How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity 1 Tapping Into the Global Brain How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase Their Absorptive Capacity Michiel de Man
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How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
1
Tapping Into the Global Brain How Four Dutch Multinationals Organize R&D in Emerging Economies
to Increase Their Absorptive Capacity
Michiel de Man
Tapping Into the Global Brain Master’s thesis Michiel de Man
2
Title: Tapping into the Global Brain: How Four Dutch Multinationals Organize R&D
in Emerging Economies to Increase Their Absorptive Capacity
Author: Michiel de Man
MSc. program: Strategic Management, Rotterdam School of Management, Erasmus University
Supervisor: Prof. H.W. Volberda
Co-reader: Dr. M.C. Schippers
Student number: 300112mm
Date: May 2008
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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Preface
This report has been written as the Master’s thesis for my study in Strategic Management at the Erasmus
University Rotterdam. It is the result of a research traineeship at Squarewise B.V., a strategic consultancy
company specializing in knowledge and innovation management based in Amsterdam.
The long journey that has led to this final report has been a very interesting and enjoyable one. Interesting,
because it provided a unique opportunity to explore the fascinating world of management of innovation by
multinational firms. Enjoyable, because I had a great time being part of the energetic Squarewise team
throughout the period of my internship.
The author is indebted to the many people who provided information for this study and to those who kindly
offered professional, financial and emotional support.
First, I would like to thank professor Henk W. Volberda, my coach, for his professional supervision and
constructive feedback and my co-reader, Michaéla Schippers, for her helpful comments and interesting
insights.
I would sincerely like to thank all colleagues at Squarewise for their enthusiasm and support. Special
thanks to Jacco van Uden, Yvonne Gerritsen and Cécile van Oppen who provided many valuable
suggestions during the writing of this report.
Special acknowledgements are due to Berry Kock, Rick Harwig and Frans Greidanus at Philips, Luc
Turkenburg, Peter Gommers, Stefan Diessen and Michael Zeitler at AkzoNobel, Piet van Egmond, Johan
Tiesnitsch and Rob van Leen at DSM, and Peter Boone, Umesh Dowlath, Colin Haine and Emmo Meijer at
Unilever. Thank you very much for enthusiastically spending many valuable working hours on the
interviews that provided for the bulk of the backbone material for this thesis.
Finally I would like to thank my family, friends and especially my girlfriend Karlijn. Thank you for your
crucial encouragement, support and patience!
Responsibility for the information and observations presented in this document ultimately rests with the
author.
The author declares that the text and work presented in this Master thesis is original and that no sources
other than those mentioned in the text and its references have been used in creating the Master thesis. The
copyright of the Master thesis rests with the author. The author is responsible for its contents. RSM
Erasmus University is only responsible for the educational coaching and beyond that cannot be held
responsible for the content.
Tapping Into the Global Brain Master’s thesis Michiel de Man
Chapter 2 The international R&D organization and absorption of external knowledge: a review and
conceptual model ........................................................................................................................................ 25
Figure 1 Knowledge tapping by the foreign R&D center............................................................................. 16
Figure 2 Basic research framework (based on Cohen & Levinthal, 1990)................................................... 18
Figure 3 Research approach ......................................................................................................................... 23
Figure 4 The organizational structures of internationalized R&D (Von Zedtwitz & Gassmann, 2002).......27
Figure 5 Tapping into external knowledge by multinational company via the foreign R&D centers .......... 31
Figure 6 The five knowledge absorption activities (based on Cohen & Levinthal, 1990 and others). ......... 36
Figure 7 Research model: identifying key coordination mechanisms for knowledge absorption ................ 39
Figure 8 Three levels of absorptive capacity ................................................................................................ 42
Figure 9 Innovation projects and external knowledge absorption ................................................................ 73
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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Executive summary
Introduction
Tapping into the increasingly sophisticated knowledge environments of the emerging economies is an
important challenge for western multinationals. India and China, for example, where high-tech industries
rapidly emerge and technical graduates are abundant, are turning into world-class suppliers of intellectual
property. Albeit at a smaller scale, Russia and Brazil are making important strides in the same direction.
The rapid economic and technical developments within these so-called ‘BRIC economies1 provide great
opportunities for Western multinational companies and at this moment many firms are in the process of
expanding their R&D activities in these countries. An important challenge for these firms is to successfully
organize the knowledge tapping processes of their foreign R&D centers in these countries. However, this
subject remains largely unexplored in the management literature.
The objective of this research is to identify key coordination mechanisms determining the absorption of
local technical and scientific knowledge by the R&D centers of Western multinationals in the emerging
economies. The empirical part of this research is based on exploratory case studies at four leading
multinationals: Unilever, DSM, AkzoNobel and Philips. A review of the relevant literatures was carried out
to provide a theoretical basis. The following research set-up was adopted.
1 ‘BRIC’ stands for Brazil, Russia, India and China. The acronym was first prominently used in a report of the Goldman Sachs
investment bank. This 2003 paper argues that the economies of the BRICs are rapidly developing and by the year 2050 will eclipse
most of the current richest countries of the world.
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Contextual findings
To understand the nature of the knowledge absorption processes by the foreign R&D centers of
multinationals, four sub-questions were addressed drawing on a combination of theoretical insights and the
cases studies. The most important contextual findings are discussed below.
1 What are the functions of the international R&D organization?
Aside from its function as a ‘generator’ of new knowledge for the development of new technologies,
processes and products, the R&D organization enables a firm to absorb new knowledge from outside the
firm, such as from universities, research organizations and other companies. Unilever, DSM, AkzoNobel
and Philips all have a network of multiple R&D centers worldwide. Depending on the quality of the local
knowledge environment (among other variables), these R&D centers may be involved in the absorption of
external knowledge and the subsequent leverage of this (processed) knowledge throughout the firm. The
focus of the present research is on the first step only, i.e. on the coordination mechanisms steering the
absorption of external knowledge by the foreign R&D centers.
2 How does the process of knowledge absorption by international R&D centers work?
From the case studies it followed that the R&D activities at the companies of this study are largely framed
into what can be taken as two different categories of multidisciplinary innovation projects: new product
development projects and platform technology development projects2. Together with other functional
disciplines (of which marketing is considered very important), geographically dispersed R&D centers
deliver knowledge inputs throughout the different stages of these projects. For the four companies, external
knowledge was found to be very important for the R&D organization throughout the different stages of
both types of innovation projects. As follows from the case studies, the acquisition of external knowledge
can be the result of several practices, which can roughly be divided into: hiring of qualified personnel;
‘scouting’ of the knowledge environment; arms-length business models (such as licensing-in of
technology); and collaborative business models (such as inter-firm alliances and research agreements). The
main sources of external knowledge include other companies, such as suppliers, peers and clients, and
universities and other research institutes. For the four companies, universities and research institutes
typically are important sources of external knowledge to technology development projects, yet much less
for new product development projects.
3 What are the functions of coordination mechanisms and which different types of coordination
mechanisms may steer the external knowledge absorption processes?
Based on Jarillo & Martinez (1989), coordination mechanisms are defined as “any administrative tool for
achieving integration among different units within an organization”. Five formal and three informal
categories of mechanisms are discussed. To conceptualize the knowledge absorption process, Cohen and
2 The technology development projects result in technologies to be applied in the projects for new product development.
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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Levinthals’s (1990) well-known definition of ‘absorptive capacity’ is taken as a basis. In their view, the
absorption of external knowledge consists of the following three activities: to recognize the value of new,
external knowledge, to assimilate it, and to apply it to commercial ends. As follows from a review of the
absorptive capacity literature, early research regarded absorptive capacity mostly as a by-product of R&D
investments: the presence of prior related knowledge was seen as the main determinant of a firm’s ability to
absorb external knowledge. However, in more recent studies the notion that a firm’s absorptive capacity
may result of a variety of organizational coordination mechanisms has become strongly established and
several different types of coordination mechanisms for absorptive capacity have been addressed in existing
research. However, the topic of coordination mechanisms for external knowledge absorption by foreign
R&D centers remains largely unexplored.
4 How may the process and the coordination of external knowledge absorption by the R&D
centers in Brazil, Russia, India and China differ from western countries?
For the four companies researched for this research, the knowledge infrastructures of the BRIC countries
provide an increasingly important basis for the establishment of research-oriented R&D centers3, for a
growing number of scientific and technological domains. Notwithstanding this general conclusion, at the
four country-level case studies conducted for this research the potential to tap into local knowledge
environments to acquire new technical knowledge was found to be modest still. This is largely due to the
comparatively low quality of the local knowledge infrastructure, limiting the potential to establish
collaborative R&D programs with other companies and universities companies. Nonetheless, in all cases,
hiring qualified R&D personnel was seen as a very important way to acquire local knowledge. Overall, the
nature of the knowledge absorption process and its coordination mechanisms in the emerging economies
are not perceived by the R&D managers to be fundamentally different from those applied in Western
countries. Nonetheless, cultural and language issues need careful managerial consideration to secure the
success of external knowledge absorption.
Case study approach
Four case studies were carried out at Unilever, DSM, AkzoNobel and Philips. Given their long history of
managing international R&D and their increasing R&D activities in the emerging economies, these leading
multinationals were assumed to have developed organizational routines to tap into foreign ‘knowledge
resources’ via their subsidiary R&D centers. The case studies discuss the knowledge absorption processes
of the international R&D centers of the firms in general, and more in-depth for one of the subsidiary R&D
centers in an emerging economy. The ‘emerging economy case studies’ are conducted for four R&D
subsidiaries in the so-called ‘BRIC-economies’:
3 Clearly, the large market potential of the emerging countries is also an important reason to establish product development-oriented
R&D centers with adaptive mandates: all companies and many of their businesses typically have a significant number of such R&D
sites in all four of the BRIC countries.
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• Unilever’s Foods Savory and Tomato R&D Center of Excellence in São Paulo, Brazil;
• DSM’s Food Specialties Enzyme Lab in Moscow, Russia;
• AkzoNobel’s Car Refinishes R&D center in Bangalore, India; and
• Philips’ Lighting R&D center in Shanghai, China.
Personal interviews with at least one senior corporate-level R&D manager and one front-line R&D
manager of one of these subsidiary R&D centers form the empirical basis of this research. Extra interviews
were held to provide more in-depth insights, resulting in a total number of 14 interviews.
As discussed, Cohen and Levinthals’s (1990) definition of ‘absorptive capacity’, as a combination of the
valuation, assimilation and application of external knowledge, was taken as a basis to conceptualize the
knowledge absorption process. Based on results from the first two interviews, it was considered useful to
redefine the knowledge ‘assimilation’ activity. This resulted in a conceptualization of ‘knowledge
absorption’ as a combination of the following five activities:
• The valuation of external knowledge;
• The acquisition of external knowledge;
• The transformation of acquired knowledge
• The transfer of acquired knowledge
• The application of acquired knowledge.
The participating managers were asked to describe how they perceive the nature of these five knowledge
absorption activities, as well as what they consider are key coordination mechanisms to steer these
activities. A cross-case analysis of the case studies was carried out to derive to general conclusions.
Results
The case studies at Unilever, AkzoNobel, DSM and Philips provided valuable insights into how the R&D
centers of these companies absorb external knowledge from the foreign knowledge environment as well as
identifying key coordination mechanisms to steer these activities. Based on a cross-case analysis of the case
study results, it is argued that the identified coordination mechanisms steer particular sub-categories of the
five knowledge absorption activities. The 12 sub-categories, which are presented in the table below,
provide insights into how the managers across the four case studies generally perceive the nature of the five
knowledge absorption activities. Typically, a combination of several different types of coordination
mechanisms were identified to steer the (sub-categories of the) knowledge absorption activities.
The main findings of the cross-case analysis are summarized in the following table (see next page).
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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Results: Coordination mechanisms for external knowledge absorption by foreign R&D centers
Knowledge absorption activity
Sub-category
Coordination mechanisms and their role
Value Mechanisms to understand the technical/scientific content and business value of external knowledge
Establish a base of qualified R&D employees, through HRM practices, etc. Development of a combination of technical and commercial employee competences, via competence management systems, internal job transfers (e.g. between R&D and marketing).
Mechanisms to keep track of external technology developments
Establish an outward orientation via communication of top-management values; an active knowledge scouting function through structural mechanisms (innovation units, technology teams, etc.), at the employee level through job descriptions etc. Develop technology search and assessment methods.
Mechanisms to frame the external knowledge requirement of R&D centers
Provide focus via strategic planning mechanisms, incl. technology strategy and new product development strategy; portfolio management systems; R&D subsidiary mandates, etc.
Mechanisms to manage a network of external partner firms and research institutes
Develop employee collaborative skills to establish network ties and trust with companies and research institutes, through trainings; employee competence management systems; socialization events, etc.
Acquire Mechanisms to acquire external knowledge by hiring local employees
HRM issues incl. salaries, career perspectives, employee policies. Promote contribution of knowledge of new employees via cultural and professional trainings, practice, job transfers, etc.
Mechanisms to manage collaborative and arms-length R&D activities with local partners
Establish professional management of collaborative and arms-length business models, via managerial competence management; structural mechanisms such as alliance management departments and special management functions.
Transform Mechanisms to manage knowledge transformation in general
Project-based organization of R&D activities, with (partly) standardized R&D deliverables improve efficiency. Enable problem solving via ‘openness’: an informal culture with low barriers to contact colleagues, communication of ‘open’ values by top-level management; reward systems and socialization events. Leverage good practices via internal benchmarking of R&D processes and events.
Mechanisms to match the R&D outputs with the requirements of the other disciplines
Establish narrow communication between the R&D team and the innovation project coordinator (several mechanisms). Development of a combination of technical and commercial employee competences, via competence management systems, internal job transfers, and integrative mechanisms, such as cross-disciplinary functions, communities of practice and technology platforms.
Transfer Mechanisms to promote knowledge sharing within the R&D center
Minimize communication barriers through requirement of one common language and culture and language trainings. Establish 'open culture' within the R&D center. Effective use of simple or more sophisticated communication tools. Events such as R&D conferences.
Mechanisms to promote knowledge sharing with other disciplines
The R&D organization is required to provide ‘deliverables’ in an explicit, documented form. Establish cross-disciplinary interfaces, such as communities of practice and technology platforms.
Apply Mechanisms for the application of knowledge by the R&D center
Funnel-type portfolio management systems and a project-based organization of R&D activities promote efficiency of knowledge application. Strategic and structural mechanism to maximize global exploitation of R&D knowledge.
Mechanisms to exploit knowledge outside the firm
Competences to manage new business models for external kn. application (e.g. spin-out management, licensing-out of IP, selling of technologies), through special departments and functions for ‘open innovation’. Professional IP management as a key requirement.
Tapping Into the Global Brain Master’s thesis Michiel de Man
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Implications
This research contributes to the burgeoning literature of absorptive capacity in several ways. Through its
practical approach and by identifying organizational determinants of absorptive capacity, the findings
contribute to reducing the problem of ‘reification’ of the concept (Lane et al., 2006). This thesis forcefully
underscores that absorptive capacity is not a ‘thing’ and challenges the idea that any one single factor (such
as R&D investments) could serve as a useful proxy for a firm’s level of absorptive capacity. Moreover, the
findings indicate that the five knowledge absorption activities studied in this research (i.e. the valuation
acquisition, transformation, transfer and application) are steered by largely different combinations of
coordination mechanisms.
Most of the identified sub-categories and coordination mechanisms steering the knowledge absorption
activities have not been addressed in existing research. For instance, the participating managers
unanimously argued that strategic focus mechanisms are critical to the R&D center’s ability to value
external knowledge (by determining which areas of knowledge are valuable to the company and the R&D
centers). Notwithstanding its perceived importance, this aspect has largely been overlooked in existing
research on absorptive capacity (Lane et al. 2006: 857). Hence, the findings of this research help improve
our understanding of absorptive capacity and capturing the “richness and multidimensionality of the
concept” (Jansen et al., 2005: 999). The identified sub-categories of the knowledge absorption activities
and their coordination mechanisms may also provide a useful basis for further research on absorptive
capacity, especially for the context of international R&D.
For managers, the case studies underscore the importance of the effective management of both the
‘external’ and the ‘internal’ components of knowledge absorption: to acquire valuable external knowledge
it is important to understand what the company may need and to have the capabilities to effectively manage
the knowledge acquisition process. Yet, this is only half of the work: to be able to successfully apply the
acquired knowledge, the internal knowledge transformation and transfer processes need to be well-
established. The identified coordination mechanisms can be regarded as important factors to take into
account when designing and managing the knowledge absorption processes by international R&D centers.
For the context of the emerging economies, the case studies indicate that the knowledge absorption
processes via the R&D centers in these countries were taken to be essentially similar to those in western
countries. Nonetheless, cultural differences may become barriers for effective knowledge absorption if they
are not effectively managed. This thesis provided insights into how specific coordination mechanisms, such
as tailored HRM practices, temporary internal job transfers, cultural and language trainings (for new
employees and for expatriate managers) may be applied to compensate this problem. In the light of the
growing popularity of the emerging economies as sources of innovation, this issue clearly calls for further
investigation.
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Chapter 1
Introduction
1.1 Introduction
This chapter introduces the subject of this thesis: the absorption of external knowledge by four Dutch
multinationals via their R&D centers in the emerging economies of Brazil, Russia, India and China. First,
section 1.2 discusses the research context. Based on this discussion, the research question is defined in
section 1.3. Section 1.4 discusses the contributions of this research. The research approach and the structure
of the remainder of this thesis are provided in sections 1.5 and 1.6, respectively.
1.2 Research context
The subject of this research is inspired by an important trend in international business: the growing
importance of the ‘emerging economies’ of Brazil, Russia, India and China as destinations for the
internationalization of R&D for Western multinationals. As will be argued, for these firms it is becoming
increasingly important to be able to tap into the increasingly sophisticated knowledge environments of
these countries via their local R&D centers. The aim of this research is to understand how four important
Dutch multinational companies organize to absorb relevant external knowledge via their R&D centers in
these emerging economies.
The internationalization of R&D to emerging economies by western multinationals
The internationalization4 by western multinationals of knowledge-intensive and ‘more core’ business
processes to emerging economies5 has rapidly increased in recent years (Booz Allen Hamilton & Insead,
UNCTAD, 2005)7. However, several recent studies argue the relative importance of cost savings vis-à-vis
the other two drivers is limited, especially for more advanced research activities (e.g. Booz Allen Hamilton
& Insead, 2006, Thursby & Thursby, 2006). An important conclusion for this research is that the
abovementioned studies unanimously confirm the importance for Western multinationals of access and tap
into to the emerging countries’ scientific and technical knowledge resources.
6 The R&D function covers activities for the purpose of discovering or developing new products (goods and services) or more efficient
production processes, including improved versions of existing products and processes (OECD 2002). 7 Notwithstanding the importance of knowledge absorption as a key factor in the internationalization decision, it should not be
overlooked that the overall decision is more complex. The decision about where to establish new R&D units is made by higher
management, usually in consultation with representatives from the R&D and strategy departments. This decision considers R&D-
specific factors such as the quality of input at the new site, the quality of expected output and the general operating efficiency of this
R&D unit. Importantly, the decision is also taken based on R&D-external factors, such as tax optimization, reliability and stability of
the local political and social system, and image enhancement (Reger, 2004).
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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The ability to tap into foreign knowledge resources is an important function of foreign R&D centers
Following the broader internationalization pattern of manufacturing in the 1970s, the rise of cross-border
R&D has been extensive since the mid 1980s (De Meyer & Mizushima, 1989; Pearce, 1999). Currently,
many multinational companies have established R&D facilities away from their headquarters at multiple
locations worldwide. Conventionally, the main functions of overseas R&D activities were considered to be
adaptation and demand-oriented: the emphasis was on adapting the technologies generated within the home
country to the local input conditions, regulations, or tastes at the foreign locations, and to support the local
production and sales activities (Vernon, 1966). This vision of foreign R&D sites as adaptive centers no
longer holds. Today, overseas R&D investments are often made with the aim to contribute to company-
wide product and process innovations. Understandably, a key challenge to multinational companies is to
successfully coordinate their complex innovation networks of internationally distributed R&D centers (e.g.
Engardio, 2006; Kuemmerle, 1997; 1999; Von Zedtwitz & Gassmann, 2002).
The innovations may result from creative efforts by the foreign R&D subsidiaries8 themselves (e.g.
Ghoshal and Bartlett, 1988), but especially also from the acquisition of external knowledge by the R&D
centers. Absorption of external knowledge is important because the vast majority of new knowledge is
created outside any particular firm (e.g Chesbrough, 2003). As Von Zedwitz and Gassmann (2002: 580) put
it, “few companies can afford to ignore the benefits of (…) tapping into foreign science clusters”. Seeking,
acquiring and applying foreign knowledge resources have thus become key functions of the international
R&D organization (see also Almeida & Phene, 2004; Ambos, Ambos, & Schlegelmilch, 2006; Kuemmerle,
1997, 1999; Pearce, 1989; 1999; Piscitello & Rabbiosi, 2006; Porter & Stern, 2001). For example, in an
empirical study Almeida (1996) found that that the knowledge used in innovation by foreign subsidiaries in
U.S. regions is predominantly from a local (U.S.) origin. Moreover, foreign firms use regional knowledge
significantly more than similar domestic firms. This conclusion unveils an important function of the R&D
organization: in addition to its ‘traditional’ role as a ‘generator’ of new knowledge for product and process
innovations, the R&D organization also enables a firm to absorb new external knowledge (Cohen &
Levinthal, 1989; 1990; Kuemmerle, 1997; 1999).
Internal and external sources of knowledge are complements that have to be combined to improve the
innovative performance of companies (Cassiman & Veugelers, 2006). The foreign R&D units make use of
their access to sources of external knowledge, such as research institutes, other companies and clients, to
co-develop or acquire new knowledge that can be applied in the R&D process. Subsequently, the newly
acquired (and applied) knowledge can be exploited throughout the firm at multiple locations (e.g. by R&D
centers or other disciplines). This notion that international subsidiary R&D units play a key role in the
acquisition and subsequent intra-firm leverage of new external knowledge has become axiomatic in the
strategic management and R&D literatures (Almeida & Phene, 2004; Cantwell & Piscitello 1999; Doz et
8 Foreign subsidiary refers to any operational unit controlled by the multinational company and located outside the home country.
Tapping Into the Global Brain Master’s thesis Michiel de Man
& Venzin, 2005; Nobel & Birkinshaw, 1998; Von Zedtwitz & Gassmann, 2002). As will be discussed in
section 2.3, many aspects of the management by multinational companies of their ‘global innovation
networks’ are dealt with in existing research. However, few studies focus on how knowledge absorption by
subsidiary R&D sites from local environments occurs.
Research motivation
As follows from the above, an increasingly important challenge for western multinationals is to effectively
tap into the knowledge resources of the emerging economies via their local R&D centers. Driven by the
author’s personal interest, the motivation behind this research is to understand how multinational firms may
organize this knowledge tapping process. In the following, this broad ambition will be made more specific
in order to define a workable research question.
Conceptualizing ‘knowledge tapping’
As discussed, the knowledge tapping process can be taken as a combination of two subsequent steps. First,
the R&D centers acquire external knowledge and apply that knowledge in their R&D processes. Second,
the acquired and applied knowledge can be leveraged throughout the firm (see section 2.5 for a discussion
and conceptualization of the knowledge tapping process). Given the need to limit the scope of this research,
the focus of is on the first step only, as is illustrated by the following figure:
Figure 1 Knowledge tapping by the foreign R&D center
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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To comprehend how the foreign R&D centers may tap into local knowledge resources, we must specify
which activities actually constitute the ‘knowledge tapping’ process. Arguably, the most dominant concept
in the organizational research literature of this subject is Cohen and Levinthal’s (1990) ‘absorptive
capacity’. Absorptive capacity is seen as the result of three subsequent abilities, namely to:
• Recognize the value of new knowledge outside the firm;
• Assimilate this valuable new knowledge; and
• Apply the assimilated knowledge to commercial ends.
This definition provides a very complete view of the knowledge absorption process: it emphasizes how
recognizing and estimating the value of external knowledge are critical phases preceding the actual
acquisition of the knowledge9, while the application of the assimilated knowledge into a commercially
exploitable form is obviously a critical final phase of the absorption process. Together with the fact that
Cohen & Levinthal’s concept of absorptive capacity has become a dominant construct in the management
literature, this ‘completeness’ is an important reason to use it as a framework to study the knowledge
tapping process by international R&D units. It should be noted that the present research takes a process
view of absorptive capacity: knowledge absorption by the foreign R&D centers is understood as a
combination of the activities (rather than the higher-order abilities) of recognizing; assimilating and
applying external knowledge. The abilities to conduct these knowledge absorption activities are seen as the
results of the mastery by the firm of particular organizational processes.
Coordination mechanisms for knowledge absorption
This thesis adopts the view that the absorption of external knowledge by organizational units (i.e. the
foreign R&D centers) does not occur automatically, but rather results from specific coordinative
organizational processes. In other words, firms apply particular coordination mechanisms to steer the
knowledge absorption process (see Cohen & Levinthal, 1990; Jansen, Van den Bosch & Volberda, 2005;
Lane & Lubatkin, 1998; Van den Bosch, Volberda & De Boer, 1999). Given the desire of this research to
explore any kind of coordination mechanisms for knowledge absorption, the broad definition of
coordination mechanisms by Martinez & Jarillo (1989: 490) as “any administrative tool for achieving
integration among different units within an organization” is applied in this study. A further discussion on
coordination mechanisms is provided in section 3.4. Concluding, this research seeks to identify key
coordination mechanisms for knowledge absorption (Figure 2).
9 As will be discussed in section 3.3, the acquisition of external knowledge can be taken as an element of the ‘assimilation’ process.
Tapping Into the Global Brain Master’s thesis Michiel de Man
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Figure 2 Basic research framework (based on Cohen & Levinthal, 1990)
From an academic perspective there are two important reasons to research the coordination mechanisms
that are applied by multinationals for external knowledge absorption by their foreign R&D centers. First,
even though Cohen and Levinthal’s (1990) article already encompassed the need to understand the nature
of the organizational mechanisms that could lead to the ability to recognize, assimilate and utilize useful
external knowledge, few scholars have addressed this issue. Moreover, from their review of 289 academic
papers citing Cohen & Levinthal’s concept, Lane, Koka and Pathak (2006) conclude the organizational
processes and dynamics underneath absorptive capacity have hardly been investigated and that this has led
to a reification of the construct. This clearly justifies further research into the coordination mechanisms for
knowledge absorption in general.
Second, although the studies that have focused on the coordination mechanisms of absorptive capacity have
clearly provided valuable insights for specific contexts, the coordination mechanisms applied by
multinational companies for knowledge absorption by their international R&D subsidiaries has not been
explicitly addressed in existing research. As follows from the literature (e.g. Van den Bosch et al., 1999),
the coordination mechanisms of absorptive capacity may vary considerably along contextual variables such
as industry, the business processes under study, the firm’s structural and cultural aspects, and the unit of
analysis. This justifies further research into the coordination mechanisms for the unexplored context of this
study (i.e. the absorption of external knowledge by the R&D centers of western multinational companies in
the emerging economies). Chapter 4 provides a review of the literature of coordination mechanisms for
absorptive capacity.
Brazil, Russia, India and China as important R&D destinations
The most dominant emerging economies in terms of current and projected economic growth and scale are
Brazil, Russia, India and China, popularly known as the ‘BRIC countries’ or ‘BRICs’10. The BRIC
countries are also becoming increasingly important in terms of a wide range of science and technology 10 The acronym ‘BRICs’ was first prominently used in a report of the Goldman Sachs investment bank. This 2003 paper argues that
the economies of the BRICs are rapidly developing and by the year 2050 will eclipse most of the current richest countries of the
world.
Value external knowledge
Coordination mechanisms
Assimilate external knowledge
Apply assimilated knowledge
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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developments and the development of world-class R&D capabilities. The rise of these countries as
important locations for R&D is illustrated by several studies. For instance, a study by Goldman Sachs
(2005) shows that China and Russia took up the second and fourth position respectively in terms of total
numbers of R&D professionals already between 1997 and 2001. A 2005 survey among 209 multinational
companies in the United States and Western Europe found that about 70 percent of the respondents
expected an increase in R&D employment in China in the next three years, while more than 40 percent
anticipated an expansion of R&D in India (Thursby &Thursby, 2006; see also Mitra, 2007) and a research
conducted by Booz Allen Hamilton and Insead (2006) among 186 of the world’s biggest corporations
projected that “by 2007, China and India will account for 31 percent of global R&D staff, up from 19
percent in 2004”, while over the next three years 77% of new R&D centers would be established in these
two countries. Brazil’s R&D intensity remains comparatively low, yet important steps forward have been
made in terms of the development of a strong policy framework for innovation which focuses on the
potential policy synergies among science and technology promotion, trade competitiveness and R&D
support in the business sector (OECD, 2006). As a result, albeit at a smaller scale, Brazil’s position as an
R&D location is also on the rise. The development of these four dominant emerging economies into
knowledge economies is the reason for this research to focus on these countries.
