The New Geography of Innovation – Asia’s role in global innovation networks

© Dieter Ernst, East-West Center, Honolulu
ErnstD@EastWestCenter.org

Argument
• Global innovation networks transform the geography of innovation. • US firms are key drivers • Much of the action now is in Asia (driven by the resurgence of China and India). • A neglected dimension of Pacific Rim integration
– dearth of data advice weak foundation for policy

Questions
1. Innovation processes in transition. What is new? 2. How important is Asia’s role? And what forces are driving Asia’s network integration? 3. Policy Challenges – Will network integration foster ‘decoupling’? – Will it reduce entrenched barriers to innovation in Asia? – Is there scope for sharing the benefits within Asia and across the Pacific?

Israel.. Singapore. India…Korea.1. Hungary. Innovation Processes in Transition (What is new?) • Observation (despite poor data): – globally distributed innovation networks complement in-house R&D – multiple new locations for innovation are emerging (China.) – But: established centers retain dominance – new conflicts over sharing the benefits arise within Asia and across the Pacific .

Asia spent US-$(PPP) 436. after the US (with $ 353 billion). . but ahead of Japan ($143.Asia’s Push to Innovate • In 2007.5 billion).2 billion on R&D (39% of world total). China is now the second largest R&D investor. • With US-$(PPP) 175 billion. placing it ahead of the US ($353 billion and a share of 31%).

8 3.8 17.7 25.6 12.9 13.7 24.2 Battelle 2007 2007e 31.7 36.8 15.6 2008p 30.9 12.9 .4 38.7 23.1 40.Asia’s % share in global R&D spending 2006 US Asia China Japan India EU all 32.5 13.4 3.0 3.

S. Germany. United Kingdom.Persistent U. France) © Dieter Ernst .-centric concentration of the sources of innovation • all 15 leading companies with the best record on patent citations are based in the United States (9 in the IT industry) • The 700 largest R&D spenders (mostly large U. followed by Japan.S. firms) account for 50% of the world’s total R&D expenditures and >2/3 of the world’s business R&D • > 80 percent of the 700 largest R&D spenders come from only five countries (United States dominates.

…technology.Explanation (in progress): • Corporate strategies respond to – globalizing markets (products. ICT. globalization of higher education) • multiple asymmetries (private vs public. advanced vs emerging economies. large vs small countries) . finance. knowledge workers) – pressures to improve R&D productivity • Asian ‘upgrading thru innovation’ strategies • Enablers (liberalization.

Asian firms construct their own (mostly intra-firm) networks © Dieter Ernst . Global firms “outsource” stages of innovation to specialized Asian suppliers inter-firm networks III. Global companies “offshore” stages of innovation to Asian affiliates intra-firm global innovation networks II.Global innovation networks I.

• Job security and unemployment are the dominant concern of US-based engineers (69% of respondents). together with offshore outsourcing (67%).2006 Engineer Survey • 50% of US respondents (up from 46% in 2005) report that their company has sent electronics design work offshore. The Electronic Engineering Times . • 34 % of Indian respondents report that their employers are offshoring high-end hardware design and software development.

Folsom and Austin Bangalore (2700 = largest lab outside US).Intel’s Global Innovation Network Location US (11 labs) Asia (7 labs. new applications for emerging markets Beijing (50++). leading-edge processor development Penang (500). processor research Nizhny Novgorod (200++): software Israel. Russia © Dieter Ernst . platform and architecture lab Haifa (1400. since 1974). more planned) Description core technology development in Santa Clara. design implementation Shanghai (100++) Linux based solutions for telecom.

CPU) CPU) Tier 2: ODM Tier 3 .ODM Inter-Firm Network Notebooks Tier 1: Flagship Core Core Component Component Suppliers Suppliers (HDD. Displays. Displays. (HDD.Suppliers © Dieter Ernst .Suppliers Tier 4(and below) .

