CRETÁCEO

JV companies need innovative capabilities if they are to develop new products and services that are worthy of developing into major global brands. This thesis has developed eight propositions, which are suggested as the key characteristics of The Research Propositions

In the last thirty years, innovation networks and co-operation have become crucial factors for expanding firms‘ resources of innovation and building up innovative capabilities. Western firms come to China to set up business building plants or subsidiaries in China, and build up innovation networks in China. At the same time, Chinese firms have taken active part in the international division of manufacturing, and also have been members of innovation network of western firms. China has been the developing country with the biggest amount of FDI utilization. Western firms build up their innovation collaboration network in China, and China economy and Chinese firms at the same time impact on innovation collaboration network. Chinese firms also participate in the innovation network of western firms of Hi-Tech and the international resources of Western Firms. According to Wang (2005), there are three factors which influence the innovation network between Western Firms and Chinese firms: firstly, the innovative network depends on the characteristics of western firms, including the advantages of technology, the type of R&D. Secondly, the characteristics of high-tech industrial climate in China also influences the innovative network between Chinese firms and Western firms, for example, the absorptive capabilities of Chinese firms; Wang (2005) also states that the innovation

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collaboration network of western firms in developing countries and developed countries are different. Western firms have more activities in establishing innovation networks in developed countries and the technology transfer in network is bi- directional. Western firms establish innovation networks and the technology transfer in network is unidirectional.

Nowadays with the high speed of globalization and development of information technology, traditional companies find it difficult to keep their boundaries. Firms are encouraged to access external resources and information because of technological innovation. According to Chesbrough and Teece (1996), Upton and McAfee (1996), firms increasingly become part of networks and strongly rely on collaborations and partnerships. Firms can absorb all the resources in the networks through different types of alliances and relationships. Gulati (2000) states the conduct and the performance of firms can be examined by their networks relationships. Firms have both horizontal and vertical relationships with other organizations; it helps to enforce firms‘ competitive advantages. To some extent the idea of strategic networks extends the theory of the RBV (the resource-based view of the firm). Firm should look for the source of value-creating resources and capabilities beyond the boundaries of firms (Gulati, 1999).

Becoming part of a wider innovative network in its industry can impact on the technological innovation of firms. Powell (1996) states that the locus of innovation augments interorganizational collaboration and the network of learning. It is not only individual firms that are relevant when the knowledge base of an industry is both complex and expanding. The sources of expertise are widely spread. Thus it can be seen that wider networks have powerful influences on technological innovation.

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According to the Chinese State Drug Administration (1998), there are 961 joint R&D collaboration projects (66.6%) of 1444 between Chinese pharmaceutical firms and universities in Chinese pharmaceutical industry in 1996. Therefore, becoming part of a wider innovative network in its industry helps to create innovative capabilities.

Western firms in joint ventures provide the technologies, management processes, brands or key knowledge and capabilities that help to develop future competitors from Chinese firms. It helps Chinese firms to set up their innovative network and further build up their innovative capabilities. Chinese partners of JVs can establish their wider innovative network through the followings way: Firstly, Chinese joint venture partners can access JV western partner‘s technologies. IPR or design features to include in their own products. Secondly, local suppliers improve productivity and quality levels as a result of equipment transfers and training provided by foreign manufacturers and subsequently produce and sell components or products they were previous sub-contracted to manufacture. Thirdly, Chinese firms link directly to distribution channels or customers (internationally) introduced by joint venture partners, to sell their own competing products or services. Fourthly, they use copycat western brands or logos, packaging, and design features outside the partnership for alternative or competing products. Therefore:

Proposition 1: Becoming part of a wide innovative network in its industry helps to create innovative capabilities. (Powell and Grodal, 2005)

In the 20th century, companies in manufacturing generally used their own ideas, and transformed them into products with their own R&D facilities. The companies just like a castle; it was protected by the wall built up by company secrets and an array of

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patents. According to Pryor (2007), the idea of closed innovation to prevent others firms competing in the marketplace is short-sighted. Traditionally, new business development processes and the marketing of new products took place within firm boundaries. But there are several factors that change closed innovation. Firstly, the mobility and availability of highly educated people has increased recently. It causes a large amount of knowledge to develop outside research laboratories. Secondly, employees move to new jobs and bring their knowledge and skills to their new company. This helps knowledge to spread among firms in the whole industry. Thirdly, venture capital has increased significantly; good ideas and high technology can be developed outside the firms. Fourthly, there are many other companies in the supply chain; for example, suppliers can impact on the innovation process.

As the result of these factors, firms start to look for many different ways to increase the effectiveness of their innovation process, new technologies and ideas outside the company; cooperation with suppliers and competitors to create more innovation in the industry grows fast.

There are several reasons why taking part in an open innovation system in its industry helps to build up innovative capabilities. Firstly, the principles of innovation show that open innovation systems can help the firms to build up their capabilities. According to Chesbrough (2003), the principles of innovation are as follows:

Closed Innovation Principles:

 The smart people in the field work for us.