The case of Dutch multinationals
For practical reasons and the author’s personal interest, this research focuses on Dutch multinationals that
manage R&D operations in the abovementioned countries. Philips, DSM, Unilever and AkzoNobel were
selected as the focal companies for this research. These four companies are among the largest Dutch
multinationals, also in real terms of R&D investments (Erken & Gilsing, 2005) and all have a strong history
of managing international R&D. Importantly, in recent years the internationalization of their R&D to the
emerging economies of Brazil, Russia, India and China has intensified (ORN RSM, 2006; AWT, 2007). It
was therefore assumed that these companies have developed (or are in the process of developing)
organizational capabilities to coordinate the external knowledge tapping process via their subsidiaries in
these countries and are therefore valuable ‘research objects’. The choice for these companies will be further
discussed in the methodology section in Chapter 5. Initial interviews with R&D managers of the four
companies confirmed the literature-based finding that it is becoming increasingly important for these firms
to be able to tap into the increasingly sophisticated knowledge environments of these countries via their
local R&D centers and that this poses significant managerial challenges.
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1.3 Research questions
Based on the above discussion it is concluded that exploratory research into the coordination mechanisms
for the absorption of external knowledge by the foreign R&D centers of multinational companies is
justified from a theoretical point of view. The context of R&D centers of Western firms in the emerging
economies of Brazil, Russia, India and China is considered to be interesting both from a theoretical and
from an empirical perspective, given the public debate on the internationalization of knowledge intensive
activities to the emerging economies. As discussed, Cohen and Levinthal’s conceptualization of absorptive
capacity is applied to specify the main activities of the knowledge absorption process. Hence, the aim of
this research is to identify important coordination mechanisms determining knowledge absorption by the
foreign R&D centers of Unilever, DSM, AkzoNobel and Philips in the emerging economies of Brazil,
Russia, India and China.
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
21
The main research question is defined as follows:
For four Dutch multinational companies, this research seeks to identify key coordination
mechanisms determining the absorption of external knowledge by their R&D centers in the
emerging economies of Brazil, Russia, India and China
To answer the main research question, the following sub-questions will be answered:
1 What are the functions of the international R&D organization?
To study the knowledge absorption process by foreign R&D centers, it is important to have a basic
understanding of the function of R&D and its international organization. As argued in section 1.2, an
important role of R&D centers is to absorb external knowledge. Yet, not all R&D centers are equally
involved in the generation and absorption of new knowledge. To clarify these issues, elaboration on the
subject of the international organization of R&D and differences in subsidiary R&D mandates is
desirable.
2 How does the process of knowledge absorption by international R&D centers work?
To understand the process of external knowledge absorption by the international R&D centers of
multinational firms, a definition of ‘knowledge’ is needed. Second, the conceptualization of external
knowledge absorption as a combination of the valuation, assimilation and application of knowledge (see
section 1.2) needs to be assessed. Third, insights into the manner in which the R&D centers of the four
companies may acquire external knowledge and into the nature of the dominant types of external
sources of this knowledge are desirable.
3 What are the functions of coordination mechanisms and which different types of
coordination mechanisms may steer the external knowledge absorption processes?
In order to identify key coordination mechanisms for knowledge absorption, it is necessary to gain
further insight into the functioning of coordination mechanisms. A distinction will be made between
different types of coordination mechanisms to be able to classify and analyze the mechanisms identified
in existing literature and this research.
4 How may the process and the coordination of external knowledge absorption by the R&D
centers in Brazil, Russia, India and China differ from western countries?
This research focuses on the context of R&D activities performed by multinational companies in the
emerging economies. How this specific context may have implications for the manner in which firms
organize their knowledge absorption process will be addressed in this research.
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1.4 Research contribution
By answering the research questions stated above, the author aims to make a valuable contribution to the
academic field of strategic management in general, and to the areas of international R&D and knowledge
management in particular. Moreover, the ambition is to provide meaningful, practical recommendations for
practitioners who are faced with the challenges of improving the ability of their R&D centers to absorb
external knowledge. The context of the emerging economies of Brazil, Russia, India and China is salient,
given the public debate about the emergence of these countries as knowledge intensive economies. Even
though this is not a primary driver of this research, en passant it will hopefully provide the reader with
interesting insights into the nature of and drivers behind the internationalization of R&D of four prominent
multinationals activities to the emerging economies.
Academic contribution
This research will contribute to the academic field by deepening the existing insights on the process of
external knowledge absorption by foreign R&D subsidiaries and its coordination. As Lane et al. (2006:
833) argue, the reification of the absorptive capacity construct “has led to stifling of research in this area”.
By viewing knowledge absorption as a capacity rather than an abstract ‘thing’ and by exploring and
analyzing coordination mechanisms that are important to increase the absorptive capacity of foreign R&D
centers, this thesis aims to help revitalize absorptive capacity research.
Managerial contribution
This research investigates the manner in which companies organize their international R&D operations.
Notwithstanding the importance of successfully tapping into the knowledge resources of foreign countries,
the topic has received only limited attention in the literature. By providing insights how established
companies with a strong heritage of managing international R&D are doing this, this research aims to
inform managers facing similar challenges.
1.5 Research approach
As discussed, the aim of this research is to identify key coordination mechanisms for knowledge absorption
by R&D centers of Dutch multinational companies in emerging economies. The rich and explanatory
nature of the qualitative case study suits this exploratory ambition well (Eisenhardt, 1989; Yin, 2003).
Consequently, a qualitative approach based on multiple descriptive cases at multiple levels of analysis is
followed for the empirical section of this research. The methodological aspects of the case studies are
discussed in more detail below and in Chapter 5. To answer the research questions stated in section 1.3, the
case studies are combined with a review of the relevant literatures.
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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The research trajectory can roughly be divided into four phases, as highlighted in Figure 3. It should be
noted that in line with the exploratory nature of this research, the research approach did not consist of a
simple linear progression of these phases, but rather of an iterative process.
Figure 3 Research approach
Phase 1. The literature review constitutes the first phase of the research, providing an exploration of the
relevant theories. Literatures that have been used include: international business theory and international
R&D (to answer sub-question 1); organizational learning theory, focusing on absorptive capacity; and
organizational theory for the study of coordination mechanisms. The literature of coordination mechanisms
of absorptive capacity has been reviewed in more detail.
Phase 2. Based on the literature review, a conceptual model of the process of external knowledge
absorption by the international R&D organization is developed (sub-question 2). Second, an analytical
framework to classify and analyze coordination mechanisms for knowledge absorption is provided and the
existing literature on coordination mechanisms for absorptive capacity is reviewed (sub-question 3).
Phase 3. For the empirical part of this research, a descriptive case study method has been followed based
on four cases. Unilever, DSM, AkzoNobel and Philips were selected and found willing to participate in this
study. In-depth interviews with senior R&D managers at two managerial levels provide the bulk of the
empirical backbone of this thesis. Case study reports are written to discuss the results (main research
question).
Phase 4. Based on a cross-case analysis of the case study results, additional insights into the process of
knowledge absorption will be discussed (sub-question 2). To answer the main research question the
identified coordination mechanisms are discussed and confronted with the existing literature in order to
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derive to implications for theory and practice. For both elements, the specificities for the emerging
economy context will be addressed (sub-question 4).
1.6 Thesis structure
The structure of this thesis is as follows.
The present chapter serves as an introduction to the research study. Most importantly, it provided a brief
overview of the research context, it discussed the theoretical concepts, and presented a basic conceptual
model. Furthermore, it discussed the research questions, research objectives, and research approach.
Based on a discussion of the literature of international R&D, chapter 2 provides essential insights into the
international organization of R&D by multinational firms and provides a conceptual model of how
international R&D subsidiaries absorb external knowledge (sub-questions 1, 2).
Chapter 3 discusses the concept of knowledge. Second, based on practical testing of the basic analytical
model, it provides a conceptualization of the knowledge absorption process. Together with a discussion of
coordination mechanisms, a final analytical framework for the case studies is developed.
Chapter 4 reviews a selection of the literature of coordination mechanisms for absorptive capacity. The
insights from this review serve as a reference for the empirical findings of the case studies (sub-question 3).
Chapter 5 discusses the methodological aspects of the case studies, including the case selection and
interview method and research validity.
Chapter 6 introduces the case studies at the four companies. The functioning of the international R&D
organization and the knowledge absorption by the R&D centers in general are discussed, as well as the
R&D developments in the emerging economies. Also, the ‘emerging economy’ case studies are introduced.
Based on the case studies, important insights were derived to answer the sub-questions, additional to the
theoretical findings. Section 6.10 discusses additional observations about the process of external knowledge
absorption by the international R&D organization (sub-question 2). Section 6.11 discusses the knowledge
absorption process specific for the R&D centers in the emerging economies (sub-question 4).
Chapter 7 provides a cross-case discussion of the identified coordination mechanisms steering the five
knowledge absorption activities and relates the findings to the existing literature of absorptive capacity
(main research question).
Chapter 8 concludes this thesis with a recapitulation of the most important findings and a discussion of the
theoretical and managerial implications.
Appendix 1 provides the interview protocol that was applied for the case studies.
The full case study reports of Unilever, DSM, AkzoNobel and Philips are provided in appendices 2,3,4 and
5 respectively.
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Chapter 2
The international R&D organization and absorption of external knowledge: a
review and conceptual model
2.1 Introduction
This chapter discusses important contextual insights to understand the nature of the knowledge absorption
processes by the foreign R&D centers of multinationals. First, section 2.2 discusses the most important
functions of the R&D organization. Section 2.3 provides insights into the structural organization of
international R&D by multinationals and for the four companies of this research. Section 2.4 discusses how
foreign R&D centers with different subsidiary mandates are involved in the absorption of external
knowledge. Finally, a conceptual model about the absorption of external knowledge by the foreign R&D
subsidiaries is provided in section 2.5.
2.2 The functions of the R&D organization
Research and Development (R&D) departments are at the heart of the product and process innovations of
many multinational firms. Traditionally, the R&D organization is viewed as a ‘generator’ of new
knowledge. This vision is reflected in the OECD Frascati Manual (2002) as follows: “Research and
experimental development comprise creative work undertaken on a systematic basis in order to increase the
stock of knowledge, including knowledge of man, culture and society, and the use of this stock of
knowledge to devise new applications (OECD 2002).
Even though the ‘R’ and ‘D’ aspects of the department are typically mentioned in one breath, they are
basically different. Development is the process of creating new products and processes that do have
commercial value, through the application of currently available platforms of scientific knowledge
(Medcof, 1997; Von Zedtwitz & Gassmann, 2002). The development function can be regarded as a process
function, responsible for the development of a specification into a producible product concept. Research is
defined as the process of discovering new scientific knowledge that has the potential to serve as a platform
for the subsequent development of manufacturing processes and commercially viable products. It is not
generally expected that the research outputs will have immediate commercial value. The research function
is a supporting one. Its support can be given to the directors, to the product market policy function which
needs research into new technologies or products, to development which needs basic solutions to be used in
a product oriented development, or to manufacture if its preparation needs basically new methods and
technologies (Vorstman, 1993).
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The second face of R&D
As was argued in the introductory chapter, in addition to the traditional role of R&D as a generator of new
knowledge, the R&D organization also enables a firm to absorb new knowledge from outside the firm, such
as from universities, research organizations and other firms (Cohen & Levinthal, 1989; 1990). The notion
that external knowledge sources can create significant value and that internal R&D is needed to claim a
portion of that value is also a key element of the ‘open innovation’ paradigm as popularized by Chesbrough
(2003) and has become increasingly dominant. The coordination mechanisms that may be applied by an
R&D organization to absorb externally developed knowledge will be discussed in Chapter 4.
2.3 The organization of international R&D
Multinational firms typically have multiple subsidiary centers world-wide performing R&D functions. The
focus of these centers may be on ‘R’, ‘D’, or both. Von Zedtwitz and Gassmann (2002: 575) provide a
classification of four archetypes of R&D organization, which allows for a better understanding of the
organization of R&D by the companies of the present research. Their classification is especially valuable
since it makes a distinction between ‘R’ and ‘D’ (as discussed above) in reference to their
internationalization drivers. The classification is compared to other studies and discussed below:
• National treasure R&D: both research and development are located at the firm’s home base. R&D
may be kept at home because this way, core technologies are easier to control. Another reason
may be that the necessary technical or scientific competences are not available elsewhere, or that a
minimum critical mass of R&D capabilities is important (see Argyres & Silverman, 2004).
• Technology driven R&D: Dispersed research and domestic development. In technology-driven
companies, research is generally more internationalized than development. Access to local
centers-of-excellence for scientific knowledge and the relative scarcity of scientific personnel at
home drives a substantial share of the technology identification and creation process abroad (see
also Kuemmerle, 1997; 1999). Development remains centralized for scale effects or for protective
or other reasons.
• Market driven R&D: Domestic research and globally dispersed development. Companies in this
category have typically followed the ‘call of the market’. Business development is dominated by
customer demands and not by scientific exploration.
• Global R&D: Dispersed research and dispersed development. These companies aim for global
coordination of their R&D activities through integrated R&D networks. Research is located where
there is high-quality scientific input expected from centers-of-excellence (see Box 1 below). At the
same time, development labs conform to local demands and standards.
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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Figure 4 The organizational structures of internationalized R&D (Von Zedtwitz & Gassmann, 2002)
The structural organization of international R&D by the companies of this research
The companies of the present research (i.e. Unilever, DSM, AkzoNobel and Philips) all have multiple R&D
centers world-wide. The focus of these centers is on R, D or on both and therefore all four companies fall
within the ‘global R&D’ category. Importantly, as Von Zedtwitz & Gassmann point out, through these
global R&D networks, local science can be quickly absorbed and adapted for utilization elsewhere within
the firm, and single development centers can take the lead to prepare products for global market launch. At
the same time, as Reger (2004) argues, managing R&D in this environment is significantly more complex
and more costly than in the other three R&D structures. Among the four companies of this research, units
with a development focus are typically more widespread than research centers (as will be discussed in the
case studies, Chapter 5). A reason therefore is that for the research activities typically technical/scientific
‘critical mass’, as well as access to scientific clusters are required (see also Reger, 2004; Von Zedtwitz &
Gassmann, 2002).
2.4 R&D subsidiaries and knowledge absorption
As argued above, the four companies of this research all have multiple R&D centers world-wide, that may
focus on research work, development work, or both. As discussed in the introductory chapter, apart from
creating new knowledge in-house, the international R&D centers play a key role as absorbers of external
knowledge that may subsequently be exploited by other parts of the firm. However, not all R&D centers are
equally involved in contributing to the firm’s innovation processes and in the absorption of external
knowledge. To clarify this issue, this section discusses the differences in subsidiary R&D mandates and
their evolution over time.
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A common classification of the different types of mandates of R&D subsidiaries is provided Nobel and
Birkinshaw (1998). They identify three main categories: the local adaptor, the international adaptor and the
international creator. Combining this categorization with additional insights from the R&D literature these
different mandates and the implications for external knowledge absorption are discussed in the following:
• The local adaptor helps the local producing unit to assimilate and effectively utilize the existing
mainstream technology of the MNC, is always local in scope and has a rather limited development
mandate. The local adaptor can thus be seen as a technical support center and has no significant
research or product development mandate. In recent decades, this adaptation role has become less
common and foreign subsidiaries more often play a role in technological innovation (Pearce,
1989).The role of the local adaptor is not to acquire external technical knowledge, nor to develop
knowledge that can be used by the rest of the company.
• The international adaptor “provides backup for a local producing unit, but aspires to a more
fundamentally creative role than a support laboratory, seeking to endow its subsidiary with some
kind of product autonomy” (Nobel & Birkinshaw, 1998:482). The international adaptor has
responsibility for developing new and improved products specifically. With the globalization of
manufacturing, many operations now have regional or global mandates, so development
responsibilities are likewise international in scope. The international adaptor units mostly build on
existing in-house technical competences. They are involved in the absorption of market-related
knowledge from the external environment, yet not significantly of scientific/ technical knowledge
(Kuemmerle, 1997).
• The international creator R&D center “provides inputs into a centrally defined and coordinated
R&D program, with no necessary connection with host country producing operations” (Nobel &
Birkinshaw, 1998:482). The distinguishing characteristics of competence-creating R&D centers
are the focus both on research and development, including more complex development work, in
contrast to the minor improvement and adaptation responsibilities of international adaptors. They
have linkages primarily to corporate and divisional R&D, not local manufacturing.
Concluding, international R&D centers differ in their focus on R or D, the extent to which they contribute
new technical knowledge to the rest of the organization, and how much they are engaged in the absorption
of new external technical knowledge, as summarized in Table 1.
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Table 1 Creator and adaptor R&D centers and knowledge absorption.
Focus on ‘international creator’ R&D centers
Clearly, of the three types, the international creator is the most important in terms of the research activities
it performs and the development of new concepts, processes and products. Importantly, given the
importance of external knowledge to perform these tasks, the international creators are also dominant in
terms of the absorption of external technical knowledge that is at the basis of the development of new
technological competences (Kuemmerle, 1997; 1999). This also illustrated by the finding that R&D units
that provide more R&D inputs to the company typically have more communication with external
institutions such as local universities, customers, and suppliers (Nobel & Birkinshaw, 1998). The present
research therefore focuses on the ‘international creators’: those subsidiary R&D centers that are both
involved in the absorption of external technical knowledge and contribute to the development of new
technical competences for the firm.
The development of R&D mandates
As discussed in chapter 1, this research focuses on the emerging economies as increasingly sophisticated
sources of new knowledge. The external knowledge environments of these countries are considered to
become more interesting for the R&D centers to tap into. In the following it is discussed how this may
result in the evolution of adaptive R&D centers to become competence creating R&D centers.
Research has confirmed that R&D subsidiary roles are not static, but may evolve over time. The qualities of
the location of the R&D subsidiary are an important determinant of whether or not it may achieve the
competence-creating output of an ‘international creator’ (e.g. Almeida & Phene, 2004; Cantwell and
Mudambi, 2005). Von Zedtwitz and Gassmann (2002) established that the focus of a subsidiary’s tasks may
shift from D to R, or broaden to include a wider spectrum of R&D tasks, as a result of changing local
market conditions and developments in the local knowledge environment. An increase in market demand
Type of R&D center Focus Contributor of new
technical knowledge to
the firm
Involved in absorption
of external technical
knowledge
Local adaptor Technical support Low Low
International adaptor Development Low Low
International creator
(focus of this research)
Research,
Development, or both
High High
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has a positive correlation to the investments in adaptive development work, while improvements in the
local knowledge environment are a driver for the expansion of research activities. As a result, the
importance of the R&D center as a contributor of new knowledge to the company may also change over
time (i.e. from an adaptor to a creator or vice versa). Under excellent market and local knowledge
conditions, R&D centers may evolve into so-called global centers of excellence (see box 1). In addition to
the identified location-related aspects, the evolution of subsidiary mandate also depends upon a
combination of and an interaction between local initiative and parent company assignment (Birkinshaw &
As discussed in the introductory chapter, Cohen and Levinthal’s (1990) concept of ‘absorptive capacity’ is
applied in this research to study the knowledge absorption process of the foreign R&D subsidiaries, given
its academic popularity and ‘completeness’: to understand a firm's absorptive capacity, one should focus
not only on the relationship between the firm (or an organizational unit) and external organizational sources
of knowledge, but also on the internal organization of the innovation process, that determines the
exploitation of technological knowledge within the organization (Argyres & Silverman, 2004; Cohen &
Levinthal, 1990; Jansen et al, 2005; Zahra & George 2002).Consequently, knowledge absorption is defined
as a combination of the valuation, assimilation and application of external knowledge.
This thesis acknowledges the reconceptualization of Cohen & Levinthal’s (1990) model by Zahra &
George (2002). Zahra & George (2002) distinguish between potential and realized absorptive capacity.
Potential capacity refers to the acquisition and assimilation of external knowledge, and realized absorptive
capacity entails the transformation and exploitation. In line with Todorova & Durisin (2007), one can argue
that this reconceptualization has some important flaws, including the omission of ‘recognizing the value’ of
new knowledge as a critical capacity. For this reason the decision was made to ‘stick to the classics’ and
use Cohen and Levinthal’s seminal article as the basis for the study of knowledge absorption.
11 Having access to non-technical knowledge, such as market and industry knowledge is also very important for the R&D
organization. These types of knowledge may be acquired directly by the R&D centers or via other organizational disciplines, such as
sales, marketing, finance, etc. (Kuemmerle, 1997). Notwithstanding the importance of non-technical knowledge to the R&D
organizations, given the need to focus this thesis will only address the absorption of technical and scientific knowledge by the R&D
centers.
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Redefining knowledge assimilation
Using Cohen and Levinthal’s (1990) conceptualization of knowledge absorption as a starting point, it
became clear from the initial two interviews that the connotations of participating R&D managers with the
concept of ‘assimilation’ were ambiguous. Therefore, the assimilation activity has been redefined based on
these initial interviews and the literature as a combination of three activities, namely the acquisition,
transformation and transfer of knowledge.
• Acquisition: The actual inflow of external knowledge into the organization was seen by the
managers as a key activity following the estimation of the value of that knowledge. In line with
Zahra and George (2002), this thesis argues this knowledge inflow is called ‘acquisition’.
• Transformation: After the acquisition, the external knowledge is typically transformed by the
acquiring R&D site into a different form, useable by other disciplines within the firm.
• Transfer: Several managers emphasized how the acquired external knowledge needs to be
effectively shared or transferred within the R&D center.
In the following, the five main activities of the knowledge absorption process are discussed. Particular
attention is paid to the three activities that substitute the assimilation activity.
Figure 6 The five knowledge absorption activities (based on Cohen & Levinthal, 1990 and others).
1 Value external knowledge
Through its R&D activities, a firm develops organizational knowledge about certain areas of science and
technology and how those areas relate to the firm’s products and markets (Cohen & Levinthal, 1990; Lane
et al., 2006). This results in the ability to identify and recognize the value of external knowledge upon
which the decision can be made whether or not to acquire the knowledge.
2 Acquire external knowledge
To be able to make use of the valuable external knowledge, it must somehow be acquired by the R&D
center first. The literature of absorptive capacity argues that the firm develops processes, policies and
procedures to acquire external knowledge (Cohen & Levinthal, 1990; Lane et al., 2006; Zahra & George,
2002). However, this literature is not very explicit about how external knowledge may actually be acquired
by the firm. How the knowledge is acquired will therefore be explored in the case studies.
Recognize the Value of external knowledge
Acquire external knowledge
Transform acquired knowledge
Transfer acquired knowledge
Apply acquired knowledge
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3 Transform acquired knowledge
In line with Zahra & George (2002), this thesis argues the transformation of the acquired knowledge by the
R&D units into a useable form is the second important capability underling the assimilation process.
“Transformation denotes a firm’s capability to develop and refine the routines that facilitate combining
existing knowledge and the newly acquired knowledge. This is accomplished by adding or deleting
knowledge or simply by interpreting the knowledge in a different manner” Zahra & George (2002:190).
The process of combining external and internal knowledge is a highly operational issue, which is typically
embedded in the daily operations in distinct units in the multinational organization. Nonaka (1994)
emphasizes the conversion of tacit into explicit knowledge (and vice versa) as an important aspect of
knowledge transformation.
4 Transfer acquired knowledge
The sharing or transfer of knowledge within the R&D center was identified in the initial interviews as a
third important element of knowledge assimilation. Zahra and George (2002) argue that effective internal
knowledge sharing is a critical part of absorptive capacity. As Carlile (2004) argues, ‘knowledge transfer’
is the most common label used to describe the movement of knowledge in organizations. The concept has
its basis in the information processing approaches to boundaries in organization theory (Lawrence and
Lorsch 1967). Although intra-organizational knowledge transfers are typically seen as ‘easier’ than
knowledge exchanges with external firms, Teece (1977) already pointed at the difficulties and related costs
of internal knowledge transfers are often substantial. This is especially the case for tacit knowledge, which
is difficult to codify and teach. Of particular importance for this research is the fact that cultural barriers
may obstruct the effective transfer of knowledge within the R&D centers (Bhagat, Kedia, Harveston and
Triandis, 2002). Transfers are also at the basis of the subsequent ‘flows’ to other organizational units, such
as other R&D units to the marketing and manufacturing disciplines, yet this is beyond the scope of this
research.
5 Apply acquired knowledge
As discussed, the application of knowledge can take several forms. In general it can be stated that the R&D
centers uses the transformed knowledge to create new technologies, processes and products. Application
thus refers to incorporating transformed knowledge into operations (Zahra & George, 2002: 190). Apart
from direct commercial applications, other important outputs have been discussed in the literature, which
are called ‘knowledge outputs’ by Lane et al., 2006. They argue that firm performance is influenced by a
combination of commercial and knowledge outputs. Examples of commercial outputs include products,
services and intellectual property. Knowledge outputs can be categorized into general, scientific, technical
and organizational outputs (Lane et al. 2006: 858). This importance of outputs with an indirect commercial
application is confirmed by other literature. For example, Cohen & Levinthal (1990) addressed the
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38
development of internal routines and the ability to forecast technological trends, while Van den Bosch et al.
(1999) underscored the ability to maneuver strategically as an important outcome of absorptive capacity.
3.4 Coordination mechanisms
Having defined the five activities of the knowledge absorption process by subsidiary R&D centers, the aim
of this research is to understand which coordination mechanisms may be important to steer these activities.
In their review study on coordination mechanisms in organizational research, Martinez & Jarillo (1989:
490) define coordination mechanisms as “any administrative tool for achieving integration among different
units within an organization”. The study lists eight mechanisms identified by past researchers that “could
be divided roughly into two groups: structural and formal mechanisms, and other mechanisms, less formal
and more subtle” (1989: 490), as discussed in the following table.
Structural and formal mechanisms
Departmentalization or grouping of organizational units, shaping the formal structure.
Centralization or decentralization of decision making through the hierarchy of formal authority.
Formalization and standardization: written policies, rules, job descriptions, and standard procedures,
through instruments such as manuals, charts, etc.
Planning: strategic planning, budgeting, functional plans, scheduling, etc.
Output and behavior control: financial performance, technical reports, sales and marketing data, etc.,
and direct supervision.
Other mechanisms, more informal and subtle
Lateral or cross-departmental relations: direct managerial contact, temporary or permanent teams, task
forces, committees, integrators, and integrative departments.
Informal communication: personal contacts among managers, management trips, meetings,
conferences, transfer of managers, etc.
Socialization: building an organizational culture of known and shared strategic objectives and values by
training, transfer of managers, career path management, measurement and reward systems, etc.
As will follow from the literature review on coordination mechanisms for absorptive capacity for different
contexts in Chapter 4, the coordination mechanisms that have been the subject of these studies can be
meaningfully classified into Martinez and Jarillo’s eight categories. Therefore, this categorization will also
be used as a framework for the case studies of the present research.
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3.5 Analytical framework: Coordination mechanisms for knowledge absorption
Combining the revised conceptualization of knowledge absorption with the categorization of coordination
mechanisms, a final analytical framework is presented below. This framework serves as a basis to study the
coordination mechanisms for knowledge absorption by the foreign R&D centers of the four multinational
companies of this research.
Figure 7 Research model: identifying key coordination mechanisms for knowledge absorption
3.6 Conclusion
• As discussed in section 3.2, many different definitions and classifications of knowledge exist. For
the context of the present research, the definition “knowledge comprises information, technology,
know-how, and skills” of Grant and Baden-Fuller (1995: 18) is considered to be appropriate.
• Management scholars widely agree about the importance of knowledge (and its successful
management) for the performance of organizations.
• This research focuses on the absorption by R&D centers of technical and scientific knowledge.
Knowledge is taken to comprise information, technology, know-how, and skills.
Recognize the Value of external knowledge
Acquire external knowledge
Transform acquired knowledge
Transfer acquired knowledge
Apply acquired knowledge
Different types of coordination mechanisms
• Departmentalization
• Centralization and decentralization
• Formalization and standardization
• Planning
• Output and behavior control
• Lateral or cross-departmental relations
• Informal communication
• Socialization
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• In section 3.3, Cohen & Levinthal’s ‘assimilation’ activity (as one of the three knowledge
absorption activities) was replaced by a combination of knowledge acquisition, transformation and
transfer. The resulting conceptualization of knowledge absorption, as a combination of the
valuation, acquisition, transformation, transfer and application of external knowledge was
discussed.
• Section 3.4 provided a definition and categorization of eight types of coordination mechanisms
based on Martinez & Jarillo (1989). They discuss five formal and three informal categories of
mechanisms. The formal mechanisms are: departmentalization, centralization and decentralization,
formalization and standardization, planning, and output and behavior control. The informal
mechanisms are lateral or cross-departmental relations, informal communication and socialization.
• The analytical framework for the case studies was provided in section 3.5.
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Chapter 4
Coordination mechanisms for absorptive capacity: a literature review
4.1 Introduction
This chapter aims to explore the different academic interpretations of absorptive capacity, its coordination
mechanisms and its outcomes based on a review of a selection of the absorptive capacity literature12. As
will be argued in section 4.2, absorptive capacity and its coordination have been studied in several different
contexts that are relevant to this study. Sections 4.3, 4.4 and 4.5 will discuss a well-known body of
literature of absorptive capacity, focusing on the firm-level; the inter-organizational level and the intra-firm
level respectively. Organizational outcomes are discussed in 4.6. Final reflections on the literature are
provided in 4.7.
The identified coordination mechanisms of absorptive capacity are presented in italics. The review also
includes a number of factors that were identified to have an important effect on an organization’s
absorptive capacity, but which should not be regarded as ‘coordination mechanisms’ (e.g. the availability of
prior related knowledge). In those cases, this will be explained.