G3 UMTS. Russia Bangalore. optical. RF design Development of embedded SW and platforms total solutions for CDMA. VoIP Moscow. Sweden base station architecture and system design. algorithms algorithms. mobile data service. analog-mixed signal design (RF).New Entrants: Huawei Kista/Stockholm. CDMA Mobile Intelligent Networks. India Plano/Texas (Dallas telecom corridor) © Dieter Ernst .

Singapore and China) chip packaging companies (Taiwan. China.Global Innovation Network . Taiwan) fabless design houses (US.Handsets Telcom service provider defines system architecture (China) ODM suppliers of handsets (China) IDM provides design platform (US) IP providers (UK. Taiwan. India) foundries (Taiwan. China) tool vendors for design automation and testing (US and India) design support service providers (various Asian countries) © Dieter Ernst .

2. How important is Asia? And what forces are driving Asia’s network integration? .

2005 Survey of the world’s largest R&D spenders • China is the 3rd most important offshore R&D location (after the US and the UK) • India is 6th and Singapore 9th • China is the most attractive location for future foreign R&D. ahead of the US and India • Leading global corporations also intend to expand their offshore outsourcing of R&D to Asian firms UNCTAD World Investment Report 2005 .

the US and China to be the best overseas locations for future R&D .EIU 2006 Survey • India and China are the 2nd and 3rd most important offshore R&D location (after the US and ahead of the UK) • Leading global corporations consider India.

combine liberalization with proactive and flexible industrial and innovation policies © Dieter Ernst Interviews with 120 companies in the US. Asia and Europe .Systemic nature of driving forces • return-on-investment must exceed risk-adjusted market average reduce development cost • demand: proximity to Asia’s markets and global factories • exploit Asian markets for knowledge workers (from ‘labor cost arbitrage’ to external sourcing of complementary innovative capabilities) • global markets for technology facilitate innovation offshoring • Asian policies: tax and financial incentives.

of-the-pyramid’ markets for less overengineered products and services with substantially lower costs of acquisition and operation © Dieter Ernst . Japan.China Market largest market for telecom equipment (wired & wireless) (test bed for 3G) ditto for semiconductors and handsets (launch market) 2nd largest market for cars Lead market for digital CE (#2) Leading export market for US. Taiwan and Korea ‘bottom.

000 *=including salary. Burnaby. 2002 Location Silicon Valley Canada Ireland Taiwan South Korea China India Annual Cost 300. benefits.000 <60. Korea.000 (Shanghai) 24.Annual Cost of Employing a Chip Design Engineer* (US-$). China) © Dieter Ernst . Inc.000 <65.000 28. Canada.000 (Suzhou) 30. Canada (for Silicon Valley.000 75.000 150. India). Ireland. plus interviews (Taiwan. office space and other infrastructure Sources: PMC-Sierra. equipment.

Wadhwa 2007 .

2005 .500 PhD degrees in 2004 are in S&E between 1995 and 2003. first year entrants in science and engineering PhD programs in China increased six-fold.China – growth of science & engineering PhDs 70% of the 23. from 8.Freeman.139 to 48.740 China will produce more S&E doctorates than the US by 2010 NBER .

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3. Implications and Policy Challenges • • • Will network integration foster ‘decoupling’? Will it reduce entrenched barriers to innovation in Asia? Is there scope for sharing the benefits within Asia and across the Pacific? .

centered on China? • Talent pool: Can Asian countries replicate the US model of attracting top talent from the global market for knowledge workers? • Innovation system: Can Asian universities become trend-setters in reforming innovation systems? • Innovative capabilities: Can Asian firms enter the “global innovation race” as sources of new technology and global standards? © Dieter Ernst .Will network integration foster ‘decoupling’? • Trade: Will reliance on “triangular” trade give way to an “Asianization” of trade and investment.

• Is network integration a poisoned chalice? • Or is it a catalyst for reducing entrenched innovation barriers? © Dieter Ernst .Strategic Dilemma for Asia’s emerging knowledge economies • Innovative capabilities continue to lag substantially behind industry leaders • Reducing the gap will take time.

Network integration – A Poisoned Chalice? • global firms compete for Asia’s limited talent pool (‘brain drain’) • weak linkages with local universities • limited knowledge sharing • reverse knowledge transfer (‘institutional arbitrage’) • bridgeheads for platform leadership strategies • IP barriers .