 To profit from R&D, we must discover it, develop it, and ship it ourselves.

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 The company that gets an innovation to the market first will win.

 If we create the most and the best ideas in the industry, we will win.

 We should control our IP, so that our competitors don't profit from our ideas.

Open Innovation Principles:

 Not all the smart people in the field work for us. We need to work with smart people inside and outside the company.

 External R&D can create significant value: internal R&D is needed to claim some portion of that value.

 We don't have to originate the research to profit from it.

 Building a better business model is better than getting to the market first.

 If we make the best use of internal and external ideas, we will win.

 We should profit from others' use of our IP, and we should buy others' IP whenever it advances our business model.

Secondly, according to Pryor (2007), five benefits of open innovation prove open innovation can strength the firm‘s innovative capabilities.

 Open innovation can leverage the R&D budget. In most industry, R&D costs the majority of a firm‘s budget. In closed innovation, firms could invest similar amount of money in the development of similar technologies, whereas if they cooperate together, the open innovation can gather all the R&D budget from different firms, gather more sources, gather more technology, get strength from all companies in

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the industry, and it can create more powerful innovation and technology development for their industry, and every firm can use it.

 Open innovation can extend the reach and capability of new ideas and technologies during R&D. Many firms develop the ideas or technologies that do not fit with corporate goals. In a closed innovation system, firms hide these ideas or technologies to prevent competitors getting them. These firms ignore these sources of potential profit, whereas if other firms could get this information additional profit could be made. And these hidden new ideas and technologies could go to the market in the first place instead of being hidden within some firms.

 Open innovation can help to refocus on internal resources to develop new technologies, products and services. Open innovation can achieve cooperation R&D and develop the same technologies costing less and using fewer researchers then for an individual company. It helps the individual company to reduce costs of recruitment and training. An individual company can use the saved capitals and staffs on the company‘s bottom line and the company‘s higher valued-added tasks.

 Open innovation can carry on R&D at lower risk and with less resources. The major share of R&D budgets is used to develop products and technologies predicted to succeed in the current market because managers do not want to take risk with something too new. There is a small portion of budgets used to develop less ‗secure‘ innovation which may not have a current market, but could be the breakthrough in a future market. Open innovation can help to develop both ‗safe‘ innovation and less ‗secure‘ innovation, once the less ‗secure‘ innovation succeeds, this new breakthrough will develop a new market for the company.

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And the company can sell the relevant technologies to other companies to make profits.

Open innovation helps to create an innovative atmosphere in the whole industry and nurture an innovative culture inside the company. Open innovation can develop the relationship between firms and their external innovators. Companies need to get the new ideas and new information from external channels. Companies cannot develop everything inside the box. Companies need to know their competitors‘ behaviour and consumers‘ demands in the current market. Collaborating with your competitors to develop the new technologies is the best way to learn their new ideas and business strategy. Therefore:

Proposition 2: Taking part in an open innovation system in an industry helps to build up innovative capabilities and create more innovation both for the firm and their industry. (Chesborough, 2004)

China is developing from a resource-driven economy to a technology-driven economy. The Chinese government encourages innovation rather than imitation. R&D expenditure has increased three times in the past seven years and continues to increase. Industry-science linkage is one of key factors for innovation capabilities in the national innovation system. In the past knowledge was created in Government research Institutes and Universities, but enterprise found it difficult to utilize the knowledge because there was no strong connection between GRIs, universities and enterprises. Since China started to reform, industry-science linkage has improved a lot during the last thirty years because of high competition pressure and institutional

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changes. Spin-offs, R&D outsourcing and co-publication are three aspects of industry-science linkage.

Government Research Institutes (GRIs) and Universities are encouraged to set up their spin-offs and commercialize their technology directly. And the spin-off companies provide capital to GRIs and universities which do not have any more budgets from government. Currently, although the size of the spin-off industry is very small, it is very important for high-tech industry in China. Spin-off companies provide Scientists, researchers from GRIs and universities many opportunities to access market knowledge. Tsinghua Science Park is the first national science park. There are more than 400 companies located in the science park. Tsinghua University is the top university in China; it cooperates with nearly a third of 400 companies. Two- thirds of the 400 companies are IT companies, environmental and life science companies. Incubator facilities for start-up firms are also encouraged to locate within parks. Since 2000, the Chinese government continuously supports research and higher education. Developing spin-off companies are one of primary objectives of GRIs and Universities. Therefore:

Proposition 3: Relating closely to universities, and particularly their research laboratories helps to create more innovation. (Link and Siegel, 2007)

All GRIs are not generally within universities. The Chinese government has encouraged closer connection between these institutions and enterprising innovation orientated companies. Traditionally it was normal for institutions and companies to develop separately, which meant a lot of new ideas, were lost to the market. The

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government has become aware of this and is currently encouraging GRI/Company crosspollination of ideas. This must increase innovation. Therefore:

Proposition 4: Relating closely to Research Institutions helps to create more innovation. (Link and Siegel, 2007)

An innovative atmosphere helps innovation development. It should be nurtured inside the company. Companies need to nurture an environment to encourage employees to think in unusual way and creative ways. Both products business and service businesses need to follow standardized routines. Routine business is different from innovation. Companies need to encourage and develop creative ideas. The CEO and executive managers must create an innovative atmosphere for innovation. Employees shares new ideas and new thinking to create a social atmosphere of innovation. And the most important is that the company should not just talk about innovation, but must take action. It needs to build up its innovative culture. A firm‘s innovative culture and atmosphere needs a long time to establish through shared, experienced, and emphasized attitudes, values, goals, objectives and practices.