4.2 Three levels of analysis
From the selection of the literature of absorptive capacity it follows that studies have focused on absorptive
capacity in different contexts. For this thesis it is useful to organize the literature according to the different
organizational levels of analysis. In section 3.3, the external knowledge absorption process by the firm
through its international R&D center can be taken as the sum of an external and an internal aspect: first the
foreign R&D center absorbs external knowledge, whereupon other organizational units may subsequently
absorb this internalized knowledge from the R&D center. Taken together, the internal and external aspects
constitute firm-level absorptive capacity (the absorption of external knowledge by the firm as a whole): this
is the first level of analysis. The external aspect of knowledge absorption is typically studied as the result of
interactions by the firm with other organizations. This second level is referred to as the inter-organizational
level of analysis. Given that R&D is more and more often the result of collaborative activities with external
parties, this context is clearly important. The third category of literature focuses on absorptive capacity at
the intra-firm level of analysis: the absorption of internal knowledge from one unit within the firm by
another.
12 Given the vast number of papers on absorptive capacity (see Lane, et al., 2006), this review cannot be exhaustive. A selection has
been made of well-known studies published in A-journals, that were judged to be theoretically and/or empirically relevant for the
context of this research.
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Figure 8 Three levels of absorptive capacity
4.3 Absorptive capacity at the firm level
R&D investments and other forms of prior knowledge
In an article preceding their seminal 1990 paper, Cohen & Levinthal (1989) focus on the role of R&D in
organizational learning and innovation. The article argues that firms invest in R&D not only to generate
innovations, but also to learn from competitors and non-industrial knowledge sources such as universities
and government labs. Until then, technological knowledge was considered to be a more or less public good
that could be utilized by firms without much cost. By pointing at the investments made in R&D as a
prerequisite to easily acquire external knowledge, Cohen and Levinthal lay the basis for the
conceptualization of absorptive capacity as the result of a firm’s prior related knowledge and its
investments in R&D in particular. In their 1990 article Cohen and Levinthal build on socio-cognitive theory
to provide explanations for the organizational processes determining the three abilities of absorptive
capacity. The authors argue that absorptive capacity is a result of a firm’s prior innovation and problem
solving and that absorptive capacity ultimately depends on the level of absorptive capacity of the individual
employees. Importantly, the article also underscores the ability of the organization to internally transfer
acquired knowledge to be exploited by the part of the organization that does this best. By itself, knowing
where and how knowledge can be effectively used within the organization can thus be regarded as
important prior knowledge that increases the firm’s absorptive capacity.
Van den Bosch et al. (1999) also emphasize the relationship between absorptive capacity and the level of
prior related knowledge, which they view as a positive feedback loop: “an increase in absorptive capacity
causes a change in prior related knowledge in such a way that, ceteris paribus, the absorptive capacity
increases”. Importantly, they note such a feedback loop may not always lead to positive outcomes. “This is
in line with Levinthal's (1994) notion of a competency trap, created by the fact that firms may be blindsided
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by new developments in the field because they focus on their prior related knowledge” (Van den Bosch et
al., 1999: 566).
Van Wijk, Van Den Bosch and Volberda. (2006) provide deeper insights into the effects of a firm’s prior
related knowledge on absorptive capacity. They distinguish between the breadth and depth of a firm’s
‘knowledge stocks’ (the concept of knowledge stocks is based on Argyres, 1996). The knowledge stock of a
firm can be understood as accumulated knowledge assets, which are internal to the firm. The depth
dimension is associated with specialist knowledge within a small domain, which increases the ability to
acquire, assimilate and exploit external knowledge within that domain. The breadth dimension of
absorptive capacity is related to generalist prior knowledge across a range of subject areas. Accordingly,
firms with a broad knowledge base are better able to absorb knowledge in domains that are different, but
related to what is currently known.
Prior related knowledge, whether conceived in the form of knowledge stocks or as R&D investments has
thus been regarded by several key authors as one of the most important determinants of absorptive capacity
at all units of analysis (i.e. the firm, intra-firm and inter organizational level). However, prior knowledge
per se can hardly be regarded as a coordination mechanism, as it is not clear which organization
mechanisms are responsible for its development. In those cases where R&D investments are taken as a
proxy for absorptive capacity (such as Tsai, 2001), this can be regarded as a planning mechanism.
In their review study on absorptive capacity literature Lane et al. (2006) question the appropriateness and
validity of prior knowledge and R&D intensity in particular as the dominant proxy for absorptive capacity
and in line with Van de Bosch et al., 1999 they stress the need for research to focus on organizational
factors. The significance of this point is illustrated by Lane & Lubatkin (1998), who demonstrated that in
comparison to the similarity of knowledge bases, other organizational characteristics, in particular
similarity in organizational structure and compensation practices, explained much more variance13.
Organizational form
The case-study based research by Van den Bosch et al. (1999) explores how organization form and the
fims’s ‘combinative capabilities14’ interact over time and what their combined effect is on the level of a
firm's absorptive capacity. They discern different dimensions of absorptive capacity: 1) the efficiency
dimension refers to the cost and economies of scale perspective, 2) the scope dimensions refers to the
breadth of component knowledge, and 3) the flexibility dimension refers to the extent to which firms can
access additional and reconfigure existing component knowledge. The authors argue that an organization’s
13 They found that the traditional measure of R&D spending explained only 4% of the variance in interorganizational learning, while
the knowledge similarity variables explained another 17% and the five knowledge-processing-similarity variables
explained 55% of the variance. 14 Combinative capabilities “synthesize and apply current and acquired knowledge” (Van den Bosch et al, 1999: 556) and are taken to
consist of systems capabilities, coordination capabilities and socialization capabilities.
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efficiency, scope, and flexibility dimensions of absorptive capacity vary depending on the particular
organizational form (i.e. the functional, divisional, and matrix forms) of the firm. The firm adopts its form
in response to characteristics of the knowledge environment, and the matrix form is found to be most
positively related to absorptive capacity15.
Coordination capabilities, systems capabilities and socialization capabilities
Building on the distinction between potential and realized absorptive capacity by Zahra and George (2002)
and the framework of ‘combinative capabilities’ by Van den Bosch et al., (1999), Jansen, Van den Bosch
and Volberda (2005) empirically assessed the impact of specific coordinative capabilities for potential and
realized absorptive capacity. An important contribution of this study is their development and empirical
testing of constructs to measure potential and realized capacity16. Their results indicate that organizational
mechanisms they classify as coordination capabilities (i.e. cross-functional interfaces, participation in
decision making, and job rotation) primarily enhance a unit’s potential absorptive capacity, while
organizational mechanisms associated with socialization capabilities (i.e. connectedness and socialization
tactics) increase a unit’s realized absorptive capacity. Their results for systems capabilities (i.e.
routinization and formalization) are also interesting. Routinization was found to impede the flexible
incorporation of newly acquired and of existing knowledge, while “in contrast to making established
behavior tacit through routinization, codification efforts through formalization enhance a unit’s ability to
transform and exploit new external knowledge”.
4.4 Absorptive capacity at the inter-organizational level
The process and the coordination mechanisms of knowledge absorption by foreign R&D subsidiaries have
not received little attention in the literature. As an exception, a recent study by Mu et al. 2007 found that
the learning and innovation of U.S.-based subsidiaries are significantly influenced by their local
embeddedness, which “helps to increase awareness of local strategic knowledge and to access and acquire
it and thus improve subsidiary innovation.”(2007: 95). Also, top management team heterogeneity, and the
corporate entrepreneurial culture of their parent company were found to be important coordination
mechanisms for knowledge absorption and local innovative performance. The results also show that
subsidiary innovation positively influences outflow of knowledge from the subsidiary to the rest of the
MNC.
15 However, not for the efficiency dimension 16 In their attempt to extend and reconceptualize the construct of absorptive capacity, Zahra and George (2002) make a distinction
between potential and realized absorptive capacity and relate these dimensions to corresponding capabilities. Potential absorptive
capacity refers to the capabilities to acquire and assimilate external knowledge (i.e. efforts expended in identifying and acquiring new
external knowledge and in assimilating knowledge obtained from external sources), while realized capacity involves knowledge
transformation and exploitation, i.e. deriving new insights and consequences from the combination of existing and newly acquired
knowledge, and incorporating transformed knowledge into operations (Zahra & George, 2002: 190).
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Collaborative practices with other companies have become a critical source of external knowledge for most
large firms (including the focal companies of the present research), which has resulted in a number of
studies on absorptive capacity at the inter-firm level of analysis (by focusing on alliances and joint
ventures). Several studies argue that apart from the existing knowledge base, the level of absorptive
capacity is at least partly attributable to similarities in organizational characteristics between the firms and
its partner firm. It is important to note these many studies take a two-way (instead of a one-way) learning
approach: both partners learn from each other. Based on their research among pharmaceutical–
biotechnology R&D alliances, Lane and Lubatkin (1998) found one firm’s ability to learn from another
firm depends not only on the similarity of both firms’ knowledge bases, but also on the similarities in
organizational structures, compensation policies and dominant logics. Based on this insight, they
reconceptualized the concept of absorptive capacity and proposed that absorptive should be viewed as a
dyad-level, rather than a firm level, construct which they call relative absorptive capacity. The similarity in
organizational structure (i.e. especially lower management formalization) and compensation systems is
related to a firm’s ability to assimilate new external knowledge, while the ability to commercialize new
external knowledge is depended on the proportion of the organizational problem solving set that is shared
with the partner.
In their study on absorptive capacity in international joint ventures (IJV), Lane, Salk and Lyles (2001)
found support for the existence and importance of relative absorptive capacity. For the understanding of
external knowledge, the relatedness of the businesses and the similarity of the problems and priorities with
which the participating companies are faced, are most important for the recognition of new knowledge.
They view the assimilation of (foreign parent) knowledge as a sensemaking process whereby the IJV
connects the new knowledge and to its existing knowledge. Flexibility and adaptability in organization
structures are important in facilitating this assimilation process, as well as a high level of training by the
foreign parent. Such training may help provide the context for large volume of knowledge acquired and its
connection to existing knowledge. Importantly, the study found a positive relationship between the level of
trust17 between the parent companies of an IJV’s and the IJV’s ability to learn from the foreign parents.
Although the present research focuses on knowledge absorption by western multinationals from emerging
economies, for local companies in these countries it is typically very important to be able learn the other
way around. From their study of 173 international joint ventures in Vietnam, Anh, Baughn, Minh Hang and
Neupert (2006) provide evidence linking the level of a firm’s absorptive capacity, the acquisition of
knowledge and performance. Apart from relatedness of initial knowledge bases, factors predicting
knowledge acquisition include investment in training, employees’ ability to learn, and joint participation by
17 “Trust entails having confidence that the other firm will refrain from exploiting your vulnerabilities, and will also contribute their
valuable knowledge to the IJV” (Lane et al., 2001: 1140).
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foreign and local employees. Especially the acquisition of tacit knowledge was found to contribute
significantly to the performance of the international joint ventures.
4.5 Absorptive capacity at the intra-firm level
Absorptive capacity has also been investigated in research on knowledge flows between different units
within multinational firms. Tsai (2001) for example examined how an organizational unit may gain useful
knowledge from other units to enhance its innovation and performance. The study does not investigate
particular coordination mechanisms of absorptive capacity, but rather takes absorptive capacity, together
with the position within the intra-firm network, as a determinant of innovation and performance. R&D
intensity was taken as the proxy for absorptive capacity. The results indicate that centrally located
organizational units with high levels of absorptive capacity reach higher levels of innovative performance
as well as financial performance.
Minbaeva, Pedersen, Björkman, Fey and Park (2003) examine the linkages between the application of
specific HRM practices and the level of absorptive capacity at the subsidiary level. They suggest that
absorptive capacity should be conceptualized as a combination of employees' ability and motivation, since
both are needed to facilitate the transfer of knowledge from other parts of the MNC. Particular human
resources management practices, namely training, performance-based compensation, and internal
communication increase the ability and motivation of employees to transfer knowledge, enhancing a
subsidiary’s absorptive capacity.
Mahnke, Pedersen, and Venzin (2005) further explore the influence of HRM and knowledge management
practices on the development of a unit’s absorptive capacity and adopt the view that employee motivation
and ability are key to effective knowledge absorption Their results indicate that knowledge management
practices, such as corporate university, communities of practice, group benchmarking, learning systems
and rewards upon absorptive capacity and performance are positively related to a unit’s absorptive
capacity.
4.6 Organizational outcomes of absorptive capacity
The ability to value, assimilate and apply external (and internal) knowledge is assumed to have a positive
effect on the firm’s performance. The effect of absorptive capacity on different types of organizational
outcomes has been studied by several authors. For example, Cohen and Levinthal (1990) explicitly relate
absorptive capacity to the firm’s innovative abilities. This positive relation has been empirically affirmed
by Tsai (2001) and Mu et al. (2007). Similarly, Van Wijk et al. (2006) specify this relation by pointing at
the effects of deep and broad knowledge stocks on exploratory and exploitative innovation. Another
important performance-related outcome of absorptive capacity is the ability to predict external business and
technology trends (Cohen & Levinthal, 1990; Van den Bosch et al., 1998; Volberda, 1998). Lane et al.,
2001 and Lane and Lubatkin (1998) focus on the effects on inter-organizational learning. Tsai (2001) and
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Anh (2006) empirically assessed the impact of absorptive capacity on financial performance, which is
found to be positive. Finally, Jansen et al. (2005) and Zahra and George (2002) found absorptive capacity
to contribute to the firm’s competitive advantage, by playing an important role in the renewal of a firm's
knowledge base and the skills necessary to compete in changing markets, and to capitalize upon emerging
strategic opportunities. “These opportunities may help the firms sustain superior performance because of
first mover advantages and responsiveness to customers” (Zahra & George, 2002:169).
Table 2 highlights the results of the above discussion (see next page).
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Level of Analysis
References Coordination mechanisms of absorptive capacity
Organizational outcomes of absorptive capacity
Firm Cohen & Levinthal, 1989; 1990 Van den Bosch et al, 1999 Van Wijk et al., 2006 Jansen et al., 2005 Zahra and George (2002)
Prior knowledge (*), R&D investments Prior knowledge (*), organizational form, combinative capabilities Deep vs. broad knowledge stocks (*) Coordination capabilities, systems capabilities, socialization capabilities Exposure to complementary sources of knowledge (*); activation triggers (*); social integration mechanisms and regimes of appropriability (*)
Innovative performance; ability to predict external business and technology trends (not empirically validated) Ditto Exploratory and exploitative innovation Competitive advantage Ditto (not empirically validated)
Inter-organizational
Lane & Lubatkin, 1998 Lane et al., 2001 Mu et al., 2007 Anh et al., 2006
Similarities in organizational structures, compensation policies and dominant logics Relatedness of businesses (*); similarity of the problems and priorities (*); flexibility and adaptability of org. structures; level of trust (*) Local embeddedness; TMT heterogeneity; corporate entrepreneurial culture of parent company Investment in training; employees’ ability to learn; and joint participation.
Inter-organizational learning outcomes Inter-organizational learning outcomes and financial performance Inter-organizational learning outcomes and innovative performance Inter-organizational learning outcomes and financial performance
Intra-firm Tsai, 2001 Minbaeva et al. 2003 Mahnke et al., 2005
R&D intensity HRM and knowledge management practices Ditto
Innovative and financial performance (empirically validated) Level of knowledge inflows into a particular unit Ditto
Table 2 Coordination mechanisms of absorptive capacity: results from the literature review.
Note: the *’s indicate the identified factor does not fit the applied definition of coordination mechanisms.
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Table 3 categorizes the coordination mechanisms for absorptive capacity based on Martinez & Jarillo, 1989
(see section 3.4).
Table 3 Categorization of the identified coordination mechanisms (based on Martinez & Jarillo, 1989)
Categorization of coordination mechanisms
Structural and formal coordination mechanisms Departmentalization Organizational form (Van den Bosch et al., 1999)
Organizational structure (Lane & Lubatkin, 1998) Flexibility and adaptability of org. structures (Lane et al., 2001)
Centralization or decentralization through hierarchy
Organizational form (Van den Bosch et al., 1999) Organizational structure (Lane & Lubatkin, 1998) Partcipation in decision making (Jansen et al., 2005)
Formalization and standardization
Routinization and formalization through policies, procedures and manuals (called ‘systems capabilities’) (Jansen et al., 2005; Van den Bosch et al., 1999). Flexibility and adaptability of organizational structures (Lane et al., 2001)
Planning R&D investments (Cohen & Levinthal, 1990; Tsai, 2001) Output and behavioral control
Performance-based compensation (Minbaeva et al., 2003) Group benchmarking (Mahnke, et al., 2005)
Job rotation (Jansen et al., 2005; Van den Bosch et al., 1999) Natural liaison devices (Jansen et al., 2005; Van den Bosch et al., 1999) Local embeddedness (linkages with parties in local knowledge environment) (Mu et al., 2007) Communities of practice (Mahnke et al., 2005)
Informal communication
Internal communication (Minbaeva et al., 2003)
Socialization (Similarity in) compensation practices (Lane & Lubatkin, 1998) (Similarity in) dominant logics (Lane & Lubatkin, 1998) Socialization capabilities(Van den Bosch et al., 1999), or socialization tactics (Jansen et al., 2005) promoting: a coherent set of beliefs; a high degree of shared values; a common language; a strongly agreed-upon kind of appropriate behavior Connectedness (dense linkages among organizational members) (Jansen et al., 2005) Social integration mechanisms (Zahra & George, 2002) HRM mechanisms promoting employees' ability and motivation to absorb knowledge (Minbaeva et al., 2003) via: training; performance based compensation; internal communication Knowledge management practices to promote knowledge absorption (Mahnke et al., 2005): corporate university; communities of practice; group benchmarking; learning systems; rewards
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4.7 Reflection on the literature
As becomes clear, even though a modest number (12) of studies that have been reviewed, a diverse range
of coordination mechanisms for absorptive capacity were found. The identified mechanisms cover all
categories of Martinez & Jarillo’s (1989) classification: from organizational structure (departmentalization)
to personnel trainings for knowledge absorption (socialization). The notion that a firm’s absorptive capacity
results of a variety of organizational mechanisms (rather than solely the availability of prior related
knowledge) has thus become strongly established, especially in the more recent literature. Based on the
relative ‘newness’ of this strand of literature (focusing on coordination mechanisms for absorptive
capacity) and the diversity of coordination mechanisms that have been explored by these studies, it can be
assumed that many coordination mechanisms are yet to be uncovered by researchers.
Second, the coordination mechanisms for absorptive capacity may differ significantly per context. For
instance, Lane and Lubatkin’s (1998) notion of relative absorptive capacity, based on similarities in
organizational structures, compensation policies and dominant logics between independent companies, is
clearly important for the inter-organizational context. However, its value to the intra-firm context (where
knowledge transfer takes place between organizational units within the same firm) is uncertain, since there
the mentioned similarities can be expected to be present and other mechanisms may thus be of more
importance (e.g see Minbaeva et al., 2003)
Third, as hypothesized by several authors and empirically established by Jansen et al., (2005), different
coordination mechanisms are important for different components of absorptive capacity (in this case
‘potential’ and ‘realized’ absorptive capacity).
Based on these observations, this thesis argues that further research into the coordination mechanisms that
may steer different components of absorptive capacity in different contexts is clearly desirable.
4.8 Conclusion
• This chapter provided a review on coordination mechanisms for absorptive capacity for three
different organizational levels that are relevant to this research, i.e. the firm level, at the inter-
organizational level and the intra-firm level.
• Since its introduction by Cohen & Levinthal in 1990, ‘absorptive capacity’ has become a
dominant concept in the management literature. However, the number of studies into the
coordination mechanisms that may steer knowledge absorption remains modest (Lane et al., 2006)
and only recently research has started to investigate the specific context of the present research:
the organizational coordination of knowledge absorption by foreign R&D subsidiaries (Mu,
Gnyawali & Hatfield, 2007).
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• Notwithstanding the limited number of studies into the coordination mechanisms for absorptive
capacity, the notion that a firm’s absorptive capacity results of a variety of organizational
mechanisms (rather than solely the availability of prior related knowledge) has become strongly
established in the more recent literature.
• Based on the review, a variety of coordination mechanisms were identified and discussed. Several
studies have empirically validated positive relationships between the level of a firm’s absorptive
capacity and its innovation strength and financial performance.
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Chapter 5
Case study methodology
5.1 Introduction
This chapter details the methodological aspects of the empirical study. Case studies were conducted among
four Dutch multinational companies to identify the important coordination mechanisms determining the
knowledge absorption activities by their foreign R&D centers. Section 5.2 discusses the case study
approach and the selection of cases. In section 5.3 the unit of analysis and the interview method are
discussed. Aspects concerning research validity and the structure of the case studies are discussed in
sections 5.4 and 5.5.
5.2 Approach
For the empirical part of this research, a descriptive case study method was followed based on four cases18.
Unilever, DSM, AkzoNobel and Philips were selected and found willing and able to participate in this
study. Semi-structured face-to-face interviews and interviews by telephone with selected R&D managers
were the dominant source of information for the case studies. Different sets of secondary data sources were
also used. As Eisenhardt (1989) argues, the use of different data collection methods adds to the unique
strength of case studies. The data collection process for each case study started with a review of articles in
newspapers, academic journals and business magazines and a scan of the publicly available information of
the firm, such as the company website and online presentations. Based on this information a general
company profile was written. Based on this company profile and the analytical framework provided in
section 3.5, interviews were held with selected R&D managers, as will be discussed below. In the
interviews, the managers were asked to discuss what they consider to be key coordination mechanisms for
the five knowledge absorption activities. The interviews were recorded and fully transcribed. Subsequently,
the interview results combined with the other sources of data were used to develop the case reports. The
categorization of coordination mechanisms (provided in section 3.4) was used as a reference to interpret
and classify the identified mechanisms mentioned in the interviews. The full case reports are provided in
appendices 2, 3, 4 and 5. Based on the case reports further cross-case analysis was carried out as the basis
for the discussion in Chapter 7.
18 The number of four cases results from the desire to include at least one example per ‘emerging’ country (i.e. Brazil, Russia, India
and China). Even though more cases could provide a larger number of examples, the required time-investment would be beyond the
scope of this master’s thesis.
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Selection of cases
The case studies were conducted at Unilever, DSM, AkzoNobel and Philips. The cases were selected based
on their similarities (to define a coherent research group) and their dissimilarities, which enhances the
possibility to build theory based on the case descriptions (Eisenhardt, 1989). The similarities include the
fact that all four multinationals have large R&D organizations: they belong to the top-five of Dutch
multinationals in terms of expenditures on R&D (AWT, 2006). More importantly, all companies have a
developed strong capabilities of managing international R&D and all have a large share of their R&D
(typically around 50% or more) being carried out outside of the home country19. Importantly, the four
companies all have subsidiary R&D centers in at least one of the emerging economies of Brazil, Russia,
India and China. The dissimilarities between the four firms are also significant. The diversity of industrial
settings together with the very different mandates of the R&D units in the emerging economies provide a
fruitful basis to explore the differential scope of knowledge absorptive capacity processes for different
settings.
• Unilever is active in the fast-moving consumer goods industries of foods and personal care, with
its Savoury and Tomato R&D Center of Excellence (CoE) in São Paulo as an important R&D
center in Brazil.
• DSM is primarily active in the business-to-business arenas of Nutrition, Pharma, Performance
Materials and Industrial Chemicals. The Russian Enzyme lab develops important biochemical
knowledge for the company.
• With its operations in coatings and chemicals for the business markets, in terms of industry
AkzoNobel is quite comparable to DSM. However, whereas the activities of DSM’s small R&D
site in Russia are largely limited to analytical work, AkzoNobel’s much larger R&D center in
Bangalore performs a broad range of R&D activities for its Car Refinishes business.
• Philips, a major global player in the electronics industry, focuses on the markets of Consumer
Electronics, Medical Systems and Lighting (since 2008). Its Lighting R&D center in Shanghai,
which had a typical production supporting function, is becoming increasingly important as a
source of innovation.
5.3 Unit of analysis and interview method
This research takes the system of action as the unit of analysis: the process of external knowledge
absorption by the foreign R&D centers, as coordinated by different organizational units or constellations of
managers, rather than an individual or group of individuals (Yin, 2003). Based on the literature review and
19 In 2005 the share of R&D activities performed abroad was 57% for Philips; 49% for AkzoNobel; 85% for Unilever; 44% for DSM
(AWT, 2007).
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initial interviews it was concluded that normally, the knowledge absorption processes by the foreign R&D
centers are at least partly steered by mechanisms at a higher organizational level than the R&D center itself
(see the discussion on subsidiary mandates in 2.4). Typically, the overarching international R&D
organization plays an important role in defining the activities of the foreign R&D centers. For example,
strategies for external knowledge acquisitions may be developed at the business group or even at the
corporate levels (Meijer, 2006). Based on this insight, two groups of respondents were selected. The first
group consisted of senior high-ranking R&D managers (i.e. Chief Technology Officers and Innovation
Officers). They were selected based on their ability to oversee the dynamics of knowledge absorption
processes by the R&D centers company-wide, as well as to provide insights into the strategic coordination
of international R&D activities, including knowledge absorption. The second group of interviewees
consisted of experienced front-line R&D managers supervising R&D operations at the subsidiary level in
one of the emerging economies. These managers could provide insights into the day-to-day business and
knowledge absorption processes at the subsidiary level and yield insights into the specific coordination
mechanisms steering knowledge absorption by the R&D centers in the emerging economies.
Per company at least one manager at each organizational level were interviewed. On average, the
interviews lasted around 1,5 hours, while the minimum interview time was 45 minutes. In some cases, extra
interviews were held (typically based on suggestions by the interviewed managers) to acquire additional
information. This resulted in a total number of 14 interviews. Most interviews (9) were held in a face-to-
face setting. In case the managers were not available for a personal meeting, interviews by telephone were
held as a second-best option. Table 4 provides an overview of the managers that participated in this
research.
An interview protocol was prepared to guide the interviews (Appendix 1). The interviews were structured
as follows:
• First, the background and method of this research were briefly explained to the managers.
• Second, the participating managers were asked to briefly introduce their function and provide
background information (complementary to the collected documentation) into the functioning of
the international R&D organization, its structural aspects, internationalization trends to emerging
economies, and the subject of knowledge absorption.
• Third, the participants were asked to assess the applied conceptualization of knowledge absorption
as a combination of the valuation, acquisition, transformation, transfer and application of external
knowledge, in the sense that it provides a useful model of the complex reality. The applicability
was confirmed by all managers20.
20 As discussed in section 3.3, based on the initial interviews the assimilation activity (Cohen & Levinthal 1990) was redefined
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
55
• Fourth, the managers were asked to identify the most important coordination mechanisms to
coordinate the five activities of knowledge absorption. Per knowledge absorption activity the
participant was asked to describe the activity and to discuss what, in his experience, are the most
important coordination mechanisms to steer that activity. In nearly all cases this resulted in a
useful description without much ‘helping’ by the interviewer. Only by exception extra information
was provided, typically to clarify the connotation of concepts. Often the descriptions covered two
or more types of coordination mechanisms and multiple mechanisms were typically identified to
steer one absorption activity. In most cases, the participants found it impossible to assess the
relative importance of one mechanism to another.
5.4 Validity
Several methodological measures were taken to secure the validity of the research. As mentioned, the
interviews were recorded and fully transcribed. This improved the quality of the interviews by allowing the
interviewer to pay full attention to the discussion and optimized the possibility to analyze the data ex-post.
Furthermore, the interpretations were sent back to the interviewees for verification. Based on the comments
of the participants final conclusions were drawn. Together with the triangulation of the interview results
with the other sources of data, these actions optimize the validity of the research. Finally, it may be useful
to mention that in case study research, generalization of results from either single or multiple designs, is
made to theory and not to populations (Yin, 2003). In line with the exploratory nature of the research, the
study cannot claim any generalizability of identified mechanisms. Nonetheless, based on a qualitative
approach this thesis aims to build contributions to theory as well as case-specific insights.
5.5 Structure of the case study results
To curb the volume of this thesis, the decision was made not to discuss the coordination mechanisms for
knowledge absorption processes in detail per case, but to provide a cross-case analysis of the results. A
drawback of this approach is that it compromises the explanatory power of the analysis. For more complete
insights, the author refers to the full case reports, provided in appendices 2-5. Apart from a more complete
picture of the identified coordination mechanisms for knowledge absorption, the appendices also provide
important contextual information concerning the organization of R&D and the internationalization to the
emerging economies. The presentation of the case study results in this thesis is as follows.
• First, the case studies are introduced Chapter 6. Key background information is provided about the
company, the functioning of its international R&D organization, knowledge absorption and the
R&D activities in the emerging economies.
• Chapter 6 will also discuss the relevant background information of the R&D subsidiaries of the
four companies.
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• Together, the case studies yield important additional insights into the knowledge absorption
processes of international R&D organizations, answering sub-question 2. These are discussed in
6.10. Also, the knowledge absorption process for the R&D centers in the emerging economies is
discussed in 6.11.
• Finally, to answer the main research question, Chapter 7 provides a cross-case discussion of the
identified coordination mechanisms for the absorption of external knowledge by the R&D centers
in the emerging economies, and compares these insights to the existing literature.
