The International Innovation Imperative

Modern opportunities and challenges in R&D footprint optimization.

While businesses large and small across a broad swath of the global economy are focusing resources on stabilizing from economic shocks being felt around the world, many companies will resolve to emerge stronger and more competitive than before. Many organizations will likely see the spike in remote collaboration and distributed innovation as a strength upon which to build, especially in the area of international research, design and product development.

Internationalization of the enterprise R&D footprint is not a new phenomenon. From automotive to consumer goods to pharmaceuticals, companies that blazed the trail of globalization in the 20th century often deployed R&D activities outside of their home countries to augment innovation capabilities, crack the code of new markets and increase the efficiency of commercialization.

But as the competitive landscape in many sectors becomes increasingly diverse and globalized, and as technology enables the pace of innovation to accelerate exponentially across sectors, as well as geographies, business leaders face a modern set of opportunities and challenges in determining how to optimize their R&D footprint.

The case for geographic dispersion of R&D capabilities

Decades of research on R&D footprint diversification and internationalization consistently illustrates that companies who invest commensurately in strategic R&D dispersion generally reap the rewards of enhanced innovation capacity and accelerated speed-to-market. While this approach introduces unique challenges for every individual business (it is certainly not one-size-fits-all), and substantial risks must be mitigated and constantly monitored, the benefits an enterprise stands to derive from gaining access to additional creative ecosystems tend to be transformative and highly advantageous.

As an enterprise builds new innovative competencies by tapping into fresh talent pools, absorbing and internalizing knowledge spillover, as well as effectively leveraging academic institutions, government research initiatives and private sector service providers, leadership can establish and nurture channels for drawing new innovation and advances back into the global organization. This is in addition to the company potentially enhancing its ability to serve the host market more effectively and efficiently.

Over the past decade, many industries have seen a more diverse and expansive range of innovation hotspots emerge around the world than ever before. In the life sciences sector, rapidly emerging clusters of innovation in countries such as Ireland, Israel, and China have attracted significant R&D investments from global leaders in biotechnology, medical devices and pharmaceuticals. Industry clusters in cities like Cork, Haifa, and Chengdu now compete with long-established innovation hotbeds for new cutting-edge R&D establishments.

Multinationals across the automotive value chain have deployed new large-scale and sophisticated R&D operations in Mexico, where cities like Queretaro have vaulted from being seen as a low-cost manufacturing location a decade ago to being recognized as a world-class innovation hub today.

Perhaps the proliferation of recognized innovation hotspots around the world is no more pronounced in any sector than it is in software and IT services, where R&D is the primary value creation driver for a broad array of enterprises. In long-established markets such as the UK, US, and India, the emergence of up-and-coming cities as alternatives to the usual suspects for R&D has accelerated dramatically over recent years. Take for example, Belfast, Northern Ireland; San Antonio, Texas; and Visakhapatnam (Vizag), Andhra Pradesh, which has emerged over recent years as a stronghold of India’s fintech R&D landscape.

Emerging regions of the world have also caught the attention of software and IT services multinationals. Numerous countries in Central and Eastern Europe have gained recognition as offering a sustainable pipeline of well-educated talent that is trainable, collaborative, productive and capable of undertaking sophisticated product development activities, such as Hungary, Lithuania, and Romania.

With such diversity of potential resources accessible, and in an age of seamless connectivity and enhanced remote collaboration, what could stop an enterprise from pursuing such an innovation advantage?

21st century challenges and considerations

As current affairs demonstrate quite clearly, macroeconomic turbulence that could result in disruption of business operations can surface at any time without warning. As a counterbalance to unforeseeable business disruption triggers, geographically diversifying the R&D footprint helps enable business leaders to build resiliency into the enterprise’s R&D portfolio and to conduct detailed business continuity planning for critical innovation competencies. However, expanding the geographic footprint of an enterprise into one or more new locations tends to add capital costs that could be avoided if existing locations (or even facilities) were leveraged instead.

While operating costs like labor, real estate, utilities, and taxes can potentially be lower in a new emerging location than in an enterprise’s home location, the extension of an organization into a new geography can often require some duplication of operating costs like managerial, administrative, and engineering/technical talent; technology systems and infrastructure; and localized services like legal and engineering.

Over the last several years, we have witnessed corporate boards more intensely scrutinizing ROI on potential R&D investments in an effort to control capital expenditure. At the same time, corporate executives and board members generally tend to understand the international innovation imperative amidst intense competition and growing international markets.

Enterprises that face the challenging balancing act of seeking to enhance their innovation footprint under very strict investment constraints can consider deploying a hybrid model of in-house and outsourced R&D capabilities; however, when evaluating the business case presented by outsourcing scenarios, it is critical to account for the often overlooked facilitation costs of managing the outsourced service provider(s) on an ongoing basis.

Partnership or co-investment with a value-added collaborator in a favorable market is another way to potentially reduce investment costs. However, outsourcing, partnership, and co-investment can increase the risk of IP loss, which is perhaps the most threatening risk associated with R&D footprint expansion.

Intellectual property protection has continued to become an increasingly challenging hurdle as multinationals pursue sustained growth in ever more globalized industries. R&D operations often contain or handle the most precious elements of a company’s intellectual property; thus, comprehensive and constantly evolving IP protection measures and an internal approach to operationalize IP protection are necessities.

Further complicating the IP risk landscape for enterprises that leverage an international R&D footprint is the cybersecurity threat, which has escalated dramatically over recent years. Companies should approach cybersecurity with intense vigilance. When considering potential partners to support the enterprise on the front lines of cybersecurity (particularly across international geographies), it may be worth considering a cybersecurity provider’s own R&D footprint and whether or not the provider has sought to benefit themselves from geographically dispersed innovation capabilities.

Overall, the path to reaping the benefits of geographically diversified R&D can be complex and flanked with risks that should be fully understood and consistently managed; however, the rewards that can be achieved through such an R&D strategy can mean the difference between a company’s ability to set international trends or race to adapt to them.

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