The paper analyses
the sources of funding accessed by laboratories of foreign MNEs operating in
the UK. The five separate sources of funding are systematically related to four
different roles that such labs are seen to play. The results confirm the view
that decentralised R & D in MNEs now plays significant and carefully defined
roles in the technological and competitive evolution of these enterprises. The
strong position of central group funds is seen to reflect two trends in the
status of decentralised labs. Firstly, to support their willingness to activate
strong local scientific inputs for longer-term and speculative (risky) research
programmes. Secondly, to inculcate an acceptance of individual labs to operate
within interdependent networks of group operations (precompetitive research
or product development).
A key implication of the growth of decentralised R & D in MNEs has been a comparable increase in the extent and diversity of knowledge flows within these companies. Early views of the MNE saw knowledge flow as almost uniquely a matter of many separate and distinct, bilateral and unidirectional, routes from the home-country parent to individual subsidiaries. This provided the basis of the only role then perceived as routinely available for overseas R & D laboratories, in the form of helping to assimilate and operationalise those group technologies on which subsidiaries were essentially dependent. However, as the changing competitive environment imposed increasing strategic diversity on MNEs an important manifestation of this took the form of a notable growth in dispersed R & D, with this playing an enhanced range of roles within not just the application but also the generation of these companies' core technologies. A crucial implication of this was, in turn, the ability of decentralised labs to supply as well as receive technology and, therefore, the growth of multidirectional knowledge flows in MNEs.
In line with this perception of the increased diversity in use and creation of technology in MNEs, the influential typology of subsidiaries derived by Gupta and Govindarajan (1991, 1994) explicitly defined their status according to the extent to which they involve inflows and/or outflows of knowledge. In a similar way recent research has begun to explicitly investigate 'reverse technology transfer' (Hakanson and Nobel, 1998a, 1998b; Yamin, 1995, 1999) and knowledge networking in MNEs (Randoy and Li, 1998; Howells, 1998). In terms of the status of overseas R & D labs in MNEs their net position with respect to knowledge flows can be seen to reflect two factors, their individualism and their interdependence (Papanastassiou and Pearce, 1998).
The more the quality and originality of local scientific inputs allows a R & D laboratory to generate distinctive in-house competences the more it can manifest a position of individualism within the group's technological scope. In principle this individualism could then be exercised autonomously through a local subsidiary (e.g. in a self-contained product development operation) or in a fashion that is still highly dependent (e.g. as one specialised element in a wider networked programme of precompetitive research organised and coordinated by the MNE group). In practice labs can operate with varying degrees of interdependence, in terms of their association with technological activity elsewhere in their MNE group. Thus a lab's degree of individualised competence, and the extent and nature of intra-group interdependency, will define its precise strategic role and determine its position with regard to knowledge transfer. In turn these factors can be expected to be crucially reflected in the sources of funding from which a laboratory operates.
This paper seeks to investigate the relevance of five sources of funding in MNEs' labs in the UK, in the light of the prevalence in their operations of four possible roles. The data derives from a survey of foreign enterprises' R & D units in the UK carried out in 1994. The questionnaire was sent to the 180 R & D units of foreign MNEs in the UK, that could be distinguished from the Longman's Directory of European Research Centres. Replies were received from 48 of these. The respondents include 17 in pharmaceuticals, 9 in industrial chemicals, 11 in electronics and 11 more in miscellaneous other industries. Nineteen had a Japanese parent company, 13 were from the USA and 16 from continental European MNEs.
In the next section we introduce four roles that MNEs' decentralised R & D labs may play and broadly suggest how the positioning of these roles may affect the sources from which their operations are funded. Section three then reviews the degree of presence of five funding sources in these labs' budgets and relates these to the roles that they play. The conclusions of section four suggest the ways in which funding patterns are indicative of quite a precise strategic positioning of decentralised R & D labs in the achievement of wider technological aims of MNE groups.
Roles of laboratories.
Respondents to the survey were asked to evaluate the extent to which their laboratories' activity involved each of four potential roles. The first of these was defined as 'to support UK-based production operations of the MNE by assisting in the adaptation of the products to be produced or processes to be used'. This is clearly the traditional support laboratory (SL1) role, in that its aim is to assist an associated production subsidiary to assimilate, and optimise the effectiveness with which it uses, imported group-level technologies.