Company Name and position of interviewees Date and location
Unilever (R&D in Brazil)
Mr. Emmo Meijer, Senior Vice President Foods R&D Mr. Colin Haine, R&D program director of Unilever’s Savoury and Tomato R&D Center of Excellence in Brazil Mr. Umesh Dowlath, R&D manager of Unilever’s Spreads R&D Center of Excellence in Vlaardingen, The Netherlands Mr. Peter Boone, Global Brand Manager Spreads, globally responsible for Unilever’s margarine portfolio
Nov ’07 The Hague, Nl. Nov ’07 São Paolo, Brazil Sep ’07 Vlaardingen, Nl Aug ‘07 Rotterdam, Nl
DSM (R&D in Russia)
Mr. Rob van Leen, Chief Innovation Officer Mr. Piet van Egmond, Senior Project Manager R&D, responsible for DSM’s Food Specialties’ R&D unit in Russia Mr. Johan Tiesnitsch, Former R&D manager DSM solutions Geleen (Nl)
Mr. Mike Zeitler, General manager Global Innovation Unit Mr. Peter Gommers, Strategy and Business Development Decorative Paints Mr.Luc Turkenburg, Manager R&D services, Regulatory affairs and Knowledge management, responsible for AkzoNobel’s Car Refinishes R&D unit in India Stefan Diessen, Manager New Business Development AkzoNobel Car Refinishes
Sep ‘07 Arhem, Nl Feb ’08, Amsterdam, Nl Aug ’07 Sassenheim, Nl. Feb ’08, Arnhem, Nl
Philips (R&D in China)
Mr. Rick Harwig, Chief Technology Officer Mr. Frans Greidanus, General Manager Philips Research Shanghai and Chief Technology Officer East Asia Mr. Berry Kock, CTO of product category Compact Fluorescents, also responsible for Philips Lighting’s R&D unit in China
Sep ’07 Eindhoven Nl. Oct ‘07 Shanghai, China Aug ’07, Eindhoven, Nl
Table 4 Overview of companies and R&D managers interviewed for this research
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Chapter 6
External knowledge absorption at the R&D subsidiaries of four Dutch
multinationals
6.1 Introduction
This chapter introduces the case studies that were conducted at Unilever, DSM, AkzoNobel and Philips.
First, key background information is provided about the company, the functioning of its international R&D
organization and the topic of external knowledge absorption, and about the R&D activities in the emerging
economies. Also, the relevant background information of the R&D subsidiaries of the four companies is
discussed. Together, the case studies provided important additional insights into the knowledge absorption
processes of international R&D organizations. These are discussed in 6.10. Also, findings about the
knowledge absorption process for the R&D centers in the emerging economies are discussed in 6.11.
6.2 Unilever
The first case study is based on face-to-face interviews with Senior Vice President of R&D Foods Emmo
Meijer, Global Brand Manager for Unilever Foods’ Spreads Peter Boone and R&D manager of Unilever
Foods’ Spreads Umesh Dowlath. The Brazil case study is based on an interview by telephone with R&D
project director Colin Haine in São Paolo. Secondary sources of data include the company website and
Unilever’s annual report of 2006.
Background
As one of the largest fast-moving consumer goods companies, Unilever owns many of the world's
consumer product brands in foods, beverages, cleaning agents and personal care products. Unilever
employs approximately 179,000 people, is represented in approximately 150 countries worldwide and had
revenues of almost €40 billion in 2006. As follows from the interviews, Unilever is strongly focused on
global consumer interests. Over the last decades, the company has put a lot of effort in improving the
efficiency of the company’s supply chain, marketing and R&D activities through large reorganizations.
Unilever’s R&D organization
Coming from a highly decentralized organization structure, centralizing of business activities has been a
key aspect of the recent reorganization programs, and this is also the case for the R&D organization. As
Emmo Meijer argues, the essence of the strategy is that a reduced number of larger research centers at the
business group level are developing fewer, yet more globally exploitable product ideas. All of Unilever’s
R&D activities are framed in a project-based organization for new product development. In 2005, a new
operating framework was established. This ‘brand development’ approach established a much narrower
cooperation between marketing and R&D in all phases of the product development process which leads to a
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better fit between marketing and R&D activities, resulting in a faster development of new products and a
higher rate of commercial success of innovations. If an interesting idea for a new product is identified, it is
adopted by the brand development manager and enters the company’s ‘innovation funnel’. Throughout the
different stages in the project, the R&D organization delivers different inputs. The brand manager acts as a
gate keeper for the different product development phases within the funnel, in narrow cooperation with the
R&D manager (Peter Boone, 2007). As Umesh Dowlath indicates, the R&D manager is fully responsible
for all technical aspects of the product development process. This R&D system is implemented globally
and although differences exist, its functioning is largely uniform.
Knowledge absorption
Unilever has six principal research and development laboratories: two in the UK, one in the Netherlands,
one in the US, one in China (Shanghai) and one in India (Bangalore). Most of the long-time-to-market
R&D activities are carried out at these centers. In recent years, Unilever has put a lot of effort in opening
up its innovation process. These large R&D centers also play a key role as absorbers of new technical and
scientific knowledge for the firm. Second, the ‘centers of excellence’ are more development-oriented.
These centers develop new concepts that are globally exploited. Third, many small adaptive development-
oriented R&D centers exist to adjust the global concepts to local markets. As Emmo Meijer argues, the
absorption of technical knowledge is a ‘global game’: technical knowledge is seldom sourced from the
local environment of the R&D centers. To acquire new technical knowledge, co-creation with research
institutes and specialist firms has become the norm at Unilever. In recent years Unilever has structurally
embedded and professionalized three types of scouting competences within the organization: science
scouting, venture scouting, business partner scouting.
R&D and emerging economies
Historically, Unilever’s R&D has been strongly internationalized21. In the years to come, Unilever plans to
strengthen its R&D position in China and India and a larger impact of Asian R&D on concept and product
development of the corporation is expected in the years to come. The economies of Russia and Brazil are
booming in terms of market potential. For R&D especially more adaptive development activities in these
countries are expected to grow.
6.3 Knowledge absorption at Unilever’s Tomato Center of Excellence (CoE) in Brazil
Tomatoes are a major ingredient in many of Unilever’s soups and sauces. Over the last decades, Brazil has
developed into a large producer of the crop and Unilever is one of the largest players in the tomato-based
foods industry. The CoE for tomato-based products in São Paulo Paolo plays a central role in the
21 In 2006, Unilever invested around €1 billion in research and development21, of which only 15% was spent on R&D in The
Netherlands.
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development of new tomato-based products22 that are ‘rolled-out’ globally. The center is also globally
responsible for the development and maintenance of all relevant information in relation to the use of
tomatoes in Unilever’s products.
To fulfill its global functions, the CoE collects and processes a lot of knowledge. A first important type of
knowledge it needs is agricultural information: the center needs to understand the agricultural conditions
for all regions and the technical (genetic) information of the different tomato types that are used in
Unilever’s products. Technical knowledge underneath the breeding and processing activities is a second
type of knowledge that needs to be collected. Third, the CoE needs to understand the global market
conditions (such as commodity prices). Most of this information is collected via the intranet from
colleagues at R&D, purchasing and supply chain departments from different countries. As discussed, this
thesis focuses on the absorption of scientific / technical knowledge (i.e. the second category only).
The Brazilian CoE is regarded as an important knowledge basis for the rest of the company and one of the
main roles of the center is to absorb external knowledge. However, relatively little technical knowledge is
derived from local sources. In most cases, scientific knowledge is bought from or co-developed with other
companies and research institutes, and these can be located anywhere. For example, a specialized seed
company located in the Netherlands is responsible for the development of tomato varieties with specific
desired traits, while partnerships have been established with academic institutions in the USA and Europe.
The involvement of the CoE in basic research activities, either in-house or with local universities, is very
limited. As a noteworthy exception, a significant part of breeding-related knowledge is developed locally,
often in cooperation with other companies. Also, the hiring of qualified staff is an important way to acquire
external knowledge, yet many R&D employees are hired from different countries.
6.4 DSM
The second case study discusses the external knowledge absorption process of DSM’s R&D organization.
Apart from the discussion of external knowledge absorption for DSM as a whole, the country study details
the knowledge absorption process at DSM’s Enzyme Lab in Russia. The first section is based on face-to-
face interviews with Global Innovation Officer Rob van Leen, R&D manager for Food Specialties Piet van
Egmond, former research director Emmo Meijer and an interview by telephone with former R&D manager
DSM solutions Johan Tiesnitsch. The Russian case study is based on the interview with Piet van Egmond,
responsible for DSM’s Enzyme Lab in Moscow. Secondary data sources include the company website,
several annuals and academic publications.
22 Apart from this global responsibility, the Brazilian R&D center has a second, regional R&D role for savory products (of which
Colin Haine is the R&D director). The focus of this section is on the Tomato CoE, however.
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Background
Established in 1902 as a state-owned coal mining company, DSM has evolved into a multi-specialty
company in the chemical business to business sector. The firm is active worldwide in life science and
nutritional products, performance materials and industrial chemicals. The activities of DSM are now
grouped into four clusters: Nutrition, Pharma, Performance Materials and Industrial Chemicals. The
company aims to be world leader in specialty products with a high added value (by focusing on the life-
sciences industry and on performance materials) and become less dependent on bulk chemistry product. To
structurally embed the company’s innovative potential, a corporate level Innovation Center was installed in
the beginning of 2006, which can be seen as an integrative function between the business groups. Among
other roles23, the Innovation Center supports the businesses with the aim to achieve innovation excellence.
DSM’s R&D organization
As part of a large reorganization trajectory, DSM started decentralizing its R&D structure in the 1990s and
the company has now fully abandoned its central R&D. Both long-time-to-market research and shorter-
term product development activities are organized within a project structure. Both types of R&D projects
are decentralized to the level of the different business groups. As the other companies of this research,
DSM explicitly aims only to engage in R&D projects that have a clear business orientation. The company
intends to capture the needs of the (business) customers as well as the technology trends to an R&D
agenda, based on a long-term technology development strategy and a shorter term product development
strategies. R&D is organized in three business clusters, which cover a total of ten business groups, each of
them with its own research organization. As Rob van Leen argues, DSM aims to manage the research
centers as ‘one global virtual lab’. The main R&D sites are located in The Netherlands, Switzerland and
Austria. These large research centers focus on the development of new technologies, processes and
products, both for the individual businesses (often more applied research activities) and combinations of
multiple businesses (typically longer term new technology development).
Knowledge absorption
DSM’s R&D organization has a strong external orientation. The most radical technological innovations
often start in the form of cooperation with universities or institutes. Aside from intensive research
cooperation, DSM also actively scouts for start-ups with promising innovations in the relevant fields of
activity, mostly for product development projects. DSM supplies these companies with the financial,
scientific, manufacturing and management support they need to successfully exploit those innovations.
23 The DSM Innovation Center comprises several units: an Innovation Office, Corporate Technology, Intellectual Property, Licensing
and Venturing, the Business Incubator, four Emerging Business Areas and Base of- the-Pyramid activities.
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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Ultimately, these successful start-ups may be fully integrated in DSM24. This is done either by the
establishment of a fully-owned group, or acquiring a company.
R&D and emerging economies
Increasing its activities in the emerging economies is one of the three pillars of DSM’s corporate strategy
‘Vision 2010’. Substantial growth is expected in China25 and India, in the mid-term especially in the form
of commodity products. At this moment, the emerging countries are primarily important in terms of market
potential, yet much less as sources of innovation. According to Rob van Leen, DSM currently does not
learn many things in the BRIC countries that can be applied elsewhere in the organization. For example, at
this moment in Brazil there are no research activities. In Russia, there is one molecular biological lab (as
will be discussed in the case study) and in India only process research for anti-infectives takes place. Also
in China at this moment very little original research is done. Nonetheless, in the Pudong New Area of
Shanghai, a large R&D capacity, centralizing DSM’s R&D activities in China, is now being established.
This is envisaged to become a key R&D location within the next decades, also for long-time-to-market
research and complex development tasks. The development of a collaborative network with research
institutes in Beijing and Shanghai is an important aspect of this strategy. According to Rob van Leen, one
of the reasons to set up this long-time-to-market R&D in China is the belief DSM can tap into knowledge
sources that are typically Chinese and unknown to the West.
6.5 Knowledge absorption at DSM Food Specialties’ Enzyme lab in Russia
Innovation is becoming ever more important to DSM’s Food Specialties division and over the last few
years, Food Specialties has been able to realize high innovation-based growth rates. However, as R&D
manager Piet van Egmond argues, making radical innovation the dominant business model is not easy: first,
the profitability of new inventions typically only occurs after 5 to 7 years, which is very long compared to
typical consumer products. This partly results from the conservatism among food consumers. Second, in
addition to stamina, for the development of innovative food products high and long-term research
investments are needed.
Over the last seven years, Food Specialties invested significantly to map the detailed knowledge of the
genome of one of DSM’s fungi, named Aspergillus Niger. This research was carried out in a large
consortium of institutes and grew into one of the most important industrial genomics projects in Europe.
Based on the sequencing of the gen, thousands of enzymes were identified, of which many have interesting
characteristics (such as taste, preservability, texture, etc) for application in foods (such as bread, cheese,
beer). However, extensive laboratory testing of the applicability of the enzymes was needed before
24 Besides direct participation, DSM Venturing’s portfolio includes investments in market-selected venture funds. 25 Currently, DSM employs 3500 to 4000 people in China (in The Netherlands this number lies somewhere between 6000 and 7000,
and is decreasing) and the most important units do now have a basis in China.
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commercial decisions could be made. As Piet van Egmond argues, “this testing is quite advanced genetic
and biochemical work, at the same time, the analytical work is of a routine nature. The challenge was to do
this fast and cheaply”. Since this routine work is not a core activity of DSM, several options were identified
to have the job done, including companies in the Netherlands, the USA and Russia. Eventually Russia was
chosen for several reasons, of which cost savings and the availability of high-class scientists were the most
important. An existing university research infrastructure was hired and converted into a DSM laboratory. A
core team was set up, consisting of key scientists who set up the Russian laboratory that would consist of
eight workplaces and four post-docs for Russian R&D employees. The Russian Enzyme Lab was set up
primarily to benefit from the low wage environment, with the availability of highly qualified molecular
biologists as a prerequisite to guarantee the high quality of the analytical work. The applications of the
research project include a number of successful food-applications, hundreds of patent filings (that can be
sold on the market), and the building of a strong scientific network. Although the center can be classified as
a ‘creator’ R&D site, the Russian lab itself is not significantly involved in the absorption of locally
available knowledge sources. Russia does not provide a state-of-the-art knowledge infrastructure for foods,
medicine, or materials, which is the reason why the research facility is unlikely to evolve into a Center of
Excellence. The acquisition of qualified local staff is the most important mechanism to acquire knowledge
from the local environment.
6.6 AkzoNobel
The case study at AkzoNobel is based on face-to-face interviews with general manager of the Global
Innovation Unit Mike Zeitler and Strategy and New Business Development manager for Decorative Paints
Peter Gommers. The India case study is based on a face-to-face interview with R&D services manager Luc
van Turkenburg and an interview by telephone with New Business Development manager Stefan Diessen.
Secondary sources of data include the company website and the annual of 2006.
Background
AkzoNobel is one of the world’s leading industrial companies for both the business-to-business and the
business-to-consumer markets. Located in Arnhem since 1911, in 2007 AkzoNobel moved its head office
to Amsterdam. In the same year, the company divested its divisions for human and animal pharmaceutical
products Organon and Intervet, and acquired UK-based chemical company ICI. These activities are part of
AkzoNobel’s ongoing efforts since the 1990s to establish a strong strategic focus. From 2008 onwards, the
firm consists of three divisions: decorative paints; performance coatings; and specialty chemicals and
significant internal reorganization activities are now taking place (May 2008). In 2006, the company had
activities in more than 80 countries and employed around 68,000 people. Sales were €13.7 billion, of which
around €10 billion was accounted for by the Coatings and Chemicals products divisions (since 2008 the
coatings division is split up into paints and coatings). It is envisaged that AkzoNobel’s divisions will be
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63
reorganized into 10-15 business units. Traditionally, AkzoNobel’s business units (including their R&D
organizations) operate largely autonomously.
AkzoNobel’s R&D organization
The vast majority of AkzoNobel's products are based on chemicals. Before they appear in the marketplace
they undergo complex research and development processes which may take two up to seven years to
complete. Innovation in the paintings, coatings and chemical products divisions focuses on product
development, process improvements and finding new solutions in cooperation with clients. On a yearly
basis, the company spends two to three percent of sales on R&D, which comes down to €200 to 300
million. The R&D activities are dispersed over 48 countries.
AkzoNobel has a strongly decentralized R&D structure, enabling the company to closely cooperate with its
customers and suppliers, while its global reach also enables the access to qualified personnel. Within the
business groups, the existence of many dispersed R&D units requires effective coordination of
competences, which is centralized at the business group-level. There is no one big research center: in the
1990s, AkzoNobel’s central research was largely reduced to the extent that it currently constitutes only a
marginal share of total R&D. AkzoNobel has little basic research activities, with the exception of a small
number of long-term research programs with scientific research centers. The R&D efforts are strongly
customer-focused and AkzoNobel focuses its R&D functions in terms of markets and customer groups, not
technology fields. An international project-based operating framework is applied for all R&D activities.
This ‘New Product Development’ process consists of a stage-gate-model where the different R&D centers
(typically from multiple countries) deliver their specific contributions to the different phases within the
process.
Cross-business unit integration is limited. However, several integrative functions have been established.
For example, cooperation within and between different business groups is promoted through (intranet-
based) communities and socialization events such as workshops and congresses. Also, the ‘Innovation
Unit’ that was set up in 2003 and the recently established function of a Chief Technology Officer are
considered to be important to improve cross-business unit synergies.
Knowledge absorption
The nature of R&D activities and the way how the R&D processes are organized by the different divisions
and business units is quite diverse. Consequently, the degree to which the different R&D centers are
involved in the absorption of external knowledge and how the knowledge absorption activities are
organized is multiform. The different ways to acquire external knowledge are largely similar to those
applied by Unilever and DSM. As an important difference with DSM, it was found that AkzoNobel is less
involved in long-time-to-market research. The dominant approach is not to develop new basic technologies,
but to acquire technologies with a proven applicability. In line with this strategy, AkzoNobel is little
involved in collaborative research with research institutes and universities.
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R&D and emerging economies
AkzoNobel has a high number of international R&D centers, of which many are very small (AWT, 2007).
The company has longstanding large R&D facilities in Western Europe, the United States, Mexico and
Brazil. In recent years R&D centers were opened in Turkey, India and China. R&D activities in Russia
remain small. Similar to Unilever and DSM, of the BRIC economies, China and India are seen as the
dominant new R&D destinations. Among AkzoNobels’ technology managers, the vision that in the mid-
term much of the innovative R&D will be carried out in India and China is widespread. As Mike Zeitler
puts it, “you only have to look at the number of graduates and you know what’s going to happen”. At this
moment AkzoNobel already employs more personnel in China than in the Netherlands. The drivers to
establish foreign R&D sites include being close to emerging markets; following the movements of key
customers and access to talented personnel.
6.7 Knowledge absorption at AkzoNobel’s Car Refinishes R&D center in Bangalore
Background
AkzoNobel Car Refinishes (ANCR) is one of the world’s leading producers of coatings for car repair
and commercial vehicles and of automotive plastics coatings. Aside the product, the company offers related
services including software for car refinishes. As a business unit within the coatings division, it had annual
revenues of over € 900 million in 2006 and is active in over 60 countries. Its headquarters are in
Sassenheim in the Netherlands. ANCR’s customers include automotive suppliers, fleet owners, distributors,
and bus and truck producers. Over the last decades, ANCR has significantly increased its R&D efforts.
Within its R&D organization three groups can be distinguished: local market support, typically for large
industrial clients; new product development, based on the inputs from basic research and the marketing
section; and basic research. Since the 1980s the R&D activities of ANCR have become strongly
internationalized. The R&D network of ANCR constitutes of four major R&D facilities in The
Netherlands, North America, Brazil and India. Europe and the United States are the dominant markets of
ANCR. However, India and China are the largest growth markets. Through a number of acquisitions in
China and large investments in India over the last decade, the Car Refinishes aims to grow significantly in
these markets.
In 2002, a large R&D center was established in Bangalore. The main reasons to set up the R&D facility in
India (and not in China) were the availability of well-educated scientists who speak English and the better
enforcement of IP regulations. ANCR decided to focus on product development head-on: first for simple
products and solutions, with a gradual evolution into more complex projects (this contrasts with the typical
mandate development model where the R&D evolves from local market adaptations to product
development and/or basic research activities). Established seven years ago, the Indian R&D center has
quickly developed into the second most important R&D center (after Sassenheim). Currently, it accounts
for 30% of the total R&D efforts. The Bangalore R&D center is mainly involved in the development of
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
65
new products and color formulations for both the regional and global market, which is seen as basic
research work. Product development activities focus around perceptual aspects, such as color and gleam, as
well as user characteristics, such as fast drying, applicability at low temperatures, durability, adhesion, etc.
The center further assists the other disciplines, such as purchase and supply chain.
In recent years, the use of external knowledge in the R&D processes has significantly increased. The
principal external source of technical knowledge for ANCR consists of technical patents (from other
companies and research institutes). These are applied in different phases of the R&D process, including
both basic research activities and product development. It should be noted that the patents used by the
Bangalore R&D site are often filed in other countries (e.g. the US and Europe) and thus not typically
‘local’. Although the R&D center in Bangalore has established several relationships with local universities,
thus far the objective of these ties is not to conduct collaborative research: these ties serve as a basis to
recruit talented scientists and managers, which is regarded as the principal way of acquiring local
knowledge. Many of the coordination mechanisms for the knowledge absorption activities that were
identified by the R&D managers of Car Refinishes were very similar to those at the corporate level.
6.8 Philips
The case study at Philips is based on a face-to-face interview with Chief Technology Officer Rick Harwig
and two interviews by telephone with General Manager Philips Research Shanghai and Chief Technology
Officer East Asia Frans Greidanus. The case study of Philips Lighting’s R&D center in Shanghai is based
on face-to-face interview and second one by telephone with Berry Kock, who worked in China between
2005 and 2007 as the global technology manager26 for product category Compact Fluorescent Lamps27 and
as a General Manager of China’s Lighting R&D division. Secondary sources of data include the company
website and the annual report of 2006.
Background
Founded as a lamp factory in Eindhoven, the Netherlands in 1891, Philips has become one of the leading
electronics companies in the world. Currently, the company is headquartered in Amsterdam. The company
employs around 125.500 people in more than 60 countries (Philips, 2007). Per 2008, Philips is organized
into the following divisions: Philips Healthcare, Philips Lighting and Philips Consumer Lifestyle. Philips
positions itself as a high-growth technology company, ensuring competitive advantage by generating
innovative products and processes. In recent decades Philips has become highly involved in the outsourcing
of production. As Frans Greidanus argues, this greatly improves the company’s flexibility and allows the
26 The position of a Chief Technology Officer within a Product Division was created when Philips adopted the contract research model.
He is responsible for the technologies needed for product development and production of the product divisions and its business groups
(Reger, 2004:68). 27 Compact Fluorescents are compact energy saving lamps.
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66
company to do business with a negative working capital model: the suppliers invest in the necessary
resources and are paid only after Philips has sold its product on the market.
Philips’ R&D organization
Innovation plays a central role at Philips and with the largest R&D investments of all Dutch multinationals
and over 130.000 registered patents and design rights, the company is known as a real technology
‘powerhouse’. Its high R&D investments have resulted in many breakthrough inventions in the past, such
as the compact cassette and the CD player. Philips’ technology development is organized in a project
organization and takes place at three levels. First, the business units are mostly involved with short time-to-
market development work. Development laboratories of the product divisions carry out the later phases of
product development projects. Second, sectoral divisions develop broader, longer term technologies. Third,
apart from the development of new technological options, corporate research looks at the boundaries
between the divisions and coordinates cross-business unit exploitation of technologies.
Philips’ R&D is strongly internationalized. Internationalization at Philips has been taking place since the
1950s. The small size of the Dutch market made internationalization of sales and production necessary
early on. Between 1945 and 1970, research laboratories were founded in England, France, Germany and the
USA. In recent decades, apart from development activities Philips has also further expanded its research
into East Asia and India. Acquisitions and cooperative agreements such as alliances and strategic
collaborations with local companies have become the dominant business model for R&D
internationalization.
Similar to Unilever, Philips practices a ‘global’ product development model: the products are designed for
the global markets by globally dispersed R&D centers. Local-for-local R&D is scarce. Philips has around
100 R&D units world wide, some of which are very small. To overcome the problems of fragmentation and
duplication of activities in central research, Philips has formed Centers of Excellence (CoEs) specializing in
particular technologies and uses several coordination mechanisms to link them together. Philips has built
strong capabilities to manage cross-border R&D projects. The different R&D activities are conducted
where the necessary capabilities are available and dispersed competencies are linked together (see also
Reger, 2004). Similar to Philips and DSM, there is always one product manager and one business manager
who make the decisions.
At the heart of the development of technologies new to the company, corporate technology is a complete
business organization. Philips no longer develops stand alone technologies without clear exploitation
perspectives, but corporate research develops the concept into a fully operational company. This is called
‘incubating’. As Rick Harwig argues, ‘landing’ a technology within a business unit thus does not occur
until there is a complete running business, including a technology, industry solutions, clients, channels, etc.
(Harwig, pers. comm., 2007).
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67
Knowledge absorption
As Rick Harwig argues, the wide array and complexity of the technologies underlying Philips’ products,
processes and services and the acceleration of innovation as a result of globalization and digitization have
led Philips to realize in an early stage that it could not develop all the necessary competences in-house.
Indeed, Philips is regarded as a frontrunner in practicing the ‘open innovation’ approach, as illustrated by
the promotion of open innovation practices at the high-tech campus in Eindhoven, since 1999. Essential
elements of the open innovation model include the development of business models for the spinning-in and
spinning-out of technology. Close, innovative types of strategic collaborations with external suppliers and
other external parties, including customers, are central to the open innovation strategy.
R&D and emerging economies
In recent decades, Philips has strengthened its position in the emerging economies. Access to the growth
markets and labor costs advantages are important reasons to establish subsidiary centers in these countries.
As Rick Harwig argues, Philips invests in R&D to be able to keep track with local market developments
and increasingly also to build on unique local expertise. Today, China is by far the largest growth market,
but India, Russia and Brazil are also significant. China has also become the most important supplier of
technology. At this moment around 800 engineers are employed in the Chinese R&D labs. Hosting one of
the corporate R&D laboratories, Shanghai is one of Philips’ main research locations, hosting all business
groups. Currently an Innovation Campus is being built in Shanghai, where most of Philips local activities
will be concentrated. As an important aspect of the R&D strategy, collaborative programs have been set up
with Chinese top-universities and other research institutes, which is seen as an important long-term
investment for ‘future knowledge absorption’. Other Asian innovation campuses have been established in
Bangalore and Singapore.
6.9 Knowledge absorption at Philips Lighting’s R&D center in Shanghai
In 1997, Philips Lighting set up its first production plant in China, in a Joint Venture with a local lamp
producer. Since then, the operations have grown steadily and at this moment about 90% of the Compact
Fluorescent Lamp (CFL) products are produced in China. It should be noted that the manufacturing process
is largely outsourced to low-cost suppliers. To secure the quality of the products, the largest share of
Philips’ R&D staff works at the suppliers’ work-floor to control and improve the manufacturing process,
leading to a high quality product28. This way, Philips’ sustains a competitive advantage based on its brand
value in combination with the exploitation of its technical competences.
28 To understand the nature of Philips’ R&D activities, it is important to understand that the industry of compact fluorescent lamps is a
typical process-industry: the production process is key to the eventual quality and efficiency of the output, while the product’s quality
is at the heart of the competitive advantage. Mastery of the production process therefore demands the continuous involvement of
highly skilled and experienced engineers to control the machines and improve the overall production process.
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The mandate of the Shanghai R&D section was not to create new technologies or products, but to improve
the quality and efficiency of local production processes. Nonetheless, over the last decade Philips Lighting
Compact Fluorescent Lamps in Shanghai has evolved into a strongly established research and development
organization. The ambition is to become an important player in the development of new technologies and
products. Philips Lighting has a very strong heritage of high-mechanization and quality engineering of
production lines. Paradoxically, as a critical lesson, Philips Lighting learned from China how to control the
quality and efficiency of production processes in a low labor cost and low-tech environment, with simple
machines and a high number of operators. As Berry Kock argues, this shift in the dominant logic proved to
be key to the success of the company in the CFL market. Furthermore, it is expected that this ‘absorbed
knowledge’ can be applied without little adaptations in other low-labor-cost countries.
For the Lighting business, China does not (yet) provide a strong scientific knowledge environment. The
recruitment of local qualified personnel is the most important way to make use of the local ‘knowledge
base’. Nonetheless, with a increasing focus on innovation, the Chinese R&D personnel is becoming more
involved in the development of new concepts and products, for which external scientific and technical
knowledge is needed. In this regard it is important to note that the R&D organization is a global one: this
knowledge can be generated through collaborations with research institutes or other companies (in Europe
the US or Asia), or acquired through patents.