Innovation needs an innovative environment to encourage value change. Change is very difficult to accept for both employees and companies. Companies need to find new markets, develop new operations and adapt to new societal changes. Encouraging creativity, thinking both inside the box, and outside the box, makes the thinking box bigger, and makes the employees and companies ready to capitalize on innovation opportunities. The purpose of creating an innovative atmosphere is to plant the seed of creativity, create the future of innovation, foster company value

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growth and increase the value of customers and stakeholders. A key objective must be to develop in the JV a social atmosphere that encourages innovation. Therefore:

Proposition 5: Developing a social atmosphere that encourages innovation in a JV brings good results (Fragerberg et al, 2005)

It is the CEO and top management team‘s responsibility to establish strategic planning and a vision including innovation. If the company does not develop systems through its strategic planning that lead to innovative thinking, the company will not succeed in innovation. The strategic plan also needs to be realistic. The management needs to create employees passion and creativity combined with measuring employees‘ satisfaction or financial performance. Therefore:

Proposition 6: Developing a strong strategic planning system with innovation as a focus encourages innovation (Taylor, 1984)

Unless the fundamental objective of a JV includes the development of innovations it is likely that other objectives will dominate. For example the Chinese partner will concentrate on learning the Western technology and the Western partner will attempt to access the large Chinese market or ensure that its manufactured products are made efficiently and at low cost. However if innovation is made a key priority of the JV then performance will be measured by this criterion and in all probability innovative performance will be achieved. For example in high-tech JVs innovation is frequently highlighted as a key measure of success, and as a result Chinese partners learn to improve their innovation processes. Therefore:

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Proposition 7: Having innovation as one of primary objectives of both partners at the outset of the joint venture leads to more innovation (Powell, 1996)

As China begins to develop a knowledge-based economy, the enforcement of intellectual property rights (IPR) becomes increasingly important. This is particularly in telecommunication, pharmaceuticals, automobile where professional bodies and, standards are set up.

 IP rights don’t limit the competition for new technology creation IP rights don‘t limit competition. On the contrary, it prevents the ideas and new inventions being stolen. It also protects the new inventions and new products so that they can get their investment return in the market. Pharmaceuticals, high-tech, IT, medical devices, and green technology are the key industries which need to rely on IP rights. In these industries, usually there are several products competing in the market to try to occupy more market share customers. The competition relies on their most advanced technologies. Competition among these products can push the development of the whole industry.

 IP rights do not drive up the cost of innovation Developing IP right benefits innovation. IP rights provide a more stable and less risky environment for all sectors. And it can help to conduct research, encourage development, commercialize and market their products and new inventions. IP rights can protect entrepreneurs, inventors, and companies to protect their new inventions, achievements and investments. And they can be paid back through profits and put more capitals into further research and development. And IP right also have

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transparency in the patent system. Other inventors can learn from their achievements promote the innovation further development; therefore it helps the whole society achieve progress. If there are no strong IP rights, inventors do not have the incentive to create more innovation, they may just keep their inventions as commercialization secrets and other companies in the industry cannot share the new inventions, it does not help the whole industry development.

 In terms of innovation output, one of the largest differences between domestic and foreign applications is the structure of the patent application. For domestic firms, the majority of their patent applications are utilization model or design, although the number of invention applications has been increasing as well. For foreign applications, the invention application is the main category. The number of invention applications by domestic firms exceeded for the first time their foreign counterparts in 2003. However, the foreign firms still outperformed their Chinese counterparts significantly in terms of the numbers of granted invention patents in the past years.

Among foreign patent applicants, the multinational enterprises from Japan and the U.S. are the most active applicants, while German, Korean and French companies are also applying for a large number of patents in China. The distribution by fields of technology reflects to a large extent the competitive strengths of these multinationals in the Chinese market. Therefore:

Proposition 8: Focusing on developing IP (Intellectual property) leads to more innovation (Granstrand, 2005)

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The research focuses on testing these eight propositions by means of semi- structured interviews. The next three chapters describe the case studies to which the propositions have been applied.

If JV companies are able to score highly on these eight key factors they can be said to have developed strong innovative capabilities. This has been explored with particular focus on the Sino-Western IJVs in this thesis.

4.6. Summary

As background for the development of the sophisticated model of innovation