Performance of the SL1 role is likely to require the work of highly competent lab personnel, but does not need highly distinctive or original research capabilities. Effective SL1 work will help the associated production subsidiary to operate to the fullest potential of the imported technology, but in no sense seeks to generate new capabilities that go beyond those limits. The SL1 asserts no distinctive individualised capabilities within the MNE group's scope. The production subsidiary will remain essentially dependent on technological progress elsewhere in the group for any substantial future development of its product scope, but how it uses current technologies becomes its own, predominantly independent, responsibility, to which any SL1 unit it possesses makes its contribution. Though the production subsidiary is likely to pay the parent group a royalty for the technologies it imports, any separate effort of localisation through SL1 work is its own independent responsibility. Thus the predominant source of funding for the SL1 role is likely to be from an associated production subsidiary. The SL1 role was reported as its 'only' one by one laboratory (2.1% of respondents), as a 'predominant' one by 11 (22.9%), and a 'secondary' one by 18 (37.5%), whilst another 18 felt it played no part in their activity.
The second role that responding UK-based laboratories were invited to evaluate was described as 'to support non-UK production operations of the MNE by advising on the adaptation of the products to be produced or processes to be used'. The emergence of this version of the support laboratory role (SL2) can be seen as reflecting two particular developments within MNEs' supply networks. One facet of this has been the systematic rationalisation of the product range supplied by individual subsidiaries, as these are moved towards a specialised position in coordinated supply networks. Thus the intensification of competition in the markets for most mature standardised goods has resulted in subsidiaries that once supplied a substantial product range to, mainly, their national host-country market being increasingly required to move to a focus on a more cost-effective supply of only a subset of these goods (but to do so for a wider market space, i.e. mainly Europe in the case of the UK-based subsidiaries). Those products that exit the supply profile of one subsidiary will then become the specialised responsibility of another subsidiary, elsewhere in the same coordinated supply network. This rationalisation process may impart SL2 responsibilities onto UK-based MNE labs in two ways (Pearce and Papanastassiou, 1999, pp. 30-1).
Firstly, a production subsidiary in another part of the network may be expected to take on lead supply responsibility for a good that the UK operation had previously established competence in, but which it is now required to drop from its range. If the new supplier faces initial problems with this inherited responsibility these may be solved by consultation with the UK subsidiary's lab, which can apply its well-rooted experience of the product in question. Mutual support of this SL2 type, between laboratories, in the process of relocation and application of these forms of tacit knowledge of established goods, may play a crucial ad hoc role in the MNE's transition to more integrated supply networks.
The second positioning of SL2 type labs may then occur once the rationalisation process is mostly complete and the supply network is more or less stabilised. At this point an MNE group may decide that many of the network's production sites no longer need the type of (SL1) in-house R & D that securing the responsiveness of a large product range to specific local-market needs could earlier have justified. Instead, with the generation of good communications and increasingly well-honed experience of intra-group networking, it may become possible to use a limited number of high-quality SL2 units to supply the R & D needs of the whole rationalised system (at least as far as the optimally effective supply of existing goods is concerned). Such enhanced SL2 units thus aim to back up a wide constituency of dispersed supply facilities and often, to avoid group politics and accusations of favouritism, may be located independently of any particular production unit (perhaps as a supplementary responsibility of the type of stand-alone precompetitive R & D units that play the fourth role, discussed below).
The other major factor in the strategic evolution of MNEs that may generate a position for the SL2 role, is the emergence of product mandate subsidiaries that take full responsibility for the development of significant new products (rather than merely the supply of established ones, that conditioned the earlier forms of SL activity). A different degree of R & D support is clearly needed to support such subsidiary-level product innovation, and this is obtained through the locally integrated laboratory (LIL) role discussed next. However, once a product is successfully innovated and its production stabilised, it may be that its competitive supply (for some markets at least) is best achieved through other subsidiaries in foreign locations. Helping these new suppliers to assimilate and operationalise the technology in question can be seen as a logical and potentially significant SL2-type responsibility for the mandate subsidiary's laboratory (alongside a continued LIL commitment to further product development operations).
The key definitional difference between the SL1 and SL2 roles is the innate intra-group interdependency through which the latter is expected to operate, by contrast with the containment of the former within the functional scope of a particular subsidiary in order to support its specific operations. The three contexts we have outlined for SL2 behaviour also point to more individualised capabilities (though ultimately still activated only to support the effective application of existing technology). In the first and third of these situations it is knowledge of specific products and processes that makes the laboratory the competitive supplier of precise advice needed elsewhere in the MNE. In the second case a network operating through a wide geographical area is to be serviced by a small number of SL2 units of quite wide ranging scope. Securing the SL role in these circumstances is thus likely to reflect a demonstrated ability to carry out this trouble-shooting function through a flexible initiative that indicates possession of more than routine competences.
