁ

ndings have important implications forboth managers and researchers. We shed light onwhat conditions must hold for international R&Dto facilitate

ﬁ

rm innovation. Moreover, we showthat successful asset-seeking FDI, such as inter-nationalizing R&D, occurs when

ﬁ

rms possesscertain capabilities. This insight fosters an inte-gration of asset-seeking and asset-based theoriesof FDI.In the next section, we discuss previous researchthat addresses the internationalization of R&D andpresent our hypotheses of when international R&Dincreases

ﬁ

rm innovation. The third section pro-vides background information on the industry con-text of our study. In the fourth section, we describeour methodology and in the

ﬁ

fth section we dis-cuss the

ﬁ

ndings of our study. We conclude withimplications.

BACKGROUND AND HYPOTHESES

International R&D: Background

Internationalization of R&D has generated con-siderable interest in academic and business cir-cles. The primary question addressed by the exist-ing literature is ‘why do

ﬁ

rms undertake interna-tional R&D?’ Previous authors have pointed to theimportance of accessing skills and capabilities thatreside overseas as the underlying motivation forinternationalizing R&D (e.g., Buckley and Casson,1976; De Meyer and Mizushima, 1989; Komaranand Goodman, 1993). This type of activity hasbeen called asset-seeking FDI by some (Wes-son, 1999) and capability-seeking by others (e.g.,Anand and Delios, 2002). This rationale for inter-nationalizing contrasts with the asset-based ratio-nales for internationalization that were proposedby many FDI theorists (Caves 1971, 1982; Buck-ley and Casson, 1976). In asset-based FDI, the

ﬁ

rm possesses some advantage, generally intan-gible in nature, that is further utilized by interna-tional expansion.Asset-seeking FDI has become more prevalentwith the realization that the skills and capabilities

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2004 John Wiley & Sons, Ltd.

Strat. Mgmt. J.

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: 121–140 (2005)

Does International R&D Increase Patents?

123

being sought by

ﬁ

rms might be uniquely avail-able in a foreign location. Although technologicalcapability is diffusing and equilibrating through-out the world, there exist pockets of expertise thatdevelop due to peculiarities of speci

ﬁ

c ‘nationalinnovation systems’ (Nelson, 1993). Foreign

ﬁ

rmsmay

ﬁ

nd it necessary to establish R&D activitiesin these locations to tap into sources of technol-ogy that diffuse slowly across national boundaries(Kogut, 1991). Technological knowledge is oftentacit and requires frequent interaction for trans-fer (Kogut and Zander, 1992). Thus, proximityis necessary for acquiring such localized knowl-edge.Indeed, Kuemmerle (1997) found that 45 percentof the foreign R&D laboratories in his samplewere established for ‘home-base-augmenting’ pur-poses. That is, the laboratories were establishedfor the purpose of tapping knowledge from com-petitors and institutions in other lands. Empiri-cal evidence also documents that foreign investorsare able to tap into foreign knowledge bases andsupports these arguments. For example, Almeida(1996) shows that foreign semiconductor

ﬁ

rmstap into local knowledge in the United States.Cantwell (1995) shows that technological leadersare becoming increasingly geographically special-ized with respect to their technological activity.Jaffe

et al

. (1993)

ﬁ

nd that inventors are morelikely to cite patents of other local inventors. Simi-larly,

ﬁ

rms might conduct foreign R&D in order tobe near the users of the technology. Foreign cus-tomers are often the most sophisticated users of atechnology and therefore important contributors tofuture technology development. For example, DowChemical established a furniture R&D lab in Italybecause Italian furniture makers are the most inno-vative in their demands for adhesives,

ﬁ

nishes, andother materials.Although there has been a great deal of discus-sion of the role of asset-seeking FDI in expand-ing the capabilities of

ﬁ

rms, there have been fewempirical studies of the results of this type of FDI.This study attempts to rectify this situation. Inorder to assess the impact of international R&Don innovation it is important to

ﬁ

rst recognize that

ﬁ

rm capability is also an important determinant of

ﬁ

rm innovation. Therefore, we turn to the existingliterature to assess how capabilities, speci

ﬁ

callyunderlying and complementary technology capa-bilities, affect

ﬁ

rms innovation. With this buildingblock we then hypothesize how such capabilities,when combined with international R&D, wouldresult in even greater innovation.

Research capabilities and patents

We expect that

ﬁ

rms with greater research capa-bilities in underlying technologies will exhibitgreater innovative output. As Scherer and Ross(1990) observed, ‘Technical innovations do not falllike manna from heaven. They require effort—thecreative labor of invention, development, testingand introduction into the stream of economic life.’As Hall, Griliches, and Hausman (1986: 265) state:‘The annual research and development expendi-tures of a

ﬁ

rm are considered to be investmentswhich add to the

ﬁ

rm’s stock of knowledge.’ Firmsundertake R&D activities, in large part, to createinnovations that will ultimately provide new prod-ucts and therefore pro

ﬁ

ts. While most innovationsmay be serendipitous,

ﬁ

rms may have a compar-ative advantage in generating inventions becausethey ‘are more likely to put together the criti-cal combination of a fertile mind, a challengingproblem, and the will to solve it’ (Scherer andRoss, 1990).R&D is one of the

ﬁ

rm-speci

ﬁ

c assets that isthe result of a cumulative pattern of activity (Dier-ickx and Cool, 1989). In addition, Dierickx andCool point out the asset mass ef

ﬁ

ciencies nature of R&D; that is, that increments to an existing stockare facilitated by possessing high levels of thatstock. The organizational learning literature hasalso emphasized the experiential nature of inno-vation and that an organization’s past can in

ﬂ

u-ence its future capabilities for renewal and change(Mezias and Glynn, 1993).Economists have long explored the outcome of corporate R&D activities through empirical studies(Mans

ﬁ

eld, 1962, 1965; Terleckyj, 1980). Mans-

ﬁ

eld (1980) found that

ﬁ

rms with large amountsof basic R&D had relatively high rates of pro-ductivity increase, although he

ﬁ

nds that long-term research rather than basic research specif-ically may explain most of this growth. Subse-quently, Griliches (1986) demonstrated that R&Dcontributed positively to productivity growth andthat basic research is an important part of pro-ductivity. Pakes (1985) and Griliches (1980) haveresults which suggest that patents are an output of R&D rather than an input.In addition,

ﬁ

rms that are more skilled in partic-ular research areas will be more likely to discover

Copyright

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2004 John Wiley & Sons, Ltd.

Strat. Mgmt. J.

,

26

: 121–140 (2005)

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