Network integration – a catalyst for reducing innovation barriers? • pressure to upgrade technological and management capabilities and skill levels of workers • exposure to leading-edge technology and (tacit) knowledge about technology and management • catalyst for reforming national innovation systems (?) • links with markets and financial institutions • access to intellectual tools and sources of knowledge .

• Asian firms need to create unique products and solutions.Avoid the ‘commodity price trap’ • Just competing as lower-cost R&D contractors may leave them in a low-margin “commodity price trap”. . addressing important user needs that incumbent market leaders have neglected.

military. energy.Innovation Strategies Matrix low Global integration high high II: mission-based complex technology systems (space. environment. climate) I: ‘bottom-of-thepyramid’ innovation (essentials for lowertier urban markets and rural poor) © Dieter Ernst IV: global market leadership • technology leadership • technology diversification III: Global R&D factory (contract support and R&D services) R&D intensity low .

India’s resurgence Japan. Taiwan.Sharing the benefits? 1. Redefining triangular relationships US-Japan-China US-China-India • … . Korea. China’s resurgence 2. ASEAN India-China. South Asia. East Asia 3.

US-Asia division of labor in innovation -Scenarios Hierarchical: selective and tightly controlled offshoring of lower-end innovation tasks and capabilities Complementary: U.-led global innovation networks combine system integration capabilities in the United States with lowercost offshore development of intellectual property Unequal interdependence: architectural innovations and new standards are developed both in the US and in Asia.S. but the US will continue to shape the terms of interdependence © Dieter Ernst .

A Comparative Analysis of Leading Asian Export Economies Globalization of Knowledge Work .Why is chip design moving to Asia ? Governing the Global Knowledge Economy: Mind the Gap! (with David M. George Mason University) 2. 3. . Hart.EWC Innovation Research 1. Innovation System Dynamics in the Global Knowledge Economy .

Juan J. Co-published with the Pacific Trade and Development Conference (PAFTAD) .. Gong Hancock. Shorenstein Asia Pacific Research Center and Brookings Institution Press -. D. International Journal of Technology and Globalisation (MIT) -. “Beyond the ‘Global Factory’ Model: Innovative Capabilities for Upgrading China’s IT Industry. S. “Can Chinese IT Firms Build Innovative Capabilities Within Global Production and R&D Networks?”. and W. 2007. in: China's Quest for Independent Innovation (M. 2007. ed.Root Causes of Asia’s Rise and Policy Implications”.). editors). “Innovation Offshoring . H. Rowen. F.EWC innovation publications(1) Ernst.. London: Routledge. in : Multinational Corporations and the Emerging Network Economy in the Pacific Rim (Palacios. 2007. Miller.

2005.” in: R.” in International Journal of Innovation Management.. July http://www. 1/ 2: 6-20 . Vol. INNOVATION OFFSHORING: Asia’s Emerging Role in Global Innovation Networks. Sassen (eds). “Limits to Modularity . published for the U. special issue on “Competitive Strategies of Asian High-Tech Firms". in cooperation with the U.. Digital Formations. Princeton University Press. 2005.1: 47-73 -.S. D. 29. Vol.EWC innovation publications (2) Ernst. 2005.3: 303-335 -. 2006. IT and New Architectures in the Global Realm. East-West Center Special Report.eastwestcenter. Latham and S. Asia-Pacific Council. 9. Vol. Social Science Research Council.” Industry and Innovation.org/fileadmin/stored/pdfs/SR010. Princeton and Oxford -.Reflections on Recent Developments in Chip Design.” International Journal of Technology Management..S. “Pathways to innovation in Asia’s leading electronics-exporting countries . 12. No. special issue in honour of Keith Pavitt..a framework for exploring drivers and policy implications. 2005. “Complexity and Internationalisation of Innovation: Why is Chip Design Moving to Asia?. “The New Mobility of Knowledge: Digital Information Systems and Global Flagship Networks.pdf ..

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