6.10 Additional insights into the process of external knowledge absorption by the
international R&D organization
Chapter 2 provided a conceptualization of the knowledge absorption process by the international R&D
centers of multinational firms. Based on the case studies this section discusses important additional insights
into this issue (sub-question 2).
International and multidisciplinary innovation projects
From the cases studies it has become clear that the vast majority of international R&D activities of
Unilever, DSM, AkzoNobel and Philips are organized within a multidisciplinary project structure for
product and process innovations29. Teams from the different functional disciplines, including R&D,
marketing, finance and supply chain deliver their inputs to different phases in the projects. The R&D
activities can thus be seen as one of the most important types of inputs into the innovation projects.
Importantly, these teams may be located at different locations over the world. The innovation projects are
29 As follows from the interviews, among all four companies R&D has become increasingly product- and market-driven in recent
decades. Most of the responsibilities for R&D have been transferred to the different business groups, demanding a clear market
rationale for all R&D activities. At the same time, traditional centralized in-house research for long-term technology development has
become less popular. To improve the efficiency and the market-focus of R&D, most of the R&D activities of the four firms are
organized within a multidisciplinary project structure.
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69
typically coordinated by one or two project leaders, in close collaboration with the managers of the teams
from the different disciplines.
Among the four companies of this research two major categories of innovation projects can be
distinguished: new product development projects and technology platform development projects.
Technology platform projects are at the basis of the development of new technical competences that serve
as important inputs for the new product development projects. This is very similar to the distinction made
in section 2.2 between R and D: the technology platform development projects typically require long-time-
to-market research task, while the new product development projects typically require development work:
New product development projects generally require short-time-to-market R&D activities with an emphasis
on Development. The product development projects are typically carried out by one business group, yet it
is important to note that the different R&D tasks are often performed at globally dispersed R&D locations
(as illustrated by the case studies).
Technology platform development projects require research-oriented R&D work. Different business groups
may be responsible for these activities and the developed technologies are also typically applied by
different business groups, or at least for different products. By their nature, the commercial applicability of
technology platform projects is less predictable, yet at all companies of this research the market rationale
has become more central also to these projects in recent decades.
New product development and the technology platform development projects are not always separated into
different projects: they may be integrated within one process structure, as was recently the case at
AkzoNobel’s Car Refinishes for example. Nonetheless, as confirmed by the R&D managers, it is typically
well possible to distinguish the two different functions. As several R&D managers noted, apart from the
‘radical’ new product and technology development, less innovative projects, such as product and process
improvement activities account for a large share of the total R&D efforts. For this discussion it is
appropriate to consider these activities as development-oriented tasks that take place in the later stages of
the product development projects.
Different stages within the innovation projects
The multidisciplinary product development and technology development projects are typically managed by
the companies of this research as a ‘stage-gate’ process (see Cooper & Edgett, 1993; Wheelwright & Clark,
1993). The essence of the stage-gate approach is that it divides the total product and technology
development processes (from idea to launch) into different stages and gates:
At the stages, teams from the different disciplines, including marketing, R&D and manufacturing, deliver
specified inputs. Each stage thus consists of a set of parallel activities undertaken by people from different
functional disciplines within the firm, but working together as a team led by the project team leader.
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At the gates, the project leader and the managers of the teams evaluate the inputs and decide about project
resourcing and coordination issues, such as the question whether or not the project should continue. Also,
requirements and coordinative issues of the next steps of development are defined. The decisions at the
gates are based on a review of the delivered inputs and predefined criteria (based on the business strategy)
and are taken by the project leader, together with the combined experience and insights from the different
team managers. At the companies of this research, marketing and R&D are typically jointly responsible
throughout the different phases in the new product development projects. This way, the market-focus is
strongly embedded throughout all phases of the project.
The stage-gate models for the innovation projects that are applied by the different companies and their
business groups have become increasingly sophisticated and complex over time and are seen by the R&D
managers as an important basis for the competitive advantage of the firm, since they enable the effective
and efficient exploitation of innovations into commercial applications. The models that are applied by the
companies of this research differ in their typologies, the number of different stages and off course the
activities. Nonetheless, the functions of the different stages in these models are essentially similar.
Consequently, it was possible to draw a general model specifying the different stages of the R&D projects.
To this end, the case study results were combined with insights derived from the literature of project-based
product and technology development. It was found that Cooper and Edgett’s models and the insights by
Vorstman (1993) capture the nature of the technology and product development processes of the companies
of this study very well (Cooper & Edgett, 2006; Cooper, Edgett & Kleinschmidt, 2002; Vorstman, 1993).
Combining the results from the case studies with insights from these articles, the following seven stages in
product development projects can typically be discerned:
• Discovery: this stage entails the generation of new product ideas. This may happen by different
disciplines (marketing, R&D, manufacturing, sales, etc.) or outside the company, e.g. by, other
companies, such as clients and suppliers, or research institutes.
• Scoping: a quick investigation and scoping of the project. Typically, this stage is undertaken by a
small core team of technical and marketing people;
• The Business Case stage can be seen as the detailed homework leading to a business case. This
stage includes market research, detailed technical and manufacturing assessments and a detailed
financial and business analysis;
• Development entails the actual design and development of the new product;
• Testing and validating: the verification and validation of the proposed new product, its marketing,
and its production;
• Product launch: the beginning of full production and commercial selling. This stage sees the
implementation of the marketing launch plan, the production plan, and the post launch activities,
including monitoring and adjustment.
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71
For the technology platform development projects, the following three stages can be distinguished:
• Discovery: entailing the generation of ideas for new technologies;
• Technical assessment: gaining understanding of the IP situation, technical feasibility studies and
documented results of experiments;
• Detailed investigation: in this stage elaborate experimental work and commercial application
assessments are carried out to determine the value to the company.
R&D inputs into the innovation projects
As discussed, together with other disciplines, the company’s R&D centers provide specific knowledge-
based inputs at the different stages of the two types of innovation projects. Based on the case studies and a
reiew of the literature on innovation management, Figure 9 summarizes the types of inputs that are
typically delivered by the R&D centers at the different stages of the innovation projects (Cooper & Edgett,
2006; Cooper, Edgett & Kleinschmidt, 2002; Vorstman, 1993). Typically, teams from different R&D
centers are responsible for the inputs within the different stages of the two types of projects and these R&D
centers are often located across different countries. For example, as illustrated by the case on DSM Food
Specialties, a specialized R&D center in Russia may perform particular research tasks (analytical work),
while a large center of excellence (in The Netherlands) is responsible for the further application of that
knowledge into the technology platform development process as well as its subsequent integration into new
product development projects. This finding supports the increasing evidence that innovation in the
multinational firm cannot be understood as either local or global, but that sources of input shifts over the
length of the innovation process (Zander & Sölvell, 2000).
Dominant sources of external knowledge
From the case studies it is concluded that external knowledge is highly important for the R&D
organizations of all four companies of this research. Furthermore, several managers from the four
companies agree that the effective absorption of external knowledge is important throughout all the
different stages within the two types of R&D projects.
The R&D organization may thus ‘tap into’ different sources of external knowledge at different stages of the
innovation projects. Which external knowledge sources are dominant at the different stages may differ
significantly per company and per project. Nonetheless, based on the case studies the most important
sources of external knowledge were identified. It is concluded that the dominant sources of external
knowledge for the R&D activities underneath the technology platform development and the product
development projects are different. Of the partner firms, in particular key suppliers and (for the business-to-
business activities) client firms were mentioned as very important partners to co-develop and absorb
external knowledge. These collaborations are not only important for development projects: although less
common, they may also be at the basis of long-term R&D projects for the development of new
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technologies. Start-up firms were found to be especially interesting as a source of technologies that are new
to the firm. The importance of scientific research institutes for the development of new technologies is
widely affirmed, yet for the new product development projects they generally play a minor role.
Table 5 shows the external parties that were found to represent the most important sources of external
knowledge for the R&D activities underlying the New Product Development and the Technology Platform
Development projects. The table represents the vision of the corporate level R&D managers on what, in
general, are common sources of external knowledge for the company as a whole.
Type of
innovation
project
Industrial and non-industrial
partner firms, including client firms,
suppliers and peers
Scientific research organizations, such as
Universities and technology institutes
Technology
Platform
Development
Unilever +
DSM +
AkzoNobel +
Philips +
Unilever +
DSM +
AkzoNobel +
Philips +
New Product
Development
Unilever +
DSM +
AkzoNobel +
Philips +
Unilever -
DSM -
AkzoNobel -
Philips –
Uncommon - Common +
Table 5 Dominant sources of external knowledge
Interestingly, the participating R&D managers view the knowledge absorption process largely as the result
of the application of different business models. Several different business models are applied by the R&D
organizations to acquire external knowledge. Collaborative agreements, licensing-in of intellectual property
(IP), spinning-in of (technology) start-up companies and hiring of qualified employees are seen as the key
mechanisms to acquire external knowledge. The interviewed R&D managers stressed that collaborative
models to co-develop knowledge with external partners have become an increasingly dominant. These
acquisition mechanisms are discussed in detail in section Chapter 7 and in the case study reports.
The main elements of the above discussion are highlighted in Figure 9 (see next page).
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
73
.
Application of P
latform Technology in
New Product D
evelopment project stages
1,2,3,4
Figure 9 Innovation projects and external knowledge absorption
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Conclusion
• From the case studies it has become clear that the R&D activities at the companies of this study
are largely framed into what can be taken as two different categories of innovation projects: new
product development and platform technology development projects. The technology development
projects result in technologies that are integrated in the new product development projects.
• The multidisciplinary innovation projects are managed as ‘stage-gate’ processes. Together with
other functional disciplines (of which marketing is very important), geographically dispersed
R&D centers deliver knowledge inputs throughout the different stages of these projects.
• At all companies, external knowledge was found to be very important for the R&D organization
throughout the different stages of both types of innovation projects.
• The main sources of external knowledge are different for the two types of innovation projects, as
summarized in Table 5. The most important difference is that universities and research institutes
typically are important sources of external knowledge to technology development projects, yet
much less for product development projects.
6.11 Knowledge absorption in the emerging economies
To answer sub-question 4, this section discusses a number of important overall observations about the
internationalization of R&D of Unilever, DSM, AkzoNobel and Philips to the emerging economies of
Brazil, Russia, India and China, and about the absorption of external knowledge in these countries by the
subsidiary R&D centers of these companies in these countries.
From the literature review in the introductory chapter it was concluded that for Western companies the
absorption of external knowledge through their R&D centers in the emerging economies of Brazil, Russia,
India and China is increasingly important. The following discusses to what extent the case studies among
the companies of this research support this view. Also, findings from the cases about the nature of and the
drivers behind the internationalization of R&D are compared to the literature review in chapter 2.
The first conclusion is that the case studies at Unilever, DSM, AkzoNobel and Philips unanimously
affirmed that Brazil, Russia, India and China provide an important basis for the internationalization of
highly-skilled R&D activities, for an increasing number of scientific and technological domains. This
includes long time-to-market research work and more complex development tasks. Also, the large market
potential of the emerging countries is an important reason to establish product development-oriented
centers with ‘adaptor’ mandates: all companies and many of their businesses typically have a significant
number of adaptor R&D sites in all four of the BRIC countries. At the country-level case studies of this
research the potential to tap into local knowledge environments to acquire new technical knowledge was
found to be limited still. This was seen largely to be due to the comparatively low quality of the local
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75
knowledge infrastructure, limiting the potential to locally establish collaborative R&D programs with other
companies and universities companies. Nonetheless, in all cases, hiring qualified R&D personnel was seen
as a very important way to acquire local knowledge.
Second, similarly to the Western countries, the absorption of local external knowledge is perceived by the
R&D managers to be very important in the emerging economies. This is the case both for technology
development and for product development activities. Of the BRIC countries, China is often highlighted as
the economy where the market growth and the developments within a variety of high-tech industrial
domains are highest. Interestingly, all of the interviewed corporate-level technology managers indicated
that for several different industrial sectors as diverse as foods (Unilever), biotechnology (DSM) and
medical equipment (Philips) China is now at a ‘turning point’ of becoming an important provider of new-
to-the-company scientific and technical knowledge. As for Brazil, Russia and India, the case studies
affirmed that these countries are also important sources of knowledge that can be tapped by the R&D
centers and used for new product and technology development. Again, this is the case for specific industrial
(sub-) domains. This point is illustrated in the case studies by the establishment of global Centers of
Excellence in Brazil (Unilever, AkzoNobel) and India (AkzoNobel, Unilever and Philips), and of scientific
research laboratories, such as DSM’s Enzyme Lab in Russia. Notwithstanding this general conclusion, for
the country-level case studies of this research the potential to tap into local knowledge environments to
acquire new technical knowledge was found to be limited. In all cases, this was seen largely to result from
the comparatively low quality of local knowledge infrastructures, limiting the potential to establish
collaborative R&D programs with universities and other companies. In all cases, hiring of qualified R&D
personnel was seen dominant way to acquire local knowledge.
Based on the literature review on R&D in section 2.4, it was argued that the ‘adaptor’ R&D centers
typically do not provide important innovative inputs for the R&D system. This argument may hold in
general, yet the case study at Philips Lighting nuances the point: the R&D lab in Shanghai developed a new
manufacturing method for compact fluorescent lamps, which can be seen as a typical adaptation task.
However, not only were these Chinese adaptations essential to the competitive advantage of the business,
but importantly this capability is now exploited by the firm without significant alterations at other low-
wage environments.
A third important conclusion is that the nature of the knowledge absorption process and its coordination
mechanisms in the emerging economies are not perceived by the R&D managers to fundamentally different
from those applied in the West. The reason therefore appears to be that the R&D centers in these countries
are managed as part of the global R&D systems. These systems entail largely uniform structures and
processes world-wide and their managers make use of the same management practices as applied in
Western countries. Nonetheless, the absorption of new knowledge from external, non-western sources does
pose additional challenges to the firms of this research. For example, several managers underscored that for
the success of the R&D activities in emerging economies, it typically is not sufficient to train and educate
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the local employees to adopt the company’s western practices and codes. Foreign R&D centers often
consist of a majority of locally hired employees and are managed by expatriate managers. To operate
successfully, the managerial sensitivity for cultural differences and the willingness and ability to adapt the
Western communication methods and the overall business approach to the local conditions is equally
important. Clearly, cultural differences also require adjustments to the ‘regular’ coordination mechanisms
for knowledge absorption. For example, collaborative R&D projects with external partners may be
hampered by concerns over the weak protection of Intellectual Property Rights. This is considered a
problem especially in China, although the issue is now high on the agendas of Chinese policy makers.
Cultural and language barriers may also be significant. The coordination mechanisms that are specific for
knowledge absorption in the emerging economies will be discussed in Chapter 7.
Fourth, in relation to the earlier discussion (section 2.4), the case studies provide supporting evidence for
the existence of different location drivers for Research and Development (see Von Zedtwitz & Gassmann,
2002). The reason to establish a foreign R&D center with typical research tasks is largely ‘knowledge-
driven’ i.e. by the presence of local sources of technical and scientific knowledge. As is illustrated by
DSM’s Enzyme Lab in Russia, for this type of internationalization the availability of a local market is not a
prerequisite. By contrast, development-oriented R&D centers are typically established to adapt existing
concepts, products and processes to foreign conditions (such as market, labor and industry conditions, etc.)
as illustrated by the case study on Philips Lighting in Shanghai. In those cases where both the local market
potential is high and a strong local knowledge infrastructure is present (or at least developing speedily) this
may lead firms to invest in activities within the full R&D spectrum, as illustrated by the large innovation
center that is currently being set up by Philips and DSM in the Pudong area of Shanghai. These innovation
centers of excellence are established with the aim to cover a broad spectrum of R&D activities for several
businesses within a number of years. Examples of dynamic changes in R&D mandates of the foreign R&D
centers were also found (see section 2.4): over the last ten years, Philips Lighting’s typical development-
oriented R&D site in Shanghai (with the main task to service and control the local production process) has
developed into an increasingly powerful R&D center with unique capabilities that can be exploited
elsewhere. At Philips Lighting this ‘R&D mandate spanning’ is seen as the result of an ongoing bottom-up
process of competence development. By contrast, at AkzoNobel a top-down planned strategy steered the
swift development of its Car Refinishes R&D site in Bangalore from a small research center for relatively
simple product development tasks into become one of the business group’s three major Centers of
Excellence.
Conclusion
Four major conclusions were drawn from the case studies about the absorption of external knowledge via
R&D centers in the emerging economies by the four companies of this study:
• First, for an increasing number of scientific and technological domains, Brazil, Russia, India and
China provide an important basis for the internationalization of more complex and highly-skilled
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77
R&D activities, enabling the establishment of research-oriented, ‘creator’ R&D centers. Also, the
large market potential of the emerging countries is an important reason to establish product
development-oriented centers with ‘adaptor’ mandates.
• Second, similarly to the Western countries, the absorption of local external knowledge is
perceived to be highly important for the R&D activities in the emerging economies and externally
developed knowledge is important for all phases in the product development and technology
platform development projects. At the country-level case studies of this research the potential to
tap into local knowledge environments to acquire new technical knowledge was found to be (still)
limited, however.
• Third, the nature of the knowledge absorption process and its coordination mechanisms in the
emerging economies are not perceived by the R&D managers to be fundamentally different from
those applied in the West. Nonetheless, cultural issues need careful consideration to secure the
success of the overall R&D operations and of knowledge absorption.
• Fourth, the case studies confirmed the existence of different location drivers for Research and
Development activities, while the case studies at Philips and AkzoNobel illustrate the dynamic
changes in R&D mandates from basic development-oriented R&D tasks towards highly skilled
research-oriented work.
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Chapter 7
Discussion: cross-case analysis and confrontation to the literature
7.1 Introduction
To answer the main research question, this chapter discusses the identified coordination mechanisms
applied by Unilever, DSM, AkzoNobel and Philips to steer the absorption of external knowledge by the
international R&D centers in general, and for the R&D centers in the emerging economies of Brazil,
Russia, India and China in particular.
7.2 Structuring the results
As discussed, the knowledge absorption process by the R&D centers is understood as a combination of the
valuation of external knowledge, its acquisition, transformation, transfer and application (section 3.3). As
discussed in the methodology chapter (Chapter 5) in the interviews the R&D managers were asked to
identify important coordination mechanisms steering these activities. From the total of 14 interviews a large
number of coordination mechanisms were identified. To draw further conclusions it was necessary to
organize and cluster the results. To this end, within-case interpretation of the results was carried out and
cross-case patterns were looked for (Eisenhardt, 1989). The categorization of Martinez & Jarillo (1989, see
section 3.4) was used as the main conceptual reference for interpreting and labeling of the interview results.
It became clear that many overlaps existed between the case studies30. To reduce the total number of
coordination mechanisms, only those mechanisms that were mentioned by at least two R&D managers are
reviewed in this chapter.
Across the cases it became clear that many of the identified coordination mechanisms actually steer
particular sub-categories of the five knowledge absorption activities. These sub-categories provide insights
into how the managers across the four case studies perceive the nature of the knowledge absorption
activities. For instance, in the interview discussions on the valuation of external knowledge, the
mechanisms that steer the focus of the R&D organization on particular areas of external knowledge
(enabling the R&D employees to assess the value of external knowledge for the organization) were a
recurring issue. Consequently, these mechanisms could be clustered into the sub-category ‘mechanisms to
30 Apart from similarities, differences in the identified coordination mechanisms were also found. Importantly however, the different
identified mechanisms were typically found to complement rather than to exclude mechanisms identified at the same or at other
companies. For example, the establishment of HRM practices tailored to local employee markets was identified at Philips and
AkzoNobel as an important mechanism to attract qualified personnel in China and India, which in turn is seen as an important way to
acquire external knowledge. Even though this mechanism was not explicitly mentioned at DSM, there is little reason to assume HRM
would not have played any role of significance when establishing the Russian Enzyme lab.
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
79
frame the external knowledge requirement of R&D centers’. Table 6 presents the different identified sub-
categories per knowledge absorption activity.
Knowledge
absorption activity
Sub-categories
Valuation of
external knowledge
Mechanisms to frame the external knowledge requirement of R&D centers;
Mechanisms to understand the technical/scientific content of external knowledge
and its business value;
Mechanisms to keep track of external technology developments;
Mechanisms to manage a network of external partner firms and research institutes
(providing access to external knowledge)
Acquisition of
external knowledge
Mechanisms to acquire external knowledge by hiring local employees
Mechanisms to manage collaborative and arms-length R&D activities with local
partners
Transformation of
acquired knowledge
Mechanisms to manage knowledge transformation
Mechanisms to match the R&D outputs with the requirements of other disciplines
Transfer of acquired
knowledge
Mechanisms to promote internal knowledge sharing
Mechanisms to facilitate knowledge transfers with other disciplines
Application of
acquired knowledge
Mechanisms to apply knowledge by the R&D center
Mechanisms to exploit knowledge outside the firm
Table 6 Sub-categories of the five knowledge absorption activities
The following five sections of this chapter will discuss the identified coordination mechanisms underneath
the five knowledge absorption activities. The discussions of the sub-categories provide important insights
into the nature of the knowledge absorption processes from a managerial perspective. Per sub-category
typically around five key coordination mechanisms have been identified. The tables at the end of each
chapter summarize the identified coordination mechanisms underneath the sub-categories of the valuation
activity. Per coordination mechanism it is indicated at which company and at which managerial level the
coordination mechanism was identified (i.e. the corporate: C, or the subsidiary level: S). Note that the C’s
and S’s only indicate that the coordination mechanism has been mentioned by an interviewee in the
discussions. Hence, the absence of a C or S does NOT indicate the mechanism is not present at the
company, but only that it was not mentioned by the interviewees on their own accord.
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7.3 Coordination mechanisms for the valuation of external knowledge
As a result of the external orientation of the R&D organizations of this research for innovation, and
increasingly also in the emerging economies, the ability to recognize the value of external technical and
scientific knowledge has become a key function of the international R&D centers. From the case studies
four categories of sub-categories were identified that together promote the ability of the R&D centers to
value external knowledge:
• Mechanisms to understand the technical/scientific content of external knowledge as well as its
business value;
• Mechanisms to keep track of external technology developments;
• Mechanisms framing the external knowledge requirement of R&D centers (allowing the R&D
center to focus on those knowledge domains that are considered of value to the firm);
• Mechanisms to manage a network of external partner firms and research institutes (providing
access to external knowledge).
The identified coordination mechanisms steering these sub-categories are discussed in the following.
Mechanisms to understand the technical/scientific content of external knowledge and its business value
The notion that the value of external knowledge depends on its eventual application by the firm is widely
supported by the participating managers. Therefore, the R&D center’s employees need not only be able to
understand the technical / scientific content of externally developed knowledge, but also to asses the
applicability and market potential of this knowledge (i.e. a boundary-spanning role). Having a base of
experienced in-house R&D employees, who possess over this combination of capabilities, is seen as a key
prerequisite by all companies31.
31 This result is in fully line with the theory of Cohen & Levinthal (1989, 1990) that was adopted by many others, including Tsai
(2001), Van den Bosch et al. (1999) and Van Wijk et al. (2001) and focuses on the presence of prior related knowledge as a key
determinant of absorptive capacity.
Recognize the Value of external knowledge
Acquire external knowledge
Transform acquired knowledge
Transfer acquired knowledge
Apply acquired knowledge
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
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Several coordination mechanisms were identified to employ and sustain such a qualified base of in-house
R&D employees, including HRM activities, such as applicant selection, remuneration systems and training
programs. As argued by several subsidiary-level managers, HRM practices need to be tailored to the
specificities of local labor markets, which is considered especially important in the emerging economies.
The R&D employees stay up-to-date with the relevant scientific and technology developments as well as
with relevant business developments typically through reading journals, visiting congresses and technology
road shows, etc. To promote the boundary-spanning capabilities of R&D employees, several participants
mentioned competence management system and internal job transfers (e.g between marketing and R&D)
are regarded as important coordination mechanisms.
Mechanisms to keep track of external technology developments
To be able to assess the value of externally developed knowledge, the R&D organization must be aware of
the important developments outside the firm for relevant knowledge domains. As several managers argued,
in the first place this requires an outward orientation of the R&D organization. This outward orientation
implies a shift from the traditional role of R&D as a generator of knowledge, to that of an ‘absorber’ of
externally developed knowledge32. Top-management commitment to ‘open innovation’ and the
communication of these values across the R&D organization are important mechanisms to promote the
openness to external knowledge among employees.
Apart from an open attitude, keeping track of external developments requires significant organizational
efforts from the R&D centers. Several structural mechanisms were mentioned to establish an active
knowledge search and assessment (or ‘scouting’) function, such as the establishment of outward-oriented
innovation units (DSM) ‘technology teams’ (Philips), and special task forces (AkzoNobel).
At the level of individual employees, often the scouting of externally developed technologies is made part
of the job descriptions and several managers argued that reward systems need to be aligned with the
aspiration of the organization to identify and acquire external knowledge. The focus of external technology
scouting ranges from long-time-to market scientific developments by universities to technological
applications developed by suppliers for direct implementation in product development projects. For
instance, whereas DSM is highly involved in basic research programs with universities for new
technologies, AkzoNobel primarily focuses on spinning-in ready developed technologies, of which the
commercial applicability is considered to be certain. For DSM it is therefore more important to have
researchers in house with strong scientific skills than it is for AkzoNobel33.
32 Although Minbaeva et al. (2003) and Mahnke et al. (2005) focus on intra-organizational knowledge absorption, an interesting
similarity exists with their observations: the authors point at the difference between the willingness and the ability to transfer and
absorb knowledge. The cultural mechanisms to promote an outward orientation are typical mechanisms to promote the willingness of
employees to focus on external knowledge. 33 This statement was affirmed by the interviews with AkzoNobel’s Peter Gommers and former DSM manager Emmo Meijer.
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To improve the quality of technology scouting by the R&D organization, technology search and
assessment methods are developed. In line with the different dominant sources of external knowledge for
research and development tasks, different value assessment methods exist. For platform technology
development projects, ‘science scouting’ is important. As discussed, collaborative projects with research
institutes are a common form to acquire new knowledge. However, the eventual resulting commercial value
of such new technologies is typically difficult to foresee. Therefore, indirect valuation systems, such as
rankings of the research groups and individual researchers are applied to maximize the likelihood that the
newly developed knowledge will be of value to the R&D organization. ‘Venture scouting’ is the screening
of start-up companies that apply new concepts. ‘Business partner scouting’ involves the search for other
companies to establish collaborative innovation programs and supplier audits are held to benchmark new
technologies provided by supplier companies. The latter two mechanisms are applied both for technology
development and for new product development projects.
Mechanisms to frame the external knowledge requirement of the R&D centers
Without a clear focus on which knowledge is needed for the development of new products and processes, it
is impossible to attach a value to external knowledge. Mechanisms that frame the external knowledge
requirement increase the ability of the R&D centers and their employees to recognize the value of external
knowledge. A combination of strategic planning mechanisms was identified at all companies: typically, a
long-term (+/-5 year) business strategy is defined at top-management level. Aligned with this overall
business strategy, a technology strategy is developed, specifying the objectives for long-time-to-market
technology development carried out within technology platform development projects (see section 6.10).
Also, the (short time-to-market) technology requirement for new product development objectives is
established and new products development projects are defined. At all companies, a portfolio management
system is at the basis of the selection of R&D projects to be resourced. The assignment of subsidiary R&D
mandates (to the extent these can be controlled top-down) is an important coordination mechanism to steer
which R&D unit is responsible for the valuation and acquisition of specific external knowledge. Finally,
based on an assessment of internally and externally available competences it is decided by R&D managers
whether the required knowledge should be developed in-house by the R&D center, or acquired from
external sources. Together, these mechanisms establish the external knowledge requirement in a largely
structured way.
Mechanisms to manage a network of external partner firms and research institutes
‘External’ knowledge is often developed through collaborative projects with external partners.
Consequently, developing collaborative skills and having strong network ties with other companies and
research institutes are highly important to keep track of and value external knowledge developments. The
promotion of collaborative skills of employees happens through trainings, applicant selection procedures
and employee competence management systems. To establish network ties with other companies and
research institutes, building trust with external partners, through frequent communication, transparency
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etc. is seen as essential. For technology development projects in particular, the establishment of network
ties with research institutes is important. This can be promoted via participation in scientific advisory
boards at universities and by employing scientists with part-time academic functions.
Table 7 summarizes the above discussion on coordination mechanisms for the valuation of external
knowledge (see next page).
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Coordination mechanisms Function
Uni
leve
r
DS
M
Akz
oNob
el
Phi
lips
Category
Different for emerging economy
Mechanisms to understand the technical/scientific content of external knowledge and its business value HRM activities, such as applicant selection,
remuneration systems and training programmes Employ and sustain a qualified base of in-house R&D employees
C,S S Socialization *
Competence management systems Manage technical and commercial competences of employees
C C,S C Output and behavioral control
Internal job transfers Develop combined technical and commercial competences of employees
C,S C S S Lateral relations
R&D employees keep track of journals, visit congresses and technology roadshows, follow courses etc.
Stay up-to-date with the relevant scientific, technical and business developments
C,S C,S C,S C,S Socialization
Employing specialized scientific staff, invest in good research facilities
Establish strong research capabilities C,S C,S C S Planning
Mechanisms to keep track of external technology developments Top-management commitment to, and
communication of, outward orientation Promote outward orientation throughout the R&D organization
C,S C C,S C Socialization / informal comm..