The positioning of the SL2 role clearly indicates that, compared to SL1, it is likely to be substantially funded by sources other than a subsidiary with which it is routinely associated on a day-to-day basis. Two possibilities then emerge. Firstly, that the status of the SL2 is sufficiently precisely defined within the MNE's strategic scope and needs that it is substantially funded through a predetermined annual budgetary allocation from the parent company. Secondly, that its role is basically more ad hoc and involves a wide range of occasional and sporadic associations with other parts of the group, each of which provides one off payments for fulfilment of specific tasks. Some supplementary funding from an associated UK production subsidiary could emerge in the budgets of SL2s in two ways, however. In line with one potential positioning of SL2 work, this could occur if the relevant production subsidiary is a successful product development facility and the SL2 is helping subsidiaries in other countries to acquire the capability to supply a good that has been innovated by the associated UK subsidiary. Alternatively a local subsidiary may provide a SL2 with funding to help it sustain a high level of capability in that role, in the hope of sharing in any intra-group credibility earned by its successful operation in providing quality advice to a wide constituency .
The fact that, in terms of the average responses (ARs) reported in Table 1, the SL2 role emerges as the least significant of the four reflects, in a fashion that is
Table 1 Roles of MNE laboratories in the UK
. |
Roles of laboratory (average response)(1) |
|||
. |
SL1 |
SL2 |
LIL |
IIL |
By industry |
. | . | . | . |
Electronics |
2.18 |
1.73 |
2.09 |
1.64 |
Pharmaceuticals |
1.35 |
1.53 |
1.59 |
3.00 |
Chemicals2 |
1.89 |
2.11 |
2.00 |
2.00 |
Other |
2.45 |
2.00 |
2.27 |
1.82 |
Total |
1.90 |
1.79 |
1.94 |
2.23 |
By home country |
. | . | . | |
USA |
1.92 |
1.85 |
2.23 |
2.00 |
Japan |
1.84 |
1.68 |
1.68 |
2.16 |
Europe |
1.94 |
1.88 |
2.00 |
2.44 |
Total |
1.90 |
1.79 |
1.94 |
2.23 |
Roles of laboratories.
SL1 - to support UK-based production operations of the MNE by assisting in the adaptation of the products to be produced or processes to be used.
SL2 - to support non-UK production operations of the MNE by advising on the adaptation of the products to be produced or processes to be used.
LIL - to work with the UK subsidiary's other functions (i.e. management, marketing, engineering, etc.) to develop a distinctive new product that it will produce for its markets.
IIL - to operate independently of any producing subsidiary to carry out basic or applied research (not associated with current producing operations) as part of a programme of precompetitive R & D implemented and coordinated by the MNE group.
Notes:
Includes petrochemicals and petroleum.
compatible with the types of contexts that we have suggested for it above, a mainly secondary, rather than lead, position in laboratories' operations. Thus with just one laboratory rating it as its only role, and only seven more (14.6% of respondents) a predominant one, SL2 activity is notably the rarest at this lead level of prominence. However, the 21 (43.8%) respondents that evaluated SL2 as a secondary part of their activity was clearly the highest.
The third possible role for MNE labs is the one we have already referred to as that of a locally integrated laboratory (LIL), which was defined for survey respondents as 'to work with the UK subsidiary's other functions (i.e., management, marketing, engineering, etc.) to develop a distinctive new product that it will produce for its markets'. The LIL is thus a key element in a nexus of creative functions that helps to secure a product mandate (PM) for its subsidiary. This mandate then provides parent HQ validation for a product development process operationalised at the subsidiary level. In terms of both the wider subsidiary scope and responsibilities and of the level of competence expected of an LIL, this process represents a major manifestation of the benefits MNEs' now expect to get from the generation and activation of individualism in their dispersed operations. How the PM/LIL operates in terms of intra-group interdependencies is open to possible variation however.
