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Monica Riviere, PhD 2nd year


Firm s strategy in deploying its competitive advantages across borders :

Firm s strategy in deploying world s knowledge :

Investment choice that lead to superior performance

Investment choice to prepare for future growth opportunities

Established corporations seeking growth today face an increasing need to innovate. While some corporations try to grow through external acquisitions, many recognize the ultimate importance of generating organic growth through innovation. Corporations are searching for new approaches to innovation (NIST, 2008)1 The capability to develop new transnational products fundamentally depends on how proficiently MNCs transfer and deploy knowledge from multiple country sources (M. Subramaniam & N Venkatraman, 2001) 2


Research focus: Firm s strategy in harnessing and internalizing new creative capabilities present in different world hubs of scientific excellence and within diverse sources of technology heterogeneous distributed across the world Research question:

what are the determining factors for MNEs to

a) opt for an R&D laboratory abroad and therefore tap into the innovative potential of scientific human talents b) tap into the innovative potential of small nascent enterprises through international acquisition c) relay on entrepreneurial ventures replicating venture capital at corporate level (CVC)

(2) what is the performance associated with

different choice modes.

Epistemology: Positivism Theories used: Knowledge Based View and Real Option Reasoning

Knowledge Based View


Real Option Reasoning



Uncertainty in creating new avenues for future growth is measured by the distance between the knowledge base and the knowledge invested in. The higher the distance, the higher the uncertainty.

I. Strategic internationalization of R&D activity

sourcing of creative inputs does not come exclusively from a central R&D laboratory, but other over- seas R&D laboratories or technological affiliates can also undertake genuine knowledge creation activity from capitalizing on the scientific heterogeneity fostered in individual host countries.. (Filippaiosa, Papanastassiouc, Pearcee, Ramaf (2009)

II. Technology/capability acquisition

A knowledge-asset motivated acquisition could be made to acquire a technology in which the buyer already has some expertise or to facilitate a firm s entry into a new area without having to go through the risky and costly process of innovation on its own (AlAzzawi, 2008)

III. Corporate Venture Capital investment

CVC programs in established corporations invest in and partner with entrepreneurial companies. By doing so, established companies are able to identify and source new emerging technologies from entrepreneurial companies. or taking real options on technologies and business models (by investing in a wider array of technologies or business directions than the company can pursue itself) (NIST, 2008)

At the country level :

At industry level :

At firm level:
Absorptive capacity- R&D expenditure relative to assets and total R&D personnel Technological proximity host country patent citation refers/not to prior technological activity of the parent Knowledge relatedness relatedness between the stock of knowledge base and the knowledge invested in Control for: -International activity -firm size -product portfolio diversification

- technological development climate supported by opportunities (Klerorick et al.,1995) the government lower cost environment growing markets tax policies Industries with more technological opportunities offer the good Early stage entrepreneurial activity ground for researchers and investors to start their own ventures (Dushnitsky et al., 2005) intellectual property (IP) laws

- industry growth opportunities

rich pool of readily available innovations difficult for MNEs to retain key personnel talents in their own R&D facility

(Global Venture Capital Survey, Deloitte Development LLC, 2010)

Multinomial model Investment choice = c+

EA +

TO +

3 AC

TP +


EA = entrepreneurial activity (country level) TO = technological opportunity (industry level) AC = absorptive capacity (firm level) TC = technological proximity R = knowledge relatedness TC and R measure the level of Uncertainty. Does the knowledge invested in will create future synergies, will it create future avenues for growth? H: MNEs investing abroad in knowledge to expand their capabilities will opt for full acquisition or greenfield investment in form of R&D labs H: MNEs investing abroad in knowledge to renew their capabilities will opt for CVC or partial acquisition as the level of Uncertainty increases H: MNEs with high level of absorptive capacity will opt for a greenfield establishment mode in industries with low technological opportunities. H: The propensity of acquisition increases for the industries with high technological opportunities for MNEs with high absorptive capacity. 9

From Global Fortune 500 parent companies selected on revenue criteria Based on continuity both in 2005 and 2010

From DBD Database: Who Owns Whom - find all the foreign affiliates

Determine the core business (CORBUS) of the parent SIC code (2 digits) and affiliates core business determine affiliates in R&D

From Thomson One Banker database acquisitions made by parent company differentiate core business from non-core business

VentureXpert dataset- CVC investment (if any)


Datastream Compustat financial figures (including R&D expenditures at corporate level) Patenting activity at corporate level and affiliates level both patent stock and patent application Damodarans data site Industry growth opportunity Global Innovation Index INSEAD country level compilation early stage entrepreneurial activity Technological opportunities = for each given sector (2-digits SIC) the average number of citation-weighted patent applications by firms in a given year