Establishment of externally oriented business groups, such as technology teams and scouting groups
Keep track of technology developments C,S C,S C C,S Departmentalization
Employee trainings, reward systems, job description and rules. For example: keeping track of developments at industrial and non-industrial partner firms is part of job description
Keep track of technology developments C,S C,S C C,S Formalization & socialization
Develop and implement search and assessment tools to scout external technology developments, including methods for venture scouting, business partner souting, benchmarking of suppliers, and science scouting.
Keep track of technology developments C C,S S Standardization
Mechanisms to frame the external knowledge requirement of R&D centers Assignment of subsidiary R&D mandates Determine to what extend the R&D center should
be involved in the absorption of external knowledge
C C,S S C Centralization
Technology strategy (derived based on the overal business strategy)
Specify the long-term technology development objectives and requirements (for research)
C,S C,S C C,S Planning
New product development strategy Specify short-term technology development objectives and requirements (for development)
C,S C,S S C,S Planning
Portfolio management systems Selection of R&D projects C C,S C C Planning
Mechanisms manage a network of external partner firms and research institutes (providing access to external knowledge) Trainings, applicant selection procedures and
employee competence management systems Develop R&D employees' capabilities to form partnerships with external partners
C,S C,S S Socialization *
Building trust with external partners, through frequent communication, transparancy, etc.
Establish network ties with other companies and research institutes
C C Socialization
Establishment of scientific advisory boards at universities
Establish network ties with research institutes (for research activities)
C C Socialization
Employing scientists with part-time academic functions
Establish network ties with research institutes (for research activities)
C C Socialization
Table 7 Results: coordination mechanisms for the valuation of external knowledge
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7.4 Coordination mechanisms for the acquisition of external knowledge
In general, the R&D managers considered the acquisition of external knowledge to be a result of practical
organizational processes. The hiring of qualified technical graduates and experienced R&D personnel was
often mentioned as an important way to directly acquire local external knowledge. Secondly, the
discussions often centered on the application by the companies of different business models at the basis of
acquire external knowledge. Several corporate R&D managers emphasized that the co-development of new
knowledge as a result of collaborative projects with external research centers and companies has become
one of the dominant ways to develop and acquire new external knowledge. Also, less collaborative, or
‘arms-length’ business models were found to have become increasingly popular ways to acquire external
knowledge. Consequently, the identified coordination mechanisms for the acquisition of external
knowledge are divided into two sub-categories:
• Mechanisms to acquire external knowledge by hiring local employees;
• Mechanisms to manage collaborative and arms-length R&D activities with local partners.
Mechanisms to acquire external knowledge by hiring local employees
Hiring of qualified technical graduates and experienced employees was often mentioned as an important
method to directly acquire local external knowledge. Furthermore, it was considered to be the dominant
way to acquire knowledge among the four country studies in the emerging economies. The successful
management of HRM issues such as salaries, attractive career perspectives, employee policies, etc., is
therefore an important mechanism to acquire external knowledge via new employees. For the R&D
activities in the emerging economies, where competition for talent is increasingly fierce and the
characteristics of labor markets can be quite different, several R&D managers argued that a successful
approach consists of a combination of leveraging the strengths of the home-base HRM system, while
tailoring the practices to the local situation.
By hiring new employees, new technical knowledge appears to enter the firm directly. Nonetheless, new
employees do not contribute their knowledge and skills to the R&D processes automatically. Instead,
internal trainings and practice are often in place to promote this. Due to language and cultural barriers,
knowledge absorption through internalizing employees may be more difficult in emerging economies. For
Recognize the Value of external knowledge
Acquire external knowledge
Transform acquired knowledge
Transfer acquired knowledge
Apply acquired knowledge
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86
example, Chinese employees often need to develop a more pro-active attitude. Well-designed training
programs and temporary job transfers to develop working experience at the Western R&D centers are seen
as important mechanisms to improve the effectiveness of this type of knowledge acquisition. Second, the
inter-cultural management skills of the R&D managers are considered to be very important to optimize the
knowledge-based contributions of the individual employees to the R&D processes, which can be promoted
via training and employee selection.
Mechanisms to manage collaborative and arms-length R&D activities with local partners
Collaborative and ‘arms-length’ business models are seen as a second important basis for the acquisition of
external knowledge by the R&D organization. Therefore, the professional qualities of the in-house R&D
employees are essential, re-emphasizing the importance of having a qualified base of R&D employees (for
which the coordination mechanisms were discussed above). The identified collaborative business models
include joint ventures, alliances, non-commercial collaborative agreements and joint-development projects.
Arms-length approaches include licensing-in of intellectual property, spinning-in of start-up companies,
equity stakes and outsourcing of R&D to external organizations. The professional management of these
collaborative and arms-length business models is considered key to improve the quality and efficiency of
the knowledge acquisition activity. Also, the ability to make the right choice for a particular model is seen
as important. Hence, the strategic decision-making for the application of different types of business models
is being professionalized at all firms. This professionalism is achieved via HRM systems, such as
competence management systems, trainings and courses to develop managerial competences. Also,
structural mechanisms, alliance management departments, and functional assignments, such as scouting
functions are considered key coordination mechanisms to improve the management of the different
business models at the basis of knowledge acquisition by the R&D centers.
Table 8 summarizes the above discussion on coordination mechanisms for the acquisition of external
knowledge (see next page).
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87
Coordination mechanisms Function
Uni
leve
r
DS
M
Akz
oNob
el
Phi
lips
Category
Different
for
emerging
economy
Mechanisms to acquire external knowledge by hiring local employees
HRM practices tailored to local employee markets,
such as remuneration, policies etc.
Attract and hire qualified employees who contribute
new knowledge to the R&D center
C,S S Socialization *
Trainings, job transfers, developing working
experience
Promote the contribution of new employees'
knowledge and skills
C,S S S Socialization *
Mechanisms to manage collaborative and arms-length R&D activities with local partners
Establishment of externally oriented business groups
such as alliance management teams, technology teams
and special task forces
Professionalize the management of collaborative
business models, including joint ventures, alliances,
non-commercial collaborative agreements and joint-
development projects.
C,S C,S C C,S Departmentalization
Trainings, applicant selection procedures, job
descriptions
Develop R&D employees' capabilities to form
partnerships with external partners
C C C S Socialization *
Employee competence management systems Manage technical and commercial competences of
employees
C C,S S Planning /
formalization
Strategic decision making for application of different
types of collaborative and non-collaborative business
models
Select appropiate business model to acquire external
knowldge
C C C,S Planning /
formalization
Building trust with external partners, through frequent
communication, transparancy, etc.
Enable knowledge exchange with external partners S C Socialization
Table 8 Results: coordination mechanisms for the acquisition of external knowledge
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7.5 Coordination mechanisms for the transformation of acquired knowledge
Knowledge transformation by the R&D centers was found to consist of a combination of a variety of
interacting processes, steered by many different coordination mechanisms. Notwithstanding this
complexity, it was possible to identify a number of general patterns.
To assess which coordination mechanisms may improve the quality of the knowledge transformation
activities, it is critical to understand the desired outcome of these processes first. Among the four
companies of this research, the R&D activities are organized in multidisciplinary innovation projects,
where organizational units (including the R&D centers) from different locations provide specific inputs
(see section 6.10). Even though this thesis only focuses on the knowledge absorption activities that are
carried out by the foreign R&D centers, these activities are to a large extent coordinated by the
overarching management of the global innovation projects. Consequently, the effectiveness of the
knowledge transformation and transfer processes can only be understood in the context of the international
project organization. An important observation from the case studies was that once the external knowledge
is acquired, it is typically managed in the same way as internally developed knowledge. Hence, based on
the cases studies, the knowledge transformation process by the international R&D centers can be divided
into two sub-categories:
• Mechanisms to manage knowledge transformation in general;
• Mechanisms to match the R&D outputs with the requirements of the other disciplines.
Mechanisms to manage knowledge transformation
Several managers argued that the project-based organization of R&D activities, with (partly) standardized
R&D deliverables improved the efficiency of the knowledge transformation activities. The centralized
responsibility to define R&D activities for innovation projects at the level of the R&D manager was
identified as a second important aspect34. An informal culture, with low barriers to contact colleagues
either within or outside the discipline, and an attitude of ‘helping each other out’ (Unilever) were also
mentioned to be of great value to the quality of the knowledge transformation process by enabling problem
34 The standardization of R&D deliverables and formalization of tasks were identified to be important mechanisms to coordinate the
knowledge transformation and transfer activities. In line with this finding, the formalization of tasks was found by Jansen et al. (2005)
to be positively related to both potential and realized absorptive capacity (as discussed in Chapter 4).
Recognize the Value of external knowledge
Acquire external knowledge
Transform acquired knowledge
Transfer acquired knowledge
Apply acquired knowledge
How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity
89
solving. Such a culture is promoted by the communication of values promoting ‘openness’ by top-level
management, as well as reward systems and socialization events. Also, the benchmarking of R&D
processes within the R&D organization was mentioned as a useful mechanism to leverage good practices,
improving the quality of the knowledge transformation processes of the R&D centers. Finally, as with the
other knowledge absorption activities, the overall quality of the knowledge transformation processes
largely depends on the quality of the established base of R&D employees (for which the coordination
mechanisms have been discussed in section 7.3).
Mechanisms to match the R&D outputs with the requirements of other disciplines
The new product and technology development projects are centrally coordinated by a project manager.
Narrow communication between the manager of the R&D team and the overall project manager is often
mentioned as an important mechanism to coordinate the fit of the R&D activities with the overall
innovation project, thus steering the quality of the transformation activities. Also, the development of a
combination of technical and commercial competences is considered to improve the quality of knowledge
transformation processes carried out by the R&D employees35. This is promoted via competence
management systems, internal job transfers and integrative mechanisms, such as cross-disciplinary
functions, communities of practice and technology platforms.
Table 9 summarizes the above discussion on coordination mechanisms for the transformation of acquired
knowledge (see next page).
35 By enabling better coordination between different disciplines, the innovation projects can be seen as an example of ‘cross-
functional interfaces’. Jansen et al. (2005) found that in general cross-functional interfaces promote potential absorptive capacity (i.e.
the acquisition and assimilation of knowledge), but not realized absorptive capacity (i.e. the transformation and exploitation of
knowledge). Whether this finding would also hold for the specific case of collaboration between marketing and R&D managers and
the context of this research appears unlikely, as the case studies of this research indicate that the narrow collaboration between R&D
and marketing is important for the effective management of the total new product development projects, including the knowledge
transformation and exploitation phases.
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Table 9 Results: coordination mechanisms for the transformation of acquired knowledge
Coordination mechanisms Function
Uni
leve
r
DS
M
Akz
oNob
el
Phi
lips Category
Different for
emerging
economy
Mechanisms to manage knowledge transformation
Project-based organization of R&D activities, R&D
deliverables are (partly) standardized through stage-
gate systems
Improve the efficiency of knowledge transformation
activities
C,S C,S C,S C Output control
Centralized responsibility to define R&D deliverables
to innovation projects
Improve the coordination of knowledge
transformation activities
C,S C,S C S Centralization /
planning
Establishing an 'open culture' within the R&D center,
through higher-level management values, reward
systems and socialization events
Promote problem solving C,S C C C Socialization
Internal benchmarking of R&D processes Improve the quality of knowledge transformation
activities
C, S Standardization
/ output control
Culture and language trainings for employees and
managers
Improve the quality of knowledge transformation
activities
C S C,S Socialization *
HRM activities, such as applicant selection,
remuneration systems and training programmes
Employ and sustain a qualified base of in-house
R&D employees
C,S C C,S S Socialization
Competence management systems Management of technical and commercial
competences of employees
C,S C,S S C,S Planning
Mechanisms to match the R&D outputs with the requirements of other disciplines
Centralized responsibility of management of
multidisciplinary innovation projects
Improve the coordination of R&D activities C,S C,S C Centralization /
lateral relations
Establishment of an 'open culture' across disciplines,
through top management values, reward systems and
socialization events.
Promote problem solving across discplines C,S C C Socialization /
informal
communication
Cross-disciplinary interfaces, such as communities of
practice, technology platforms and temporary job
transfers
Improve the effectiveness of knowledge
transformation activities
S C C C,S Lateral
relations
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7.6 Coordination mechanisms for the transfer of acquired knowledge
From the interviews it followed that the transfer and the transformation of knowledge are strongly
interrelated. For instance, Peter Gommers at AkzoNobel argued that “the promotion of knowledge transfers
throughout the R&D organization is the strongest conduit to knowledge transformation”. Also, the
requirement to be able to transfer the knowledge within the organization has implications for how the
deliverables are presented, and hence for the transformation process. Similar to the above discussion on
knowledge transformation, the knowledge transformation activity is subdivided into two sub-categories:
• Mechanisms to promote knowledge sharing within the R&D center;
• Mechanisms to facilitate knowledge transfers with other disciplines.
Mechanisms to promote knowledge sharing within the R&D center
Knowledge sharing between R&D employees is facilitated by several mechanisms. Given that most R&D
centers consist of employees from several different nationalities, communication barriers need to be
minimized. Typically, all employees within the R&D organization are required to speak one common
language (normally English). Also, culture and language trainings for employees and managers were
mentioned as a method to improve the quality of communication, especially for the R&D centers in the
emerging economies. Establishing an informal, 'open culture' within the R&D center, through top-
management values, reward systems and socialization events was also often mentioned as a coordination
mechanism to promote knowledge sharing within the R&D centers. Advanced communication tools, such
as video conferencing, are applied by some companies (e.g. Philips). However, in general, relatively simple
communication tools, such as telephone, email and intranet-based applications to share data, such as
communities of practice are used predominantly. Finally, events such as R&D conferences stimulate
internal knowledge transfer both directly (through the dissemination of relevant knowledge) and indirectly,
through their socialization function (as discussed above)36.
36 Knowledge transfer has not received much attention in the absorptive capacity literature. As an exception, Minbaeva et al. (2003)
and Mahnke et al. (2005) took inter-unit knowledge transfers as an indicator of absorptive capacity and they found HRM and
knowledge management practices to have a positive impact. No publications were found that study internal knowledge transfers as a
part of the total external knowledge absorption process. Nontheless, the internal transfer of knowledge has been subject to extensive
research in the management literature (e.g. Boone, 1997; Björkman, Barner-Rasmussen & Li, 2004; Buckley & Carter, 1999; 2001;
Hamel, 1991; Ireland, Hitt & Vaidyanath, 2002). In these cases, the acquisition of knowledge typically happens through the learning
of individual members of the firm and the development and subsequent appropriation of new explicit technological knowledge. More
‘direct’ forms of knowledge acquisition including licensing in of technology and patents and the hiring of qualified experts, up to the
acquisitions of another company have been studied by Ahuja & Katila, 2001 and Bresman, Birkinshaw & Nobel, 1999 and
Chesbrough, 2003; 2006.
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• Most of the identified coordination mechanisms have not yet been addressed in the existing
absorptive capacity literature. Hence, the practical new insights derived in this research may serve
as a basis for future research.
• A summary of the identified mechanisms is provided in section 8.2.
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Chapter 8
Conclusion
8.1 Introduction
This chapter recapitulates the key findings of this research in section 8.2. Section 8.3 addresses the
limitations. Theoretical and managerial implications are discussed in section 8.4.
8.2 Results
The objective of this research was to identify key coordination mechanisms determining the absorption of
local technical and scientific knowledge by the R&D centers of Western multinationals in the emerging
economies of Brazil, Russia, India and China. The empirical part of this research was based on exploratory
case studies at four leading multinationals: Unilever, DSM, AkzoNobel and Philips. A review of the
relevant literatures was carried out to provide a theoretical basis.
Four sub-questions have been addressed to be able to understand the nature of the knowledge absorption
processes of the subsidiary R&D centers of multinational firms and to provide insights into the R&D
activities of the four firms in the emerging economies. The main findings to these questions were
summarized at the end of each chapter.
For the case studies, ‘knowledge absorption’ was (re)conceptualized on the basis of Cohen & Levinthal
(1990) as a combination of the following five activities: the valuation of external knowledge; the
acquisition of external knowledge; the transformation of acquired knowledge; the transfer of acquired
knowledge; and the application of acquired knowledge (see section 3.3). The participating R&D managers
were asked to describe how they perceive the nature of these five knowledge absorption activities for the
foreign R&D centers, as well as what they consider are key coordination mechanisms to steer these
activities.
The case studies at Unilever, AkzoNobel, DSM and Philips provided valuable insights into how the R&D
centers of these companies absorb external knowledge from the foreign knowledge environment as well as
identifying key coordination mechanisms to steer these activities. It was found that the identified
coordination mechanisms steer particular sub-categories of the five knowledge absorption activities. The
12 sub-categories, which are presented in the table below, provide insights into how the managers across
the four case studies generally perceive the nature of the five knowledge absorption activities. Typically, a
combination of several different types of coordination mechanisms were identified to steer the (sub-
categories of the) knowledge absorption activities.
The main findings of the cross-case analysis are summarized in Table 12 (see next page).
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Knowledge absorption activity
Sub-category
Coordination mechanisms and their role
Value Mechanisms to understand the technical/scientific content and business value of external knowledge
Establish a base of qualified R&D employees, through HRM practices, etc. Development of a combination of technical and commercial employee competences, via competence management systems, internal job transfers (e.g. between R&D and marketing).
Mechanisms to keep track of external technology developments
Establish an outward orientation via communication of top-management values; an active knowledge scouting function through structural mechanisms (innovation units, technology teams, etc.), at the employee level through job descriptions etc. Develop technology search and assessment methods.
Mechanisms to frame the external knowledge requirement of R&D centers
Provide focus via strategic planning mechanisms, incl. technology strategy and new product development strategy; portfolio management systems; R&D subsidiary mandates, etc.
Mechanisms to manage a network of external partner firms and research institutes
Develop employee collaborative skills to establish network ties and trust with companies and research institutes, through trainings; employee competence management systems; socialization events, etc.
Acquire Mechanisms to acquire external knowledge by hiring local employees
HRM issues incl. salaries, career perspectives, employee policies. Promote contribution of knowledge of new employees via cultural and professional trainings, practice, job transfers, etc.
Mechanisms to manage collaborative and arms-length R&D activities with local partners
Establish professional management of collaborative and arms-length business models, via managerial competence management; structural mechanisms such as alliance management departments and special management functions.
Transform Mechanisms to manage knowledge transformation in general
Project-based organization of R&D activities, with (partly) standardized R&D deliverables improve efficiency. Enable problem solving via ‘openness’: an informal culture with low barriers to contact colleagues, communication of ‘open’ values by top-level management; reward systems and socialization events. Leverage good practices via internal benchmarking of R&D processes and events.
Mechanisms to match the R&D outputs with the requirements of the other disciplines
Establish narrow communication between the R&D team and the innovation project coordinator (several mechanisms). Development of a combination of technical and commercial employee competences, via competence management systems, internal job transfers, and integrative mechanisms, such as cross-disciplinary functions, communities of practice and technology platforms.
Transfer Mechanisms to promote knowledge sharing within the R&D center
Minimize communication barriers through requirement of one common language and culture and language trainings. Establish 'open culture' within the R&D center. Effective use of simple or more sophisticated communication tools. Events such as R&D conferences.
Mechanisms to promote knowledge sharing with other disciplines
The R&D organization is required to provide ‘deliverables’ in an explicit, documented form. Establish cross-disciplinary interfaces, such as communities of practice and technology platforms.
Apply Mechanisms for the application of knowledge by the R&D center
Funnel-type portfolio management systems and a project-based organization of R&D activities promote efficiency of knowledge application. Strategic and structural mechanism to maximize global exploitation of R&D knowledge.
Mechanisms to exploit knowledge outside the firm
Competences to manage new business models for external kn. application (e.g. spin-out management, licensing-out of IP, selling of technologies), through special departments and functions for ‘open innovation’. Professional IP management as a key requirement.
Table 12 Summary: key coordination mechanisms for knowledge absorption
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8.3 Limitations
Even though this research has been carried out with due consideration and care, it has some limitations.
First, the number of respondents, cases and business units of this research is limited. Therefore, even
though many similarities were found in terms identified coordination mechanisms, the question to what
extent the research findings can be extrapolated to other companies cannot be answered. Second, R&D
managers provided most of the empirical inputs for the study. It can be argued that their thinking about how
external knowledge is absorbed and how this is coordinated is framed by what they have learned from their
education and training, interactions with colleagues, etc., which may bias the case study results. For
example, the emphasis on the establishment of systems to manage the innovation process may partly be
attributed to a (hypothesized) inclination of the R&D managers to think in terms of technical systems,
whereas people with a different backgrounds (e.g. sociology) may focus on different aspects (e.g. social
interaction patterns) and hence identify different coordination mechanisms to be important for knowledge
absorption. As discussed in section 5.4, several measures were taken to maximize the validity of the case
studies.
8.4 Theoretical and managerial implications
Theoretical implications
In this research several valuable new insights were derived both into the nature of the knowledge
absorption processes of subsidiary R&D centers and into the coordination mechanisms to steer these
processes. Most of the identified sub-categories and coordination mechanisms of the knowledge absorption
activities have not been addressed in existing research. For instance, the participating managers
unanimously argued that strategic focus mechanisms are critical to the R&D center’s ability to value
external knowledge (by determining which areas of knowledge are valuable to the company and the R&D
centers). Notwithstanding its perceived importance, this aspect has largely been overlooked in existing
research on absorptive capacity (Lane et al. 2006: 857).
Through its practical approach and by identifying organizational determinants of absorptive capacity, the
findings contribute to reducing the problem of ‘reification’ of the concept (Lane et al., 2006). This thesis
forcefully underscores that absorptive capacity is not a ‘thing’ and challenges the idea that any one single
factor (such as R&D investments) could serve as a useful proxy for a firm’s level of absorptive capacity.
Moreover, the findings indicate that the five knowledge absorption activities studied in this research (i.e.
the valuation acquisition, transformation, transfer and application) are steered by largely different
combinations of coordination mechanisms. The identified sub-categories of the knowledge absorption
activities and their coordination mechanisms may provide a useful basis for further research on absorptive
capacity, especially for the context of international R&D. Section 7.8 provides a more elaborate reflection
on the results and confrontation to the literature.
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Managerial implications
This thesis has explicitly focused on the topic of external knowledge absorption by R&D centers from the
perspectives of senior R&D managers. The case studies underscore the importance of the effective
management of both the ‘external’ and the ‘internal’ components of knowledge absorption: to acquire
valuable external knowledge it is important to understand what the company may need and to have the
capabilities to effectively manage the knowledge acquisition process. Yet, this is only half of the work: to
be able to successfully apply the acquired knowledge, the internal knowledge transformation and transfer
processes need to be well-established. The identified coordination mechanisms can be regarded as
important factors to take into account when designing and managing the knowledge absorption processes
by international R&D centers. For the context of the emerging economies, the case studies indicate that the
knowledge absorption processes via the R&D centers in these countries were taken to be essentially similar
to those in western countries. Nonetheless, cultural differences may become barriers for effective
knowledge absorption if they are not effectively managed. This thesis provided insights into how specific
coordination mechanisms, such as tailored HRM practices, temporary internal job transfers, cultural and
language trainings (for new employees and for expatriate managers) may be applied to compensate this
problem. In the light of the growing popularity of the emerging economies as sources of innovation, this
issue clearly calls for further investigation.
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• Performance materials: elastomers, engineering plastics and resins DE (elastomers), DEP
(engineering plastics), DR (resins)
• Industrial Chemicals: DAG (agro: very little research activities), DMM (melamine), DFI (fibre
intermediates).
The councils are headed by a council president. The three council presidents, together with the CTO and
the president of DNP46 form the DSM Science & Technology council, are responsible for the overall
coordination of R&D. The Science and technology council reports to the Chief Innovation Officer (CIO)
and to the responsible Managing Board member, via the Chief Technology Officer. The high-ranking
position of the CIO illustrates the importance DSM attaches to innovation.
45 Meijer (2006:266) mentions the following responsibilities of the R&D councils:
technology strategy development and implementation for the cluster
competence management across business groups within the cluster
development and implementation of shared long-term R&D programmes
career development for employees in the shared R&D unit
planning and financing of shared R&D resources according to capacity
financing model
representation in external knowledge infrastructure. 46 As a result of historic heritage the senior R&D officer heading DNP, which is a very large research organization, is part of this team.
Tapping Into the Global Brain Master’s thesis Michiel de Man
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Figure 16 DSM’s R&D councils
Strategic coordination of R&D
The overall strategic coordination at DSM consists of a long term business strategy, the underlying
technology strategy and the needed competences to implement this strategy (Van Leen., pers. comm.,
2007). A ‘Corporate Strategy Dialogue’ was established to determine the total strategic direction for time
spans of five years (recently, Vision 2010 was finalized). One of the outcomes of this dialogue is the
identification of ‘global megatrends’ (market developments), as well as global trends in technology.
Building on these trends, the business strategy is chosen. The R&D directors and council presidents
understand which technologies should be(-come) available in the next 5 years. In practice, a large part of
the technology is usually in place, but may need updates etc. Also new directions are identified where
DSM decides to take in a position within the next few years. These are typically emerging technologies that
DSM expects to need in the coming years. For this purpose, the Corporate Research Program is in place.
Together with the CTO, the leader of the R&D council decides how the budgets should be spent. Together
with corporate scientists the decision is taken whether to develop the competence in-house or externally. If
the competence is built in-house, a decision is made about the site and who will manage it, again on behalf
of everyone who needs this competence (Van Leen, pers. comm., 2007). The initiatives for developing new
capabilities (also the ‘in-house ones’) often start in the form of cooperation with universities or institutes.
Aside from intensive research cooperation, DSM also actively scouts for start-ups with promising
innovations in the relevant fields of activity. DSM supplies these companies with the financial, scientific,
manufacturing and management support they need to successfully exploit those innovations. Ultimately,
these successful start-ups may be fully integrated in DSM47. This is done either by the establishment of a
fully-owned group, or acquiring a company.
47 Besides direct participation, DSM Venturing’s portfolio includes investments in market-selected venture funds.
Science and Technology council Chair; 3 council chairmen; and VP R&D DNP
Life science council: nutrition and pharma
DAI, DFS, DNP, DPP
Performance materials council:
DE, DEP, DR
Industrial Chemicals council:
DAG, DMM, DFI
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R&D internationalization
As discussed, the main R&D centers of DSM are located in Western Europe. For the near future DSM
plans to increase its technical research capacity in the USA. Although exceptions exist, a general pattern
can be observed within DSM’s R&D internationalization process. Typically, entering a new country starts
with establishing local application research. Especially in foods, local adaptation labs are necessary. This
type of close-to-the-market research focuses on the tweaking of global products to local demands. Such
application research is not very high-tech, yet it is crucial to develop a successful business. At this moment,
such application research takes place at 25 locations. In the second phase local factories are opened. These
need support, and process know-how is transferred in the form of technical and scientific staff that helps to
establish pilot plants and run operations. For example, a fermentation process, developed in Netherlands, is
implemented in China and know-how is needed to adapt to local specificities such as small differences in
resources. If the problems are serious it may be necessary to install a permanent group of expatriate
managers. This local research team also has an important function as a recipient of concepts developed at
DSM’s centers of excellence. In the third phase of R&D internationalization, the technical competences at
the foreign location have developed to a world-class level, which lays the basis for establishing a more
basic research facility. Whether the foreign R&D center develops to this Center of Excellence phase,
largely depends on the external knowledge infrastructure, including the presence of highly qualified R&D
personnel, universities, research institutes, partner companies, etc.
Emerging economies
Increasing its activities in the emerging economies is one of the three pillars of DSM’s corporate Vision
2010. Substantial growth is expected in China and India, especially in the form of commodity products.
Currently, DSM employs 3500 to 4000 people in China (in The Netherlands this number lies somewhere
between 6000 and 7000, and is decreasing) and the most important units do now have a basis in China.
Currently, DSM is building an innovation campus in the Pudong New Area of Shanghai (PRC). Apart from
the current offices and business groups, also DSM’s R&D laboratories will be located in Shanghai. It is
envisaged that at the start, about 400 employees will work at the Shanghai campus. Activities in India will
Moving out Centers of Excellence?
It is important to note that it is typically impossible to ‘move’ a competence center to another country. “For example, in the
Netherlands, 400 people work on biotechnology, costing (e.g) €100 million. Even though it may be possible to carry out
this work in Russia for €20 million, you cannot bring these 400 people (i.e. the knowledge base) to Russia: 90% or more of
your employees simply won’t do it! Part of the knowledge is in the infrastructure and is therefore moveable, but people
simply are not. It is already a problem to get them from Delft to Geleen! Moving a competence center would thus imply a
massive destruction of human intellectual capital, including expertise that has been built up over many decades. This also
counts for the new research capacity that is being built up in China: impossible to move, since it is organically grown.” (Van
Leen, pers. comm., 2007).
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be stepped up, the aim being to double the 2005 sales level towards €300 million by 2010. Studies into
Russia are expected to yield the first concrete results in 2007. Basic chemistry is rapidly growing in all
developing countries. For example, fiber intermediates (half products for Nylon) is a large growth market
in developing countries, since construction is booming and there is a huge demand for the cheapest possible
carpet, which is based on nylon. It does not make sense to transport such commodities all over the world,
so the base chemicals must be produced locally.