Though the early (mainly Canadian) literature on PMs clearly demonstrated a range of quite idiosyncratic origins for such subsidiaries, we have suggested two more systematic scenarios for the emergence of PM scope in subsidiaries (Pearce, 1999b, 128-30) and the concomitant product development commitments of LILs (Pearce and Papanastassiou, 1999, 33-4). In the first the process is initially very self-contained at the subsidiary level (avoidance of substantial interdependency). The new product concept is itself initiated by the subsidiary, perhaps as the result of an original perception from its marketing unit or to build on a new technology that is derived in its own laboratory or accessed through a collaborative arrangement with a local university (or other independent) lab. As pursuit of a new PM is usually seen as quite an aggressive act within the competitive network of MNE subsidiaries, initial development of the prospective idea may be contained within the subsidiary in a quite covert fashion. Once its potentials are clarified, however, validation (the formal mandate) will be sought from the parent company. At this stage the LIL may begin to liaise with the central R & D unit of the group in order to sharpen (refine or redefine) some elements of the new good's technology from the wider scope of the MNE's core technologies. The main funding for the LIL's participation in this form of product development is likely to be the associated subsidiary (especially in the more exploratory and pre-mandate stage), though supplementary finance might become available from the parent company in the later more interdependent stages. The latter would certainly be true if the local technologies being generated by the LIL are seen to have potential value to aspects of the group's operations beyond the specified and mandated product development process.
The alternative procedure involves group-level interdependency from its initiation and has been described elsewhere as positioning in a global innovation strategy (Pearce and Papanastassiou, 1996; Pearce, 1997). Here the new product concept emerges at the group level. Where tastes and other differentiating elements make it appropriate, the MNE may then wish to see the new product and/or its associated production process taking different forms for different environments and use local PM/LIL operations to secure this. For example, the UK LIL of a US or Japanese MNE may have responsibility for securing the European variant (significantly different from other variants in North America and Asia) of the new product concept. The LIL will here be responsible for acquiring the underlying technology of the new good from central R & D and will then work with other functions in the product mandate subsidiary (engineering, marketing, management) to secure its most effective local implementation. Though the substantial benefits that the subsidiary will obtain from producing and selling the new good may involve it to some degree in the financing of the LIL, the intra-group positioning of the operation is likely to secure substantial parent funding (especially in the earlier stages of the localisation of the new technology).
Though none of the responding laboratories felt that they only played the LIL role, 17 (35.4%) rated it a predominant one and 11 (22.9%) more considered that it took a secondary position in their operations.
The final lab role offered for consideration was defined as 'to operate independently of any production subsidiary to carry out basic or applied research (not associated with current producing operations) as part of a programme of precompetitive R & D implemented and coordinated by the MNE group'. Thus this internationally interdependent laboratory (IIL) role avoids any immediate systematic integration with other functions (notably those related to the competitiveness of current products and technologies) and instead operates interdependently with similar labs in other countries to pursue the regeneration of the group's core technologies. Here MNEs are seen as being aware of a need to regenerate and extend their core technologies in order to secure the basis for subsequent programmes of product innovation that can be sustained into the longer term. However, the range of scientific disciplines that are perceived as needing to be accessed in order to build this new body of regenerative technological competence is widening for many of the dynamic and innovation oriented industries. Furthermore, the most distinctive and important competences in these separate scientific disciplines are becoming dispersed over a widening range of countries (i.e. individual countries now offer a limited range of leading edge competences in selected areas of research). Therefore in order to cover the spectrum of basic and applied research inputs that are needed to assemble a coherent precompetitive research programme that can incorporate all likely sources of technology relevant to building the knowledge-basis for future major innovations, MNEs operate through a network of IILs. Each of these focuses on precompetitive research in disciplines that reflect distinctive strengths of the host-country science base and which are expected to have a potential to contribute to the long-term technological development of the MNE.
Since IILs build strong individualised research scopes out of the local science base, but aiming to support coherent and interdependent programmes of investigation articulated and coordinated at the group level, the parent MNE is expected to be their main source of funding. For institutional and/or accounting reasons other parts of the MNE group may assist in funding IILs, but this would not be with any logical expectation of direct and immediate benefits from individual pieces of work carried out in such a lab. Local (i.e. here UK) producing subsidiaries could provide funding for an IIL, for reasons not inherent to these labs' natural mode of behaviour. Firstly, a subsidiary might offer funding to a stand-alone IIL in order to buy-into the prestige of a world class research operation. Secondly, such a production subsidiary might actually want to acquire (in a manner either authorised by the parent or activated in a subversive and covert fashion) a selection of the IIL's current results to support their own product development operations (i.e. for assimilation and use by their own LIL).
