Building Effective R&D Capabilities Abroad

Planning R&D facilities in the new global economy calls for a complex decision making process, based in part on whether a particular site is intended to tap local knowledge or to support a company's manufacturing and marketing abroad. HBS Professor Walter Kuemmerle offers a look at two contrasting foreign-based R&D decisions in this excerpt from his article in World View: Global Strategies for the New Economy (HBS Press).
by Walter Kuemmerle

World View: Global Strategies for the New Economy is a collection of Harvard Business Review articles edited by Jeffery E. Garten, Dean of the Yale School of Management. At the dawn of the new century, says Garten, "globalization has become one of the key frameworks—if not the key one—for every aspect of corporate strategy." The articles in the book have been selected, he writes, "to help corporate leaders think through global strategies at a time when there are few guideposts to navigating the mind-boggling changes that are occurring."

In one of those articles, "Building Effective R&D Capabilities Abroad," Walter Kuemmerle looks at changes in the research & development function in the global economy. A centralized R&D approach will no longer suffice, says Kuemmerle, for two reasons: "First, as more and more sources of potentially relevant knowledge emerge across the globe, companies must establish a presence at an increasing number of locations to access new knowledge and to absorb new research results from foreign universities and competitors into their own organizations. Second, companies competing around the world must move new products from development to market at an ever more rapid pace."

In the following excerpt, Kuemmerle examines two foreign R&D sites created to meet those two needs: a home-base-augmenting site, in which information flows from the foreign laboratory to the central lab at home; and a home-base-exploiting site, in which information flows to the foreign laboratory from the central lab at home. (See the exhibit, "How Information Flows Between Home-Base and Foreign R&D Sites.")

The particular type of foreign R&D site determines the specific challenges managers will face. Setting up a home-base-augmenting site—one designed to gather new knowledge for a company—involves certain skills. And launching a home-base-exploiting site—one established to help a company efficiently commercialize its R&D in foreign markets—involves others. The cases of Xerox and Eli Lilly present an instructive contrast.

World View

Xerox established a home-base-augmenting laboratory in Grenoble, France. Its objective: to tap new knowledge from the local scientific community and to transfer it back to its home base. Having already established, in 1986, a home-base-augmenting site in Cambridge, England, Xerox realized in 1992 that the research culture in continental Western Europe was sufficiently different and complementary to Great Britain's to justify another site. Moreover, understanding the most advanced research in France or Germany was very difficult from a base in Great Britain because of language and cultural barriers. One senior R&D manager in the United States notes, "We wanted to learn firsthand what was going on in centers of scientific excellence in Europe. Being present at a center of scientific excellence is like reading poetry in the original language."

It was essential that managers from the highest levels of the company be involved in the decision-making process from the start. Senior scientists met with high-level managers and entered into a long series of discussions. Their first decision: to locate the new laboratory at a center of scientific excellence. Xerox also realized that it had to hire a renowned local scientist as the initial laboratory leader. The leader needed to be able to understand the local scientific community, attract junior scientists with high potential, and target the right university institutes and scholars for joint research projects. Finally, Xerox knew that the laboratory would have an impact on the company's economic performance only if it had the critical mass to become an accepted member of the local scientific community. At the same time, it could not become isolated from the larger Xerox culture.

Xerox considered a number of locations and carefully evaluated such aspects as their scientific excellence and relevance, university liaison programs, licensing programs, and university recruiting programs. The company came up with four potential locations: Paris, Grenoble, Barcelona, and Munich. At that point, Xerox also identified potential laboratory leaders. The company chose Grenoble on the basis of its demonstrated scientific excellence and hired as the initial laboratory leader a highly regarded French scientist with good connections to local universities. Xerox designed a facility for 40 researchers and made plans for further expansion. In order to integrate the new laboratory's scientists into the Xerox community, senior R&D management in Palo Alto, California, allocated a considerable part of the initial laboratory budget to travel to other Xerox sites and started a program for the temporary transfer of newly hired researchers from Grenoble to other R&D sites. At the same time, the Grenoble site set out to integrate itself within the local research community.

In 1989, Eli Lilly considered establishing a home-base-exploiting laboratory in East Asia. The company's objective was to commercialize its R&D more effectively in foreign markets. Until then, Eli Lilly had operated one home-base-augmenting laboratory site abroad and some small sites in industrialized countries for clinical testing and drug approval procedures. But in order to exploit Lilly's R&D capabilities and product portfolio, the company needed a dedicated laboratory site in East Asia. The new site would support efforts to manufacture and market pharmaceuticals by adapting products to local needs. To that end, the management team decided that the new laboratory would have to be located close to relevant markets and existing corporate facilities. It also determined that the initial laboratory leader would have to be an experienced manager from Lilly's home base—a manager with a deep understanding of both the company's local operations and its overall R&D network.

The team considered Singapore as a potential location because of its proximity to a planned Lilly manufacturing site in Malaysia. But ultimately it decided that the new home-base-exploiting laboratory would have the strongest impact on Lilly's sales if it was located in Kobe, Japan. By establishing a site in the Kobe-Osaka region—the second-largest regional market in Japan and one that offered educational institutions with high-quality scientists—Lilly would send a signal to the medical community there that the company was committed to the needs of the Japanese market. Kobe had another advantage: Lilly's corporate headquarters for Japan were located there and the company was already running some of its drug approval operations for the Japanese market out of Kobe. The city therefore was the logical choice.

The team assigned an experienced Lilly researcher and manager to be the initial leader of the new site. Because he knew the company inside and out—from central research and development to international marketing—the team reasoned that he would be able to bring the new laboratory up to speed quickly by drawing on resources from various divisions within Lilly. In order to integrate the new site into the over-all company, some researchers from other Lilly R&D sites received temporary transfers of up to two years to Kobe, and some locally hired researchers were temporarily transferred to other Lilly sites. It took about 30 months to activate fully the Kobe operation—a relatively short period. Today the site is very productive in transferring knowledge from Lilly's home base to Kobe and in commercializing that knowledge throughout Japan and Asia.