As discussed, the major part of DSM’s research operations take place at the large research centers in
Western Europe. At this moment, the emerging countries are seen as important in terms of market potential,
yet much less as sources of innovation. According to Van Leen (pers. comm., 2007), DSM does not learn
many things in the BRIC countries that can be applied elsewhere in the organization. To illustrate this
point, at this moment in Brazil there are no research activities. In Russia, there is one molecular biological
lab and in India only some process research for anti-infectives takes place. The case study will detail the
knowledge absorption processes at the Russian R&D site.
Of the BRIC countries, China has the highest R&D potential, yet at this moment very little original
research is done in China (Van Egmond, pers. comm., 2007). of the BRIC countries, only in China a basic
research capacity is being build. The development of cooperation with research institutes in Beijing and
Shanghai is an important aspect of this long-term strategy. The reason to set up R&D in China is the belief
DSM can tap into knowledge sources that are typically Chinese and not existent in the Western world (Van
Leen, pers. comm., 2007). Interestingly, Van Leen sees Eastern Europe as a next important arena for (more
basic) research activities for DSM. “The location for basic R&D activities is unimportant. Many companies
entered China as if they were Lemmings. However, China has become very messy: it is highly polluted,
clean water has become scarce, there are shortages, etcetera. Also the language barriers and distance are
large problems. At the same time, there are many unused resources in Romania, Czechia and other eastern
European countries, with a good infrastructure, no time-difference problems and a smaller cultural
distance.” At this moment the potential for R&D of Eastern Europe is being explored. As is the case for the
other emerging economies, the availability of world class scientists, but especially a strong research
infrastructure appear to be the major contingencies. Consequently, Van Leen expects the Western European
advantage resulting from a unique set of knowledge based capabilities, will remain steady for many years
to come, also vis-à-vis China.
3.2 Coordination mechanisms for the absorption of external knowledge by DSM’s R&D
organization
As follows from the above discussion, over the last decade DSM’s R&D organization has undergone
significant changes and, triggered by the increased focus on new business development, several advanced
organizational mechanisms have been implemented to effectively coordinate the development of new
products from ideas to marketing. A key element of this approach is the radical increase in the company’s
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dependence on external knowledge sources. To manage the absorption of external knowledge by the
dispersed R&D centers, a range of coordination mechanisms were highlighted by the interviewed
managers. In the following, the dominant processes behind the valuation, assimilation and application of
external knowledge by DSM’s R&D organization are discussed.
Coordination mechanisms for the valuation of external knowledge
DSM’s R&D program and mandates of R&D centers
Similarly to Unilever, AkzoNobel and Philips, the strategic ambitions of DSM and of the individual
businesses, and especially the translation thereof into R&D programs with specific mandates for the
different R&D units, play a key role in determining the receptivity to (and actual absorption of) external
knowledge by these units. Based on the interviews, it has become clear that technical knowledge can be
seen as the most important type of external knowledge for the R&D organization. As discussed in the
above section, over the years DSM has established an organizational routine to formulate and implement
the R&D strategy. Based on the interviews and company documents, this routine (which can be flexibly
adapted to changing business needs) appears to be effective. The R&D strategy entails both short term and
long term objectives for the development of technological competences for the businesses. A structured
analysis of available and needed competences leads to a clearly defined focus for externally developed
(technical) knowledge (Kirschbaum, 2005). Which (section of an) R&D unit should absorb particular
knowledge is also well-organized, as will be discussed below. Consequently, this thesis argues that the
valuation of external knowledge at DSM is very strongly framed by the (structurally derived) strategic
focus and clear R&D mandates.
The promotion of an outward orientation
With the increasing focus on new businesses development since the mid 1990s, DSM has become much
more externally oriented. The reasons behind this outward focus include the increasing dependency on
multidisciplinary technologies for new products and the recognition that not all of these rapidly emerging
and changing technologies can successfully be developed in-house (Van Leen., pers. comm., 2007). Over
the last decade, achieving innovation through strategic partnerships with third parties48, including
universities and other research institutes, suppliers and other partners49 in all phases of business
development has become the norm. Several mechanisms have been implemented to organize this shift in
orientation of R&D employees towards the external knowledge infrastructure. According to Van Leen
48 DSM has over a hundred bilateral partnerships. About 40 of our R&D staff hold part-time professorships or other high academic
positions. DSM forms part of a network of some 2000 university departments and is also a member of twenty research consortiums
representing both academia and industry (Meijer, 2006). 49 The shift in perspective towards building wider and deeper strategic alliances is reflected in the company’s new strategy program,
Vision 2010, which focuses on accelerating profitable and innovative growth of DSM’s specialties portfolio to generate its target of €1
billion of sales from innovation by 2010.
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(pers. comm., 2007), creating an open innovation culture is probably the most important coordination
mechanism to promote the external orientation among R&D employees. This thesis argues that structural
mechanisms and top-management commitment are important mechanisms to implement this culture shift.
Establishment of externally focused business groups
Over the last decade, the increasingly external orientation is illustrated by the evolution of DSM’s business
group responsible for the promotion of innovation.
• In the 1990s, the New Business Development (NBD) group was created to promote effective
innovation and coordinate innovation processes from idea to product launch. In the beginning, this
group, consisting of 50 employees, mainly focused on the development the ideas of in-house
scientists. Over time, the need to also focus on outside knowledge sources for new product
development became more apparent and the external orientation got more and more promoted by
the managers.
• In 2001, NBD evolved into the business group DSM Venturing and Business Development
(DV&DB). The adding of the venturing capability illustrates the increased focus on external
cooperation, which was further professionalized in the years to come.
• In 2006, the new corporate Innovation Center absorbed the activities of DV&DB. At this time, the
external orientation of DSM had become strongly established. The flexible use of different
business models for open innovation (including the spinning in of early stage business
opportunities and spinning out others that are in a position to bring significant financial return, as
well as professionalized venture management) has become the norm.
Clearly, in the last decade the mandate of DSM’s business group for the promotion of innovation has
become explicitly externally oriented. Institutionalizing the outward focus within the organization structure
(i.e. through a special business group) has led to the more frequent and more positive valuation of external
technical knowledge.
Professional the scouting function
At all phases of the product development trajectory (which will be discussed below), DSM’s R&D
organization is now heavily involved in the active screening of the external technical developments. The
external search techniques applied vary per business, with some methodologies being better developed than
others. For example, in Nutrition there are scouts whose only task is identifying potentially interesting
leads. “They do this by looking at other companies and what they are developing, visiting start-ups,
conferences, scanning Google, etc. Then they just go after it. They talk to the people who have the
interesting technology and see if DSM and they can reach an agreement.” (Van Leen, DSM internal doc.,
2007). Professionalizing the scouting function can be seen as an important mechanism to increase the
frequency and quality of external knowledge valuation.
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Top-managerial vision and commitment
Based on the interviews (Meijer, 2007; Tiesnitsch, 2007; Van Egmond, 2007;Van Leen, 2007) and
thesis argues that high-level managerial commitment; first to more product innovation in general, and
increasingly to the application of collaborative methods to achieve this, is an important factor to explain the
success of shifting the internal focus of R&D personnel to become more open to external knowledge
developments. This commitment played an important role to downplay the not-invented-here problem
among employees, which is typical for an inward oriented organization.
Scientific competences
At the individual level, DSM’s R&D employees must have a clear notion of the (external) technological
knowledge requirements, and be well aware of the state-of-the art of the developments within their
technical domain. Typically, this role is fulfilled by senior scientists with a solid experience within the
company. Unlike other companies in the chemical sector, throughout its reorganizations DSM in the last
decade maintained a solid basis of top scientists and capabilities for basic research in-house. This can be
seen as an important prerequisite behind the ability to identify and value external knowledge (Meijer, pers.
comm., 2007).
Concluding, over the last decade, the external orientation of DSM’s R&D organization has been promoted
through the organization culture and professionalized through structural mechanisms, including the
establishment of business groups for external co-development activities and professionalizing the scouting
function; top-level commitment to the open innovation approach; as well as investing in the necessary in-
house scientific competences (i.e. well-trained and experienced R&D staff). In turn, this external
orientation has increased the valuation of external knowledge sources, both quantitatively (i.e. the number
of times that external knowledge is sought) and qualitatively (i.e. external knowledge is considered as a
positive opportunity rather than a threat).
Coordination mechanisms for the acquisition of external knowledge
As affirmed by the interviews, the assimilation of external knowledge acquired by the R&D units can be
perceived as a combination of the acquisition of external knowledge, its transformation of the acquired
knowledge into another form (e.g. to be applied by organizational units in a later phase of the product
development trajectory) and the intra-organizational transfer of this knowledge to other units within DSM.
New business models for knowledge acquisition
Similar to Unilever, DSM has developed a managerial routine for the application of different business
models for the acquisition of external technical knowledge. For a large part, the use of particular business
models depends on the phase within the R&D project development process at which the external
knowledge is needed.
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Figure 17 DSM’s open innovation model. Adapted from presentation by Van Leen, 2007.
The ‘front end’ is about new technology development with a long time to market, to fill the ‘gaps’
identified by the technology strategy. Non-competitive collaboration programs with research institutes,
especially best-in-class universities, are the preferred option50. This collaboration usually continues for a
couple of years, when the business unit decides whether or not to internalize the developed capability. Also,
DSM has established several scientific advisory boards (often a university chair function) that serve as a
platform to build alliances between companies and research institutes. The knowledge acquisition process
should thus be seen as the result of co-development practices, where both the external partner and DSM’s
R&D employees develop new (technical) knowledge.
• Licensing-in of IP developed by external parties has becoming very important to DSM. Licensing-
in is typically seen as a tool to accelerate the development of the product development pipelines
(DSM, int. doc., 2007). Acquiring a license to use a specific piece of IP can be seen as a very
direct form of external knowledge acquisition. Obviously, the R&D unit must have sufficient
capabilities to fully understand and successfully integrate the acquired technology.
• Venturing has also become very important. DSM takes participations in start up companies with
promising innovations in the relevant fields of activity and supplies these companies with the
financial, scientific, manufacturing and management support they need to successfully exploit
those innovations. Ultimately, these successful start-ups may be fully integrated in DSM (i.e.
spinning in or acquisition). At this moment, DSM investigates more than 300 companies each year
50 DSM has over a hundred bilateral partnerships. About 40 of its R&D staff hold part-time professorships or other high academic
positions. DSM forms part of a network of some 2000 university departments and is also a member of twenty research consortiums
representing both academia and industry (Meijer, 2006).
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141
and directly approaches the most interesting ones to identify collaboration options. DSM carries
out the due diligence and then usually takes a share ranging between 5 and 20% of the company
(DSM, int. doc., 2007). Currently DSM has around 15 direct investments. Apart from direct
participations, DSM Venturing’s portfolio also increasingly includes investments in market-
selected venture funds. These venturing activities enable DSM to remain up-to-date about the
relevant activities in its technical domains (improving the valuation ability), as well as acquire the
technological knowledge it judges to be most relevant in a cost-efficient manner (improving the
knowledge acquisition ability).
• Spinning-in at DSM is bringing in products or technologies developed by other companies that
may benefit from DSM’s ‘exploitation power’, i.e. its capabilities such as process and industry
knowledge, supply chain, marketing etc. Spinning in can be seen as a model to acquire a whole
new technical competence, yet without taking full control over the company supplying the
technology.
• Over the last few years, DSM has considerably increased its budget for mergers and acquisitions
of small start-ups that are in a late stage of growing up. These acquisitions can be seen as a model
to quickly acquire and completely control ready developed technologies.
Concluding, for the acquisition of external knowledge within the sequential phases of the product
development process, different business models are applied in a coordinated manner. The strategic
management of these different business models can be seen as a critical mechanism to improve the
effectiveness and efficiency of DSM’s knowledge acquisition capability.
Hiring employees
Qualified technical employees constitute the backbone of DSM’s R&D organization. Similar to Unilever,
hiring personnel is identified as an important direct method to acquire external expert knowledge and to
build up technological and more market-oriented competences. DSM increasingly scouts new technical
graduates abroad, which is partly due to the low number of graduate chemists in Europe and, contrastingly,
the growing pool of academic talent in emerging economies, especially China. Recruitment programs,
tailored to the employee markets in these new countries, are developed to attract the best possible
candidates. More generally, HRM practices that suit the local employee market are believed to be an
important prerequisite to hire and keep talented personnel.
Coordination mechanisms for the transformation of acquired knowledge
At DSM’s R&D organization, the internal knowledge assimilation processes are highly structured (Van
Leen, pers. comm., 2007). The following section details the organizational mechanisms that were identified
as critical to the knowledge assimilation ability.
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Managing R&D employee competences
In the early 1990s, Rob van Leen (then head of R&D food specialties at Gist-brocades, which was acquired
by DSM in 1995) developed a ‘3-dimensional’ (3D) R&D organization to manage employee competences
company-wide. After the acquisition of Gist Brocades, the model was adopted by DSM and it still plays an
important role in the internal knowledge assimilation process of DSM (and of Unilever, which has recently
adopted the model).
The essence of the 3D model is that it increases the transparency of the different roles of R&D employees,
by distinguishing three strictly divided domains (axes) of responsibilities:
• The business axis, determining what should be done and by whom. This involves program and
project management and coordinative roles deducted from the business strategy;
• The Science axis, determining how the different activities should be carried out. This includes
various scientific roles to develop the required competences either internally or externally; and
• The line organization, taking care of people and resources management.
Figure 18 The 3D competence management model. Adapted from Meijer, 2006.
The three axes represent the three major categories of competences needed within the project based
organization. Within the R&D projects, an R&D employee may perform a role that is positioned on any
one of these three axes or a role that incorporates elements of two or all three axes, depending on his or her
specific capabilities and interest: in other words, people get to do what they can do best51. Important to the
knowledge absorption process is the distinction between the scientific and the project management
functions. Employees that are specialized in the scientific axis have strong skills in terms of the
51 Apart from R&D project management, the model is also used as the basis for the career development of R&D personnel (Meijer,
2006).
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143
development of new scientific ideas, which, as described, increasingly results from co-operative practices
with external partners. These ‘science people’ are thus specialized in valuation and acquisition of external
knowledge. Similarly, the employees who specialize in project management are likely to be particularly
good at coordinating the internal knowledge transfer and transformation processes. As a result of this
specialization, the 3D model can be seen as a coordination mechanism to improve the effectiveness of the
overall assimilation process (i.e. the acquisition of external knowledge, and its internal transformation and
transfer).
Project based R&D management
To advance our understanding of the knowledge assimilation processes at DSM, it is important to
comprehend how the R&D activities are embedded within the total business development process. In the
following, the essential aspects of DSM’s business development process are discussed. This system has
been developed based on a model designed by Harald Vorstman, a former quality manager at Philips and
consultant at DSM (see also Vorstman, 1993).
Figure 19 Project based R&D management
As discussed, DSM’s R&D is organized within the business groups. The business projects together with the
longer term technology strategy determine the content of the R&D activities. A business development
manager (BDM) is responsible for the coordination of the full business development trajectory, involving
market research; the specification of the product; product design; product launch and sales. The BDM
carries the responsibility for achieving a result in the market. The BDM decides about what should be done
and is responsible for the overall coordination, including the full project planning and setting up a business
Market research
Specification Develop (Project manager R&D)
Production Selling
Business Development Manager
R&D process step 1
R&D process step 2
R&D process step 3
R&D process step 4
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development team comprising of managers of the different underlying disciplines (marketing, R&D,
production, etc.). The managers of the different disciplines work closely together with the BDM, as well as
among each other. Obviously, the BDM must thus have strong competences within the ‘business axis’, as
well as sufficient knowledge of the science aspects. The managers from the different underlying
organizational disciplines are fully responsible for the execution, and they make all decisions concerning
‘how’ the R&D assignment should be carried out52. For R&D, this includes decisions about which technical
processes should be used to produce a specified molecule, and whether the needed technology should be
developed in-house or externally; which scientist should work on it, etc. Within the develop phase carried
out by R&D, different sub-processes can be distinguished, ranging from basic research (i.e. typical ‘science
axis’) activities to product and process development activities.
The centralization of the product development responsibility with the BDM, who communicates closely
with the managers of the different disciplines, appears to be effective to integrate the business processes
underlying product development, and allows for a ‘smooth’ business development process. Hence, this
combination of structural divisionalization (with a clear formalization of tasks) and the strong integrative
function of the BDM improves both the effectiveness of the transfer and transformation processes of
technical knowledge acquired or co-developed by the R&D units, and consequently of the assimilation
ability of DSM.
Coordination mechanisms for the transfer of acquired knowledge
Formalized routines
Based on many years of experience, the processes to support this management model have been improved.
The projects are managed via a stage-gate model (similar to the innovation funnel at Unilever) to effectuate
strategic control between the different phases. A multidisciplinary team of business/marketing managers
and R&D managers make the decisions at the end of each phase in this process. An important aspect is that
at the interfaces of the different phases, sophisticated checklists have been developed to facilitate the
transition from one phase to the next. It is important to note that even though the development of a new
product can be perceived to move from the left to the right in the above figure (i.e. from market research to
sales), for the coordination of this process a lot of interaction between the managers of the different
disciplines is needed throughout the project, since different types of assessments are needed from all
disciplines, at all stages (Van Egmond, pers. comm., 2007). The ‘formalized routinization’ of all the
necessary checks and required contributions by the different disciplines along the development time-line,
provides the company with a powerful tool to secure the effectiveness of both the knowledge
transformation and internal transfer activities (and thus of the assimilation ability). According to Van Leen
(pers. comm., 2007) “it took some time to learn how to play this game, but it proved to be the most
52 The managers of the different disciplines do not hierarchically report to the business development manager (these are dotted lines).
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effective way to manage the research organization. As soon as this had been worked out, it had also
become much easier to manage the project across sites”.
Figure 20 DSM’s stage gate model for product development. Adapted from Meijer, 2006
Coordination mechanisms for the application of external knowledge
New business models for the external exploitation of knowledge (efficiency
DSM generates a large amount of knowledge and capabilities that for one reason or another it may not use
itself. In these cases licensing out and spinning off are increasingly applied a DSM, especially at the growth
markets for commodity products. As discussed, large scale production of bulk chemistry products is no
longer considered to be strategically interesting to DSM. Licensing out of process technology to production
companies proves to be a very profitable business, however. Also, rendering its R&D services to other
companies is done in some exceptional cases, but it is not DSM’s strategy to make money from R&D
services. The increased use of new business models to acquire technical competences from the outside
world, as well as of the external exploitation of internally developed knowledge have increased the
importance of sound IP management. To this end, R&D employees are trained and support services have
been improved (Van Egmond, pers. comm., 2007). Thus, the more extensive and professional application
of new business models for external knowledge exploitation promotes the effectiveness of DSM’s
knowledge application ability.
Exploiting cross-cluster synergies
The explicit goal of DSM is to become ‘intrinsically innovative’. A special diagnostic tool has been
developed by the Innovation Center to map the innovation performance of the different business groups,
allowing for internal benchmarking, as well as with the industry’s best performers. To improve the
performance of the business groups that are lagging behind, best practices are identified and passed-on by
the Innovation Center. For example, if a particular business group performs very well at project or portfolio
management, internal learning activities are developed to allow the other business groups to adopt the
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superior practices. This promotion of exploitation of internal operational know-how can be seen as a useful
mechanism to improve the quality of the knowledge assimilation processes of the different business groups.
3.3 Knowledge absorption at DSM’s Enzyme lab in Russia
Background
This section discusses the knowledge absorption process and its underlying coordination mechanisms of
DSM’s Enzyme Lab in Moscow. Face-to-face interviews with Foods Specialties R&D manager Piet van
Egmond and Innovation Officer Rob van Leen provided the main inputs for this section. As discussed, the
absorption process is understood as a combination of valuation of external knowledge, its assimilation (i.e.
acquisition, transformation and transfer) and its application.
Innovation is becoming ever more important to DSM’s Food Specialties division and over the last few
years, Food Specialties has been able to realize high innovation-based growth rates. However, as R&D
manager Van Egmond (pers. comm., 2006) argues, making radical innovation the dominant business model
is not easy: first, the profitability of new inventions typically only occurs after 5 to 7 years, which is very
long compared to typical consumer firms. This partly results from the conservatism among food
consumers. Second, in addition to stamina, for the development of innovative food products high and long-
term research investments are needed.
Over the last 7 years, Food Specialties invested significantly to map the detailed knowledge of the genome
of one of DSM’s fungi, named Aspergillus Niger. This research was carried out in a large consortium of
institutes and grew into one of the most important industrial genomics projects in Europe. Based on the
sequencing of the gen, thousands of enzymes were identified, of which many have interesting
characteristics (such as taste, preservability, texture, etc) for application in foods (such as bread, cheese,
beer). However, extensive laboratory testing of the applicability of the enzymes was needed before
commercial decisions could be made. “This testing is quite advanced genetic and biochemical work, at the
same time, the analytical work is of a routine nature. The challenge was to do this fast and cheaply” (Van
Egmond, pers. comm., 2007). Since this routine work is not a core activity of DSM, several options were
identified to have the job done, including companies in the Netherlands, the USA and Russia.
Eventually Russia was chosen for several reasons, of which cost savings and the availability of high-class
scientists were the most important. The research infrastructure was hired and converted into a DSM
laboratory. Interestingly, a non-for-profit legal form under a non-western name was chosen to benefit from
tax exemption and keep the costs low. A core team was set up, consisting of key scientists, who set up the
Russian laboratory that would consist of 8 workplaces and 4 post-docs. Part of the analytical work is done
in the Netherlands, and the samples are subsequently sent to Russia, where a large number of processes are
carried out. The results (i.e. deep-frozen samples, plus all the information on the characteristics) are sent
back to the Netherlands (by courier and internet, respectively) for further analysis. Telephone, email and a
web-based application to share protected data are the main communication tools. The project is very
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successful: the quality of the work is high and cost-savings compared to the alternatives amount between
65 and 75%, with a payback time of only two years. The Aspergillus niger genome project has resulted in
numerous patent filings by DSM and has laid the basis for a number of new DSM products such as
PeptoPro, an ingredient for muscular recovery after physical exertion and an enzyme for preventing chill-
haze in beers. Importantly, in addition the project has resulted in a valuable scientific network.
Knowledge absorption
Based on the above discussion, it can be concluded that DSM’s R&D operations in Moscow are mainly
cost-driven. The Russian Enzyme Lab was set up to benefit from the low wage environment, with the
availability of highly qualified molecular biologists as a prerequisite to guarantee the high quality of the
analytical work. The Russian lab itself is not significantly involved in the absorption of locally available
knowledge sources and the high-level, yet exploitative research facility is unlikely to evolve into a
competence center, since Russia does not provide a state of the art knowledge base for foods, medicine, or
materials. Hence, for now and the near future, DSM’s knowledge tapping process will remain limited to
making use of the professional expertise of the Russian scientists.
Coordination mechanisms for the valuation of external knowledge
The need for particular expertise (i.e. the ability to perform semi-routinized scientific work) could be well-
defined by DSM: based on their experience, the home-base scientists knew exactly which ‘external
knowledge’ (i.e. scientific qualities) was needed and this enabled them to identify the optimal source of that
knowldge. Even though the knowledge ‘need’ was clearly established, its eventual commercial value
remained quite uncertain: it is not possible to predict the applicability of the enzymes, let alone the
potential of the eventual commercial success (nonetheless, several potential applications were expected).
This ‘search for the unknown’ results from DSM’s R&D portfolio management system that explicitly
promotes the development of innovative, high-margin products based on new technologies and therefore
allows for the engagement in more risky knowledge development and acquisition trajectories. This
illustrates an interesting issue: to create innovative products based on knowledge that is not yet developed,
a company must accept that its ability to value the commercial potential of that knowledge is limited.
Coordination mechanisms for the acquisition of external knowledge
As discussed, the Russian R&D center is not significantly involved in the acquisition of external
knowledge. Hiring of qualified staff is regarded as the main method to acquire technical knowledge.
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Coordination mechanisms for the transformation of acquired knowledge
Importantly, as discussed above, DSM Food Specialties has an organizational heritage of being successful
at transforming very different types of molecular inventions into commercial products, which can be seen
as the result of its assimilation and application skills. Thus, even if the yield of the costly enzyme analysis
(in terms of discovered functionalities of the enzymes) would be limited, the chance that the company
would be able to transform some of the outputs into successful products (and compensate for the research
costs) would be relatively high. To this end, having a base of scientific and technical experts from different
backgrounds is crucial. Also, DSM Food Specialties needs to be able to understand the market and how
technical inventions may be eventually sold on the market. Operating in the business-to-business sector,
having a thorough understanding of the desires of the ‘customer behind the customer’ is critical. This
requires strong marketing skills in addition to scientific competences as important traits of the business
development managers, which contributes to the quality and efficiency of the assimilation and the
application processes. The transformation of the knowledge (samples and information) generated by the
Russian R&D center into useful forms, such as product concepts, happens at the large R&D center in the
Netherlands.
Coordination mechanisms for the transfer of acquired knowledge
As discussed, the information accompanying the samples is of an explicit form and can be easily
transferred via the internet. The contributions of the Moscow R&D center are a standard input in the
formalized product development process.
Coordination mechanisms for the application of acquired knowledge
As discussed, the applications of the research project include a number of successful food-applications,
hundreds of patent filings (to be sold on the market), and the building of a strong scientific network. The
coordination mechanisms that were already discussed at the corporate level play a critical role to steer the
application processes.
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Appendix 4
AkzoNobel case study
4.1 Introduction
This chapter discusses the coordination mechanisms underneath the knowledge absorption processes of
AkzoNobel’s R&D organization. As discussed, knowledge absorption is seen as a combination of the
valuation of external knowledge, its acquisition, transformation transfer and application. The contextual
background of AkzoNobel is discussed first. This includes information about the company’s organizational
heritage and its current organizational dynamics, the organization of international R&D, and its activities in
the emerging economies. Subsequently, the knowledge absorption process and the underlying coordination
mechanisms of the company as a whole are discussed. Finally, a discussion of the knowledge absorption
process at AkzoNobel’s Car Refinishes R&D center in Bangalore is provided.
This first section is based on face-to-face interviews with General manager of the Global Innovation Unit
Mike Zeitler and Strategy and New Business Development manager for Decorative Paints Peter Gommers,
the company annual 2006, and a powerpoint presentation of Michael Zeitler.
4.2 Coordination mechanisms for the absorption of external knowledge by the
international R&D organization of AkzoNobel
Based on the interviews among AkzoNobel’s R&D managers, it becomes clear that the nature of R&D
activities performed and the way how the R&D processes are organized by the different divisions and
business units is quite diverse. Consequently, the degree to which the different R&D centers are involved in
the absorption of external knowledge and how the knowledge absorption activities are organized is
multiform. Nonetheless, it was possible to identify a number of widely applied and important coordination
mechanisms framing the external knowledge absorption processes. As discussed, the knowledge absorption
process is understood as a combination of the valuation of external knowledge, its assimilation (i.e.
acquisition, transformation and transfer) and its application by the company.
Valuing external knowledge
4.3 Coordination mechanisms for knowledge absorption at AkzoNobel Car Refinishes in
Bangalore
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Appendix 5
Philips case study
5.1 Introduction
This chapter discusses the coordination mechanisms underneath Philips’ absorptive capacity. As discussed
in chapters 1 and 2, knowledge absorption is seen as a combination of the valuation of external knowledge,
its assimilation and application. As with the case studies of the other three companies, the contextual
background of Philips is discussed first. This includes information about the company’s organizational
heritage and its current organizational dynamics, the organization of international R&D, and its activities in
the emerging economies. Subsequently, the knowledge absorption process and the underlying coordination
mechanisms of the company as a whole are discussed. Finally, the knowledge absorption process at Philips
Lighting’s R&D center in Shanghai is discussed.
This first section is largely based on a face-to-face interview with Chief Technology Officer Rick Harwig
and two interviews by telephone with General Manager Philips Research Shanghai and Chief Technology
Officer East Asia Frans Greidanus. Secondary data sources include the company website, the company
annual of 2006 and academic publications.
Company background
Founded as a lamp factory in Eindhoven, the Netherlands in 1891, Philips has become one of the leading
electronics companies in the world. Currently, the company is headquartered in Amsterdam. In 2006, its
sales were €26.976 billion and it employed 125,500 people in more than 60 countries (Philips, 2007). Per
2008, Philips is organized into the following divisions: Philips Healthcare, Philips Lighting and Philips
Consumer Lifestyle. Philips positions itself as a high-growth technology company, ensuring competitive
advantage by generating innovative products and processes. Philips’ brand promise is captured in its global
tagline ‘Sense and simplicity’ which stands for delivering products and solutions that are advances, easy to
use and designed to meet the needs of all users.
R&D organization
Innovation plays a central role at Philips and with the largest R&D investments of all Dutch multinationals
and over 130.000 registered patents and design rights, the company is known as a real technology
‘powerhouse’. Its high R&D investments have resulted in many breakthrough inventions in the past, such
as the compact cassette and the CD player. In 1914, Dr. Gilles Holst became the first true researcher in
Philips. He developed Philips Research into a major center of technical competence and innovation and to
date, Philips Research Eindhoven, the NatLab, remains Philips’ largest research laboratory. Besides the
NatLab, Philips Research consists of smaller laboratories in various other countries. Philips has around 100
R&D units world wide, some of which are very small.
