Destination Unknown

Based on research by Haiyang Li, R. Michael Holmes Jr., Michael A. Hitt, Kaitlyn DeGhetto and Trey Sutton

• Setting up foreign research and development centers can create lucrative new markets.
• But the risks are real: When establishing a new R&D center, location matters.
• Multinational corporations that set up shop overseas must be vigilant about their intellectual property.

Setting up a research and development center abroad can be a brilliant move. Thriving foreign R&D hubs can lead to growth, new technologies and hungry new markets. Foreign R&D also comes with plenty of risks: Choose the wrong spot and your multinational firm could spend more than it makes. How should corporations choose where to go?

In a paper, Rice Business professor Haiyang Li joined a team of colleagues to analyze the ups and downs of foreign R&D. While the study focused on China, they noted that their findings could apply to multinationals considering other locales.

To conduct the study, Li and his team studied data from 164 multinational corporations between 1998-2012. The researchers focused on publicly-traded U.S. corporations, because public companies offered more accessible data and because more U.S. corporations have R&D centers in China than do any other countries.

Because moving corporate R&D to other countries is an established trend, the data clearly showed its advantages. The main perk: a chance to tap into the new country’s resources, including its people, materials and culture. In China, the enormous population combined with an explosion in higher education has created especially fertile ground for R&D staffing — even though hundreds of multinationals have already moved in. Cisco Systems is one such business: Its R&D facility in Shanghai now employs 100 Chinese telecommunications engineers.

Access to material resources and an understanding of local culture both help immensely — first in the early R&D phase and then in development and marketing of new products. This strategy worked well for Caterpillar, which used its China-based R&D center to help establish a Chinese market for their heavy machinery. Establishing foreign R&D centers also helps firms tap into wider global markets. Opening a research center in China, for instance, is more than just a push into that market, the researchers wrote: It can be part of a larger, global strategy.

While foreign R&D centers are by now a longstanding trend, deciding when and where to set them up has been surprisingly haphazard, the researchers wrote. Recent history shows that choosing well requires weighing a daunting array of economic, political and cultural factors.

So where does a shrewd manager start? From an economic perspective, the researchers advised, prioritize a host country with strong growth indicators — especially if your company might enter markets in that country. From a political angle, look for countries with proven, long-term political stability. Finally, you’ll need sophisticated information about the economic and political realities in different parts of a country. In a nation as vast as China, for example, choosing the right region for your R&D center is as almost as consequential as choosing the right country.

A less tangible, but enormously important, consideration is the role of intellectual property or IP. Since a company’s IP is its lifeblood, it’s vital that its host country provide real, enforceable legal protections. China in particular is notorious for shoddy IP protections, leading to rampant bootlegging and other forms of idea theft. While new laws theoretically protect intellectual property, companies should still seek assurance that these laws would be enforced. 

Last on the multinational to-do list: take logistical and cultural challenges seriously. For firms based in the United States, moving people and materials around the world needs careful cost-benefit calculations. And that’s only half of the equation. To succeed in a foreign culture, multinationals then need to fully research, understand, and honor the new host culture.

Despite all these challenges, and the very real cost when companies fail to meet them, globalized R&D is booming. To help companies avoid mistakes, Li and his colleagues wrote, future researchers need to pinpoint exactly when, where and for whom global R&D really works. There’s clearly a market for such research. Whether measured in airline miles, shipping containers or even financial ledgers, multinationals are clearly finding overseas R&D worth the risks.

Haiyang Li is a professor of strategic management and innovation at the Jones Graduate School of Business at Rice University.

To learn more, please see: Holmes Jr., R., Li, H., Hitt, M., DeGhetto, K., Sutton, T. (2016). The Effects of Location and MNC Attributes on MNCs' Establishment of Foreign R&D Centers: Evidence from China. Long Range Planning, 49, 594-613.