Why MNES should locate their R&D units in countries with both strong and weak IP protection

MNEs (multinational enterprises) increasingly locate their Research and Development (R&D) innovation units not only in developed markets but also in emerging-economy markets that are characterized by weak protection of intellectual property rights (IPR).

Doing so enables MNEs to source globally dispersed knowledge and improve the effectiveness of technology creation and product development. Nevertheless, innovating in weakly protected markets increases the difficulty of protecting their technologies and products from imitation and in turn decreases firms’ ability to create and capture value.

Although previous research acknowledges the above advantages and challenges, it remains rather unclear why some firms make location choices that help them become more productive whereas others fail to do so. Our research shows that such performance variations across firms arise because firms differ in their strategy of locating R&D in markets with strong and weak IPR protection.

The geographic distribution of R&D units across weak and strong IPR protection markets matters. IPR regimes determine not only technology (product) protection but also how firms access knowledge and what types of knowledge they access.

The efficacy of internal R&D

Technology creation builds cumulatively on predecessor technologies. Therefore, the effectiveness of an MNE’s internal R&D depends on the degree to which it can utilize external technologies in a sequential manner and use them as platforms for developing new ones. Greater exposure to external technologies helps MNEs improve inefficiency in their innovation activities and utilize internal resources more effectively.

Given that weaker IPR protection facilitates such exposure, R&D teams can utilize prior technologies more easily, improving the effectiveness of an MNE’s R&D in enhancing its productivity. By contrast, strong IPR protection may hinder R&D by increasing the difficulty of creating better or different versions of follow-up technologies.        

Exploiting globally dispersed knowledge

The benefits of sourcing external knowledge from abroad are significant. R&D units can identify relevant technical knowledge and information on new promising activities. Internal linkages facilitate knowledge transfer between the MNE’s units and strengthen technological interdependencies within the organisation. Therefore, a global portfolio of R&D units can serve as a vehicle for transferring and integrating technological knowledge. Such benefits lead to the co-creation of technology, new scientific breakthroughs and stronger MNE performances.

Countries with stronger IPR protection reduce uncertainty and improve coordination, incentivising MNEs to engage in R&D. However, stronger IPR protection decreases the extent to which organisation can utilize and combine external ideas and technologies.

By contrast, weaker IPR protection accelerates technological diffusion and knowledge spillovers, creates a wider set of technological opportunities, and facilitates the diffusion of practices that stimulate novel combinations. It also enables MNEs to identify ample opportunities to learn about scientific advances from universities, improve processes with suppliers, understand market preferences from customers and access their competitors’ designs.

Furthermore, conducting R&D in weak IPR protection countries helps MNEs not only to access and combine knowledge that complements that from strong IPR regimes, but also learn about different approaches to innovation that cannot be learnt in strong IPR regimes. Therefore, by providing the MNE with different competitive advantages and access to diverse knowledge, weaker IPR protection enhances the utilization of external knowledge and the usefulness of the external innovation ecosystem in which the MNE can draw from.

Taking advantage of cross-country differences in IPR protection

IPR heterogeneity in R&D portfolios (i.e., conducting R&D in both strong and weak IPR protection countries) can help MNEs deal with certain challenges and enhance productivity performance by providing MNEs with both knowledge sourcing and technology protection that go beyond the advantages of mere geographic dispersion.

IPR heterogeneity differs from geographic dispersion. A large geographic dispersion of R&D does not necessarily result in a higher level of IPR heterogeneity if the MNE chooses to locate the majority or even all of its R&D units in countries with either strong OR weak IPR protection.

The knowledge and overall advantages of weak IPR regimes (e.g. in emerging economies) differ considerably from those of strong IPR regimes (typical in developed countries). The context in which firms innovate leads to different trajectories of technological development and therefore affects the type of knowledge that is created in each regime. Hence, IPR regimes determine not only whether access to external technological knowledge will be easier and less costly for firms, but also what type of knowledge firms can access and utilize.

Depending on the nature and purpose of each technology, it is more effective to develop certain technologies (e.g. those that push technological frontiers or those that can be imitated easily) in strong IPR protection countries and other technologies (e.g. those that involve adaptation and refinement or heavily rely on external knowledge) in weak IPR protection countries. In such cases, IPR heterogeneity provides significant advantages by facilitating the optimal dispersion of R&D efforts across countries depending on which IPR regime is more advantageous and appropriate for each technology and R&D project.

Guidance for organisations

Multi-location firms should not consider weak IPR protection countries as disadvantageous contexts. However, neither should MNEs locate all their R&D units in markets with weak IPR protection. As weakly protected contexts provide significant knowledge advantages, locating some R&D units in weak IPR protection markets allows the firm to better utilize external knowledge.

What matters is not only the effectiveness of IPR protection in a particular market, but also how managers can geographically configure their R&D portfolio in a way that enables firms to access different IPR-specific advantages. In this respect, innovating in a mix of countries with both strong and weak IPR protection (IPR heterogeneity) can be a fruitful way to enhance the productivity performance of the MNE.

Read the article: “How can MNEs benefit from internationalizing their R&D across countries with both weak and strong IPR protection?”, Journal of International Management.