Both exploratory and explanatory methods


work to add insight on the dynamic capability building issue

Interviews 2 kept in France at IBM and Accenture


analysis for the investment choice mode and


Heckmans procedure to control for self-selection biases Econometric model: multinomial model for choice mode Tobins Q 2005 vs. 2010 Hedonic regression ( regress the market value of a firm on the bundle of resources that compose the firm including measures of knowledge & innovation)



Technological opportunities= concept examined by Klerorick et al. (1995) to explain cross-industry variation in R&D intensity and technological advance. Calculated following Dushnitsky et al. (2005), for each given sector (2-digits SIC) the average number of citation-weighted patent applications by firms in a given year Knowledge Relatedness(following GAUTAM AHUJA1 and RIITTA KATILA - Strat. Mgmt. J., 22: 197220 (2001) first, the list of patent numbers that appeared in both the invested in/ acquired firms knowledge base and in the acquiring firms knowledge base is prepared. Then, the number of elements on this list is divided by the absolute size of acquired knowledge base (measured as the number of cited and obtained patents Technology proximity (following Cantwell J.A. and Noonan C. (2002) Technology sourcing by
foreign-owned MNEs in Germany. An analysis using patent citations, paper presented at the 28th EIBA conference, Athens.) the majority of citations reference the prior technological activities of the parent ?




Area of

research: Global Strategy


of research: Knowledge Management

Aspect: Global Investment for strategic renewal

Investment choice in knowledge creation vs. acquisition

Strategic innovation

MNES international strategy



To expand firms existing capabilities To renew firms existing capabilities


the mean of achievement

Knowledge creation Knowledge sourcing


the degree of equity investment

Full equity investment Partial equity investment


where knowledge is grounded

Technology available Human talents available


We now find ourselves in a time of economic maturity. The development of new businesses has become one of the most important tasks for corporations seeking to maintain growth. []Now, we are focusing our efforts on business fields that are expected to experience rapid growth in the 21st century, such as biotechnology and afforestation, environment and energy, high-tech fields, etc


Firms face the risk not having the right capability at the right time Still far from being closed the debate on the advantages and drawbacks of early movements, late entrants face the risk to be outpaced by competitors entered earlier
Foreign Direct Investment (FDI) in R&D has two different motivations: doing 'adaptive' R&D and getting access to 'state-of-the-art' knowledge. The 'adaptive' R&D modifies products, processes and technologies according to local needs and supports foreign production facilities. Getting access to 'state-of-the-art' knowledge means that companies invest in foreign countries with a view to benefiting from excellent, local research and researchers ( from United Nations Conference on Trade and Development 2004).

Takes into account uncertainty about future parameters that determine the value of the project, as well as management ability to respond to the evolution of those parameters

The project is modeled in terms of:

Uncertainty: the volatility in the change in value over time Value: the starting value (spot price)- is usually proxied via management's best guess of NPV

Management ability to respond to changes in value over time is modeled at each decision point

Level of uncertainty the highest, the greatest the value of option Nature of uncertainty- exogenous vs. endogenous Competition Option exercise cost- ex: bargaining cost over acquisition of a JV Managerial flexibilities that may interact with future uncertainties include the flexibility to expand or contract a project, the option to delay an investment, and the option to speed up or hold up an investment. Researchers in modern financial theory tend to agree that option pricing theory is one of the most promising approaches to addressing such complex investment issues (Ping & Liu, 2003) We already have models to evaluate investment projects in emerging technologies derived from financial methods to evaluate financial options (NPV method)
Tong & Li, 2008

Knowledge Based View

Real Option Reasoning

Addresses firm performance differences using asymmetries in knowledge and associated competences and capabilities (Barney, 1991; Prahalad & Hamel, 1990; Peteraff,1993; Winter, 1995; Hederson & Cockburn, 1994) the costs that the RBV consider are not those derived from opportunistic behavior but the cost of coordination, communication and combinations (Kogut and Zander, 1993)- Knowledge Based the entry mode predicted by RBV will consider the most efficient ways to transfer, coordinate and combine knowledge within the MNE subsidiaries

focuses on managing the costs associated with uncertainty while providing access to future opportunities (Myers, 1977) Investment in the capability to respond profitably to future uncertainty (Kogut, Kulatilaka, 1995) real [assets (the investment)] options [bear the right but not the obligation to undertake later business decisions] type of options: - growth options - switching options

By limiting the framework to TC explanations, the role of global strategy is overlooked TC does not consider how firms create and compet. adv. - the role of experience, communication technologies and globalization to assist in the problem costs associated with opportunism and assets specificity Independent of opportunism, frictions between economic actors occur because of inevitable, irreducible differences in their knowledge (Conner & Prahalad, 1996) Contrary to transaction cost theory (TCT) which focuses solely on the efficient transaction of individual products (Williamson, 1975), organizational capability and network approaches emphasize the acquisition and development of value-creating resources and capabilities as basis of competition.