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The functions of R&D
Philips’ technology development takes place at three levels. First, the business units are mostly involved
with short term development work. Development laboratories of the product divisions carry out the later
phases of product development activities. Second, sectoral divisions develop broader, longer term
technologies, such as plasma and lcd screens, etc. Third, apart from the development of new technological
options, corporate research looks at the boundaries between the divisions and coordinates cross-business
unit exploitation of technologies. For example, corporate research may investigate whether molecular
diagnostics may be applicable in the medical systems division. Corporate technology is a complete business
organization. Philips no longer develops stand alone technologies without clear exploitation perspectives,
but corporate research develops the concept into a fully operational company. This is called ‘incubating’.
Landing a technology within a business unit thus does not occur until there is a complete running business,
including a technology, industry solutions, clients, channels, etc. (Harwig, pers. comm., 2007). Total R&D
efforts amount to around 8% of total sales. About 10% takes place in central research, and 90% in
development in the division and in their Business Groups (Reger, 2004).
R&D Internationalization
Philips’ R&D is strongly internationalized. Internationalization at Philips has been taking place since the
1950s. The limited availability of researchers and the small size of the Dutch market made
internationalization of sales and production necessary early on. Also, increasingly production and system
developments had to be adapted to specific national or regional customer requirements and technical
standards. Third, as Reger (2004: 64) argues, “the proximity to leading scientists and research
establishments has played an important role in setting up the central research laboratories. Due to the
frequent real coincidences of ‘excellence in science’ and ‘lead markets’ (as with microelectronics in Silicon
Valley in California), market aspects were also indirect determinants of the choice of locations.” The
decisions about new locations are made by the board in agreement with the management of Philips
Research. Between 1945 and 1970, research laboratories were founded in England, France, Germany and
the USA. In recent decades, apart from development activities Philips has also further expanded its research
into East Asia and India (Reger, 2004). In 2000, Chinese labs in Shanghai and Xian and Taipei formed a
research organization called Philips Research East Asia. Acquisitions and cooperative agreements such as
alliances and strategic collaborations with local companies have become the dominant business model for
R&D internationalization.
Since the 1990s, the distribution of research domains among the dispersed laboratories has been decided
only on grounds of competence. Competences include the corporate-wide responsibility for topics of
research and the development of technologies for specific applications. Accordingly, international core
competences have crystallized out. As Reger (2004: 65) argues, to overcome the problems of fragmentation
and duplication of activities in central research, Philips has adopted a strategy of forming Centers of
Excellence (CoEs) and using several coordination mechanisms to link them together. Cross-border R&D
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projects are conducted where the necessary capabilities are available and dispersed competencies are linked
together. Over the years, the increasing complexity of technologies underlying Philips’ product, together
with the global dispersion of competences have led to an increase in complex cross-border R&D projects.
As a result, the coordination between the globally distributed Philips laboratories has become both more
complex and more important (see Reger, 2004 for a detailed description of the mechanisms to coordinate
the research activities).
Open innovation strategy
The increasingly wide array and complexity of the technologies underlying Philips’ products, processes and
services, and the acceleration of innovation as a result of globalization and digitization have also led Philips
to realize in an early stage that it could not develop all the necessary competences in-house (Harwig, pers.
comm., 2007). Since the early 1990’s external networks of companies have become critical to the
development of new products. In the Netherlands, the company took the lead in practicing ‘open
innovation’, as illustrated by the establishment of the High Tech Campus Eindhoven in 1999. Essential
elements of the open innovation model include the development of business models for the spinning-in and
spinning-out of technology. Close, innovative types of collaborations with external suppliers and other
external parties including customers, are central to the open innovation strategy.
Global product development
Philips practices a ‘global’ product development model: the products are designed for the global market by
globally dispersed R&D centers and it’s unimportant at which location things are done. Cross-border R&D
projects are conducted where the necessary capabilities are available and dispersed competencies are linked
together (Reger, 2004). For example, software for a new product may be developed in Bangalore, part of
the hardware for sensors in Eindhoven, part of the data processing equipment in Beuningen, while the R&D
for the integration of all these elements is located in Seattle. This process is coordinated with a global
project manager and organizations that operate globally. For example, the development of patient
monitoring is in Seattle and Shanghai, while the coordination is in Eindhoven. Similar to Philips and DSM,
there is always one product manager and one business manager who make the decisions (Harwig, pers.
comm., 2007).
The international R&D organization is little involved in ‘local for local’ research. Yet it happens where the
demand for specific products is strictly local. For example, the market for rice-cookers is highly
concentrated in Asia. At the same time the Senseo is only well developed in Europe, since “Asia drinks tea,
while America drinks weak coffee” (Harwig, pers. comm., 2007). Yet also at the Senseo project the way of
working was typically local for global. The product has been developed with Sara Lee, with the idea that
the concept should be exploitable elsewhere. A second reason for local for local R&D is that businesses are
driven by their local view of the world. For example, with the acquisitions of US companies (including
ATL, Intermagnetics, Marconi, Agilent), Philips Medical Systems has become an US-style company (since
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the accents have shifted away from the Dutch/German business culture). In addition to this US business
culture, the fact that half of its market is in the US, the view of the world is largely based on the American
market, and product development also focuses on this market.
Emerging economies
In recent decades, Philips has strengthened its position in the emerging economies. Rapid growth is mainly
achieved though acquisitions and strategic partnerships. Typically, through those agreements Philips ‘gets’
local capacity, employees, market knowledge and access to existing networks, while the company ‘adds’ its
unique experience in terms of process knowledge, quality control, project management and ‘global
specification thinking’. Access to these growth markets and labor costs advantages are important reasons to
establish subsidiary centers in these countries. Important to note, in recent years Philips has progressively
reduced its in-house production operations. Strategic collaborations with external suppliers and
manufacturers are becoming the norm. This greatly improves the company’s flexibility and allows the
company to do business with a negative working capital model (the suppliers invest in the necessary
resources and are paid only after Philips has sold its product on the market (Greidanus, pers. comm., 2008).
Today, China is by far the largest growth market, but India, Russia and Brazil are also significant. In the
emerging countries, Philips invests in R&D to be able to keep track with local market developments and to
build on unique local expertise (Harwig, pers. comm. 2007). Among the emerging economies, China has
also become the most important supplier of technology. At this moment around 800 engineers are
employed in the Chinese R&D labs. Hosting one of the corporate R&D laboratories, Shanghai is one of
Philips’ main research locations. Currently an Innovation Campus is being built in Shanghai, where most of
Philips local activities will be concentrated. As an important aspect of the R&D strategy, collaborative
programs have been set up with Chinese top-universities and other research institutes. Other Asian
innovation campuses have been established in Bangalore and Singapore.
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5.2 Coordination mechanisms for the absorption of external knowledge at Philips’
international R&D organization
As both the interviewed R&D managers underscore, Philips is a very large organization and its
management of innovation is not a standardized process. As a result, the R&D centers of the divisions and
the different businesses differ significantly in how they absorb external knowledge and what types of
external knowledge are required. Nonetheless, it proved possible to identify a number of important
coordination mechanisms that are applied throughout the R&D organization of the company. In the
following, the dominant processes behind the valuation, assimilation and application of external knowledge
at Philips are discussed.
Coordination mechanisms for the valuation of external knowledge
Strategic coordination
As discussed, Philips’ R&D can be divided into short-term development work and research for the
development of broader, longer term technologies. The total ‘technology need’ is defined based on the
global business strategy. Similar to DSM and Unilever, this results in a strategy for the development of new
core technologies and concepts with a long time-to-market, and shorter term, business-related R&D
projects for the business groups. Within these two categories, the need for external knowledge differs, as
will be discussed below. The strategic planning of R&D activities frames the need for external knowledge,
and hence, defines which external technological knowledge is of value to the company.
Philips’ second Open Innovation Campus in Shanghai
Built on the site of Philips Research in Eindhoven, Philips’ High Tech Campus was established in 1999. Since then
it has become a key element in Philips’ adoption of the philosophy of ‘open innovation’. The campus houses over
40 (external) technology-based companies and institutes employing several thousand people in developing new
technologies and products through the open innovation model. Philips goal was to establish an environment and
structures which promote interactions, networking and knowledge-sharing, leading to joint projects and joint
ventures among the companies at the campus. For Philips this means that the company can spin in ideas and
innovations from outside, enriching the services it can offer Philips’ business divisions. Also, it can spin out
technologies from its own extensive IPR portfolio to high-tech companies in the HTCE, which can bring
innovations to market more quickly. For the companies on the campus, networking and co-operation on ideas is
reinforced by shared facilities and technology. In most cases, start-ups can make free use of those facilities.
Building on this experience, in 2005 Philips started building a second Innovation Campus in Shanghai, with annual
investments of about 40 million Euro. Philips’ objectives are twofold. First, it aims to increase efficiency and
internal collaboration by bringing different R&D centers together on one campus. Second, they want to open up the
campus to external parties, facilitating R&D cooperation and open innovation (De Ridder, 2007). Clearly, the ideas
and technologies developed at the Shanghai campus are envisaged to be at the basis of Philips’ next generation of
products.
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Development R&D.
As discussed, the majority of the R&D activities are carried out by the business groups, in the form of
product development projects. The knowledge that is needed in the product development projects can
typically be well-defined. Within the different phases of these development projects, decisions about
whether the required knowledge is developed in-house or externally (via collaborations with external
companies or acquiring patents) are made by the project managers.
The absorption of external knowledge by the development R&D centers is often the result of collaborations
with suppliers. To understand this point, it is important to note that Philips is has a low level of vertical
integration. In other words, many components of its products are developed and produced by its suppliers.
Indeed, more and more often Philips outsources the complete production process. Typically, to coordinate
this process, Philips ‘development’ R&D centers cooperate narrowly with their suppliers. In turn, the
suppliers play an important role as a base for knowledge that is needed by the company for the
development of new products. For example, an external supplier develops and produces small LCD screens
that are applied by Philips in its Senseo machines. The knowledge that is needed to apply the LCDs in its
products, and knowledge about the expected developments within the technology are very important for
Philips’ development center to have access to. Frequent communications and trust between Philips and its
suppliers are therefore seen to be at the basis of the ability to keep track of technologies and to recognize
the value external knowledge. On a regular basis, supplier audits are held by the supply chain group and
the development R&D managers. The suppliers must not only conform to world-class technical
requirements, but also to Philips ethical policies. These audits are therefore seen as an important
coordination mechanism for the development R&D centers to value external sources of knowledge.
Research R&D.
The research centers develop technologies for the global business groups and aim to benefit from local
science networks through tight cooperative programs with local universities and other technical institutes.
These different types of collaborative agreements have become the norm. Regarding the development of
new technologies, uncertainties about the value of the knowledge (that is developed by Philips’ research
centers in collaboration with the external partners) is inherent. Nonetheless, to maximize the potential
outputs of a project, indirect valuation mechanisms are applied. The quality of the external research groups
is obviously critical and its scientific reputation is seen a useful proxy for the quality of ‘knowledge’ that
may eventually be generated in a collaborative project. Hence, quality rankings of universities as well as
the screening of professional profiles and the academic history of the foreign scientists are used as
indicators. Before a collaborative agreement is established, several meetings are organized between the
R&D managers and the scientists to get to know each other and build a trust base between Philips and the
external research groups.
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Having top-class technologists in the R&D organization
As a technology company, having top-class technologists in the R&D organization is key to be able to
value external knowledge. This holds both for the technical research and the product development centers.
As Harwig (pers. comm., 2007) argues, Philips’ technologists are able to foresee technological
developments for the next 15-20 years: “they already saw LCD TV coming, even when the TV industry
was saying it would never happen. They can even calculate when this is more or less going to happen.
Also, the camera with video, music and data, and remote control was prototyped in 1988. In 2001 this has
landed at the youth segment. This is absolutely predictable”.
Outward orientation
Within the R&D organization technology teams are assigned the responsibility to keep track of external
technical developments within their domain, through reading scientific journals, visiting congresses,
benchmarking other companies, etc. This technology scouting is a formal part of their job. Special
‘technology teams’ are established that assign different technology domains to its members. The outward
orientation is thus professionalized and structurally embedded within the company, which improves the
ability of Philips to valuate external knowledge.
Coordination mechanisms for the acquisition of external knowledge
Hiring qualified staff
As with the other companies of this study, the hiring of qualified staff is seen as an important way to
acquire external knowledge. This is the case both for research and development oriented R&D centers. As
Harwig (pers. comm., 2007) argues, a stable organization, treating people respectfully and HRM
management tailored to local conditions are important elements to hire and keep qualified staff. This
strategy appears to be successful: the turnover in Shanghai is even lower than in Eindhoven (Harwig, pers.
comm., 2007).
Collaborative models
Apart from hiring staff, different types of models are used to co-create knowledge with external partners
(Greidanus, pers. comm., 2007). As discussed, for the research activities, research institutes are the
dominant partners and the scientific level of research institutes, particularly in China and India provide
opportunities. Different collaborative models with these institutes are applied:
The partner performs the research task. The external research group may perform a research assignment
and write a technical report or develop a prototype, without the involvement of Philips employees in the
process.
Narrow collaboration with partner. If the research institute possesses a strong network (of clients or other
companies) and a strong infrastructure, Philips may also choose to place its own researchers within the
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institute and work on a project together with the scientists of the institute. This is the case for the Institute
of Health Science in Shanghai, for example.
Using the partner’s research infrastructure. Philips uses the infrastructure of the institute, but its own
employees work on the project.
Other forms of external knowledge acquisition applied by Philips are licensing-in of technology, and
spinning-in of technology start-ups. Inter-firm alliances and full acquisitions also provide access to external
knowledge. These business models have already been discussed in the chapters on Unilever and DSM. The
management of these external collaborations has become more professional and in recent years, and
dedicated management functions have been established to manage them.
Coordination mechanisms for the transformation and transfer of acquired knowledge
As discussed, Philips’ R&D is organized in global projects, where different R&D centers provide their
inputs at different phases of the product development process. How a research project is managed is not
clear from the start. The project leader defines the method. Different tools to manage such projects have
been developed, but, as Harwig (pers. comm., 2007) notes, “these are not very sophisticated. In the end it
all comes down to good and frequent communication”. Examples of tools that facilitate the knowledge
transfer (between the globally dispersed R&D units) processes include:
• Video conferencing, combined with a facility to share different types of data simultaneously
facilitates the transfer of project-related knowledge and improves coordination. Email and video
conferencing are used frequently, to avoid too much traveling.
• ‘Team rooms’, where all project documentation is stored in a standardized way, so that it can be
easily retrieved by the project members (enabling on-line knowledge transfers and knowledge
transformation).
• Other coordination instruments are large research conferences, which take place about twice a
year, as well as personal and direct contacts among researchers (Reger, 2004).
• A global competence management system is in place to make sure people with the right experience
base work on the right projects. This promotes the quality of the knowledge transformation
processes (see also DSM).
Clear input/output responsibilities
To enable the effective transfer of knowledge between the R&D units, clear responsibilities are assigned to
the different units by the project leader. This is similar to Unilever and DSM’s project management
systems. These responsibilities include the definition of the output-input interfaces between the different
R&D phases. How knowledge is transformed within the units is a complex issue, coordinated by different
managerial systems, which is beyond the scope of this research. Important for this section is that clear,
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preferably standardized input and output responsibilities increase the efficiency of knowledge assimilation
(both transform and transfer) by avoiding duplication and reducing the problems of ambiguity at the
boundaries between units. This minimizes the need for managerial overhead.
Coordination mechanisms for the application of external knowledge
From the interviews it followed that the assimilated technological knowledge can be applied by the
company into different outputs. These include new knowledge outputs, organizational routines, product
concepts and eventually, products sold.
Integrative functions
Several structural mechanisms have been established to improve the coordination of, and increase the level
of collaboration between the different R&D organizations. Through the better coordination of R&D
activities, the integrative functions lead to a higher efficiency of the application of the developed
knowledge by the different R&D units. As an important example, technology platforms have been
established at Philips in the 1990s to cope with the tendency towards the fusion of various technologies and
cross-corporation topics. The platforms cut across the departments of the research labs, which are mainly
organized according to technical disciplines. Project proposals and applications can come from the research
centers and the product divisions and business groups worldwide. The participation is global and facilitates
the fusion of various technologies, as well as the coordination among the central labs and among the central
labs with the product divisions and business groups (Reger, 2004).
Portfolio management
Similar to the other companies of this study, Philips uses a portfolio management system to select R&D
and manage projects. As Harwig argues, over the years Philips has learned to kill projects early to improve
the effectiveness of R&D through having fewer larger R&D projects. This strategy increases the success
rate of projects and thus improves the efficiency of the application of knowledge that may be developed
internally or come from external sources.
Global roll-out
Philips’ R&D organization (including the corporate incubator function) is responsible to fully develop a
product, ready to be handed over to internal or external the supply chain organization. Similar to Unilever,
this ‘global roll-out’ system, i.e. optimizing for efficiency by centralization of R&D activities (including
decision making and product formulation) can be seen as an important coordination mechanism for the
efficiency of knowledge application.
New business models for the external exploitation of knowledge
Philips does not only develop technologies and products that can be launched within the organization.
Indeed, patenting of IP, the selling of technologies, and spinning-out of companies raised by Philips has
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become part of Philips’ strategy. As Harwig (pers. comm., 2007) argues, since the early 1990s, the
company has become very succesful at this spinning-out strategy and he expects the company will be able
to make 600 million Euro per year by selling companies a continuation for the next 20 years to come.
Concluding, in the interviews, the following important coordination mechanisms for the effective
application of (externally acquired) knowledge were identified: the establishment of integrative functions, a
global roll-out strategy for new products, R&D portfolio management and the establishment of new
business models for the exploitation of knowledge outside the company boundaries.
5.3 Absorptive capacity at Philips Lighting’s R&D center in Shanghai
Background
This section discusses the knowledge absorption process and its underlying coordination mechanisms of
Philips’ Chinese R&D organization of the product category Compact Fluorescent Lamps (CFL). As
discussed, the absorption process is understood as a combination of valuation of external knowledge, its
assimilation (i.e. acquisition, transformation and transfer) and its application. Philips Lighting is one of
Philips three corporate divisions. It consists of the following businesses: Lamps, Luminaries, Lighting
Electronics, Automotive, Special Lighting and Lumileds. The division has sales- and service organizations
in over 60 countries and many processing plants in Europe, Latin America and Asia. Together with the
consumer market, where the company is very well-known for over a century, Philips lighting’s main
market consists of Business clients and the market of semi-finished products for Original Equipment
Manufacturers (OEM's).
This section is largely based on a face-to-face interview and an interview by telephone with Berry Kock,
who worked in China between 2005 and 2007 as the global technology manager53 for product category
Compact Fluorescent Lamps54 and as a General Manager of China’s Lighting R&D division. In this double
position, Kock was responsible both for technology development for the CFL business55, and for general
management tasks, such as the staffing of the Shanghai lab with competent people, quality management
53 The position of a Chief Technology Officer within a Product Division was created when Philips adopted the contract research model.
He is responsible for the technologies needed for product development and production of the product divisions and its business groups
(Reger, 2004:68). 54 Compact Fluorescents are compact energy saving lamps. 55 Currently the Lighting division employs around 2000FTEs in R&D, of which 400 in Shanghai (20%). The key motivation to start
production in China was to cut costs. CFL has become Lighting’s most dynamic product category, as a result of the so-called ‘green
switch’ in consumer behavior that was triggered by Al Gore’s movie about the dangers of global warning. In this product segment,
consumer demand had remained quite stable over the last 30 years, yet in the last few years, demand has risen very rapidly, with
growth numbers of 25-30% in value annually and 30-40% in volume.
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(through the implementation of procedures to avoid recalls and guaranteeing decent engineering), the
design of uniform processes for knowledge protection, and for the transition from Europe to China.
In 1997, Lighting set up its first production plant in China, in a Joint Venture with a local lamp producer.
At this moment about 90% of the CFL products are produced in China and by 2006, the business turnover
of CFL was around 600 million euros. The business group consists of approximately 100 employees, of
which 60% are located in China. CFL also has industrial activities in Roosendaal, a large park in Poland,
and a research ‘satellite’ in North America for local product specification and facilitating design-ends with
original equipment manufacturers.
The business model applied in China is quite interesting: typically, the manufacturing process is outsourced
to low-cost suppliers. To secure the quality of the products, the largest share of Philips’ R&D staff works at
the suppliers’ work floor to control and improve the manufacturing process. This way, Philips’ competitive
advantage is based on its brand value in combination with the exploitation of its technical competences.
CFL’s R&D internationalization
To understand the drivers behind the R&D internationalization process, it is essential to note that the lamp
industry is a typical process-industry: the production process is key to the eventual quality and efficiency of
the output and the product’s quality is at the heart of the competitive advantage. Mastery of the production
process demands the continuous involvement of experienced technicians to control the machines and
improve the overall production process” (as indicated, Philips’ R&D employees are currently mainly
occupied by controlling these production processes at the supplier’s work floor). Consequently, the
establishment of foreign production facilities is typically accompanied by the internationalization of
process-related R&D.
Innovation ambitions
As a result of large business growth of the CFL business in recent years, most of the R&D employees
mainly work on process control as a result of limited R&D capacity. At the same time however, over the
years the experience and professionalism of the Shanghai R&D organization has dramatically improved. In
this light, Kock argues it is unrealistic to think that radical innovations cannot come from China: “my
electronics engineers in Shanghai are at least as good as my people in Europe and, furthermore, they are on
top of the supply base in China”. Kock’s vision is that in the near future CFL’s people in China will work
on radical innovations and budgeting commitments have been made to realize this.
Learning from China
As discussed, the mandate of the Shanghai R&D section was not to create new technologies or products,
but to improve the quality and efficiency of local production processes. With over 90% of all compact
fluorescent lamps currently produced in China, over the years the center of gravity of the process-related
R&D work has shifted to China and this has led to some interesting consequences. At the time of the
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relocation of its manufacturing processes to China, Philips Lighting had (and still has) a heritage of making
very well-engineered, safe, long-life, over-specified and therefore costly manufacturing process lines. This
mechanization had been largely driven by defensive motives, particularly to reduce labor costs and with the
‘techno-conservatist’ idea that you need high-tech machines to make high-quality products. When setting-
up its first CFL manufacturing operations in China ten years ago, Philips intended to transfer its Western
European highly-mechanized production lines to China. However, this approach proved not very
successful. In particular, the highly mechanized process did not fit very well with the Chinese labor
intensive, capital extensive manufacturing environment. Eventually, the full production process had to be
re-designed to Chinese standards, with a much higher (both skilled and unskilled) labor content (of 10 to 15
times more employees!) and lower technological capital investments. Quite surprisingly, replacing
mechanized work with labor did not by default lead to lower quality products. In fact, a test revealed that
only 15% of the investments in the highly mechanized production process in Eindhoven were important for
quality, the rest of the investments were mainly done to replace labor. In this regard, Kock highly values
the Chinese capacity to reduce all sensitivities related to tolerance in the labor-based manufacturing
process. The Chinese manufacturing process also allows for the use of much cheaper and lower-end
machines, which is a very important cost saver. Taken together, the following four aspects are key to the
cost difference with western facilities:
• The Bill of materials, that is much higher at highly mechanized product lines.
• Overhead costs, which are much higher in the Western (European or American) setting
• Labor costs
• Depreciation costs, that are much higher with highly mechanized product lines
As Kock indicates, the experience built up by Philips Lighting Chinese R&D organization with controlling
the quality and efficiency of production processes in a low labor cost, low-tech environment is very
valuable to the company, since it is at the core of Philips competitive advantage in the CFL market.
Furthermore, it is expected that this ‘absorbed knowledge’ can be applied without little adaptations in other
low-cost countries. In general however, according to Kock, the transfer of knowledge from Chinese to
western organizational units (and the subsequent application of this knowledge by these units) is
suboptimal. Important reasons include the differences in the ‘dominant logic’ (e.g. the western engineers
may think it’s daft to manually produce a lamp) as well as the thinking about China in competitive terms
(i.e. seeing China as a threat). According to Kock, this is unnecessary, since the western and Chinese
activities are fully complementary.
Coordination mechanisms for the valuation and acquisition of external knowledge
In the Lighting domain, the local Chinese infrastructure does not provide a high-class (scientific)
knowledge base. Nonetheless, partly as a result of large government investments, lighting has grown up in
the last decade to a mature industry. Nonetheless, China does not yet offer the state-of-the-art technical
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science base as Western Europe and the United States. As a result, knowledge absorption by Philips mainly
takes place in the form of the hiring of qualified graduates and experienced technical engineers.
As with the other companies of this research, having in-house high-class R&D personnel is a precondition
to be able to estimate the value of external knowledge, while the hiring of qualified graduates and
experiences professionals can be seen as the major (direct) way of acquiring external knowledge.
According to Kock, the fact that at the time the Lighting R&D center was established in Shanghai, there
were not so many other companies around, which enabled Philips to hire the top-1 percent at the
universities. Over time however, competition for talent has increased. Several HRM practices are applied to
hire and keep high-level employees and these appear to work well. First, Philips pays more than the
average salary, which is important at the application phase. To keep the qualified people, it is important to
provide them with career perspectives, and personal development programs are standardized. Also,
temporary internal job-transfers (to the Netherlands, for example) are considered to be an important
premium by Chinese employees.
The valuing of external knowledge has been institutionalized at Philips Lighting’s research organization by
the establishment of technology teams. For all laboratories world-wide, technology teams are assigned that
are responsible to keep track of the state-of-the-art of a specific part of their professional domain (e.g.
electronics, processing).These teams provide the necessary background information based on which the
choice for particular technological options is made. Also, once a year, the technology teams make a
roadmap about the technological developments within their technical domain. An explicit part of their
assignment is to make benchmarks with external actors in the same technology domain, which enforces the
outward orientation of the employees. These benchmark analyses also serve as one of the inputs for
assessments at the basis of interfirm alliances or full acquisitions. Clearly, the institutionalization of the
valuation function with the technology teams is believed to improve CFL’s valuation capability.
Coordination mechanisms for the transformation and application of acquired knowledge
As Kock indicates, an important ‘cultural’ drawback of hiring local staff lies in the fact that the Chinese
employees are generally not very entrepreneurial. As confirmed by Chief Technology Officer for East Asia
Frans Greidanus, this largely results from the education culture that fosters a rather passive attitude. Also,
Chinese companies tend to have a more directive organization culture. This results in the problem that these
employees may not contribute their knowledge to Philips’ business processes in an optimal way. To
compensate this problem, Philips established intensive training programs where new employees are taught
to adopt a more pro-active approach (e.g. to raise questions when something is unclear, come up with
solutions, learn to deal with ambiguous research assignments, etc.).
Coordination mechanisms for the transfer of acquired knowledge
An important element of these programs is the management of temporary job-transfers to the Western
R&D sites, to learn from their Western colleagues. This way Philips is able to leverage its experience base
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among new employees. It can be stated that these mechanisms contribute to the quality of the assimilation
process: the quality of the acquisition of external knowledge improves, since the Chinese employees are
better able to contribute their knowledge to the company, the knowledge transformation processes improve
because the Chinese employees learn to know how to transform their knowledge into a useable form, and
the internal knowledge transfers improve as a result of better communications with their overseas
colleagues.
Global organization
Lighting’s R&D organization is managed as a global organization. The organization is such that inter-unit
dependencies exist and the research groups need each other for different phases in the research and
development projects. Based on these ‘forced’ collaborations, intrafirm personal networks are created that
in turn serve as a basis for further collaborations. This leads to a higher degree of exploitation (application)
of R&D knowledge throughout the firm. Also, Technology platforms have been established, typically they
are intranet-based. These improve the quality of the transformation and transfer processes, and stimulate
the exploitation (application) of knowledge company-wide. To the same end, meetings and congresses are
organized.
Conclusion
Over the last decade, Philips Lighting’s R&D organization for compact fluorescent lamps in Shanghai has
evolved into a strongly established research organization. As a result of the business dynamics, the largest
share of its 400 R&D employees is involved in the management of production processes at the supplier’s
workfloor. Nonetheless, the ambition is to become an important player in the development of new
technologies and products. Paradoxically, as a critical lesson, Philips Lighting (with a strong heritage of
high mechanization and quality engineering of production lines), has learned from China how to control the
quality and efficiency of production processes in a low labor cost, low-tech environment, which proved to
be key to the success of the business. For the Lighting business, China does not (yet) provide a strong
scientific/technical knowledge base. The recruitment of local personnel is the most important way to make
use of local competences.
The following mechanisms are considered to be important to coordinate the knowledge absorption
processes by Philips CFL’s R&D organization. For the valuation of external knowledge, having a strong
base of qualified R&D employees is key. Hiring and keeping qualified graduates and expert employees is
promoted by European style HRM practices. Technology teams have been set up to keep track of external
technological developments within specified technical domains. Hiring of qualified graduates and
experienced technical engineers is the dominant ways to acquire external technical (process-related)
knowledge. Intensive training programs have been established to teach new employees to adopt a more pro-
active approach. Together with the temporary job-transfers to the Western R&D sites these improve the
knowledge transformation and application processes. The establishment of a global R&D organization with
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narrow inter-unit collaborations as a result of inter-unit dependencies and technology platforms are
important for the quality of the transformation and transfer processes, and stimulate the exploitation