Sources of funding
Respondents to the survey of laboratories were asked to evaluate the degree of prominence in their budgets of five potential sources of funding. The relevance of these sources of financing are summarised (in terms of average responses) in Table 2. Regression tests were run with each of the five sources of funding as dependent variables. These regressions included dummy variables for the MNE's industry (with the miscellaneous 'other' group of labs serving as the omitted industry) and for its home country (Europe serving as the omitted source location) and with the lab's degree of commitment to each of the four strategic roles (outlined in the previous section) as independent variables. The regression results are reported in Table 3.
The first source of finance evaluated was funds from an associated UK producing subsidiary (SUBSID). We hypothesised in the previous section that UK subsidiaries were likely to play a very significant role in funding SL1 units (whose role is to help these to apply extant group technologies to their own competitive contexts), but that the alternative positioning of SL2 (to provide similar types of advice and assistance to non-UK producing units) would preclude extensive funding from local subsidiaries. Since we have seen that LILs are motivated to help the product developing subsidiaries that they operate within to enhance their profitability and, crucially, their intra-group status, these subsidiaries will be expected to provide some of the funding for these labs.
Table 2: Sources of funding for MNE laboratories in the UK
. |
Source of funding (Average response)(1) |
||||
. |
SUBSID |
PARENT |
GROUP |
UK |
EU |
By industry |
.
|
.
|
.
|
.
|
.
|
Electronics |
2.20 |
2.18 |
1.82 |
1.30 |
1.20 |
Pharmaceuticals |
1.69 |
3.18 |
1.25 |
1.06 |
1.00 |
Chemicals(2) |
1.89 |
2.33 |
1.89 |
1.11 |
1.11 |
Other |
2.00 |
2.20 |
1.20 |
1.10 |
1.10 |
Total |
1.91 |
2.53 |
1.50 |
1.13 |
1.09 |
By home country |
.
|
.
|
.
|
.
|
.
|
USA |
2.18 |
2.42 |
1.33 |
1.27 |
1.18 |
Japan |
1.74 |
2.63 |
1.58 |
1.05 |
1.05 |
Europe |
1.93 |
2.50 |
1.53 |
1.13 |
1.07 |
Total |
1.91 |
2.53 |
1.50 |
1.13 |
1.09 |
By laboratory type(3) |
.
|
.
|
.
|
.
|
.
|
SL1 |
2.45 |
2.18 |
1.45 |
1.00 |
1.00 |
SL2 |
1.00 |
3.62 |
1.62 |
1.00 |
1.00 |
LIL |
1.93 |
2.13 |
1.33 |
1.13 |
1.13 |
IIL |
1.71 |
2.68 |
1.56 |
1.12 |
1.06 |
Sources of funding
SUBSID - funds from an associated UK producing subsidiary.
PARENT - funds from the parent company of the MNE group.
GROUP - funds from elsewhere in the group.
UK - funds from UK government.
EU - funds from EU budget.
Notes:
Table 3: Regressions with sources of laboratory funding as dependent variable
. |
Dependant variable (source of funding) |
||||
. |
SUBSID |
PARENT |
GROUP |
UK |
EU |
Constant |
2.377* |
1.019 |
1.520* |
1.266*** |
1.124*** |
Electronics |
0.057 |
-0.013 |
0.152* |
0.088** |
0.040 |
Pharmaceuticals |
0.028 |
0.148 |
-0.001 |
-0.033 |
-0.040 |
Chemicals |
0.062 |
0.011 |
0.202* |
-0.020 |
-0.009 |
USA |
0.183 |
-0.096 |
-0.154 |
0.204 |
0.146 |
Japan |
-0.156 |
0.181 |
-0.029 |
-0.097 |
-0.027 |
SL11 |
0.415 |
-0.192 |
-0.096 |
-0.097 |
-0.076 |
SL2 |
-0.627** |
0.428* |
0.147 |
-0.004 |
-0.031 |
LIL |
0.131 |
0.164 |
-0.112 |
0.005 |
0.057 |
IIL |
-0.193 |
0.182 |
-0.038 |
0.032 |
0.036 |
R2 |
0.323 |
0.212 |
0.223 |
0.290 |
0.222 |
F |
1.86* |
1.10 |
1.15 |
1.59 |
1.11 |
N |
45 |
47 |
46 |
45 |
45 |
*** - significant at 1% ** - significant at 5% * - significant at 1%
n - number of observations.
The subsidiaries will usually be keen to do so in order to stake a claim to the individualised competences generated through the LIL participation. However, in ways that we have seen can be either ad hoc or very systematic, the innovations to which LILs contribute extend overall group-level competitiveness and we have hypothesised some participation of parent funding. We have suggested that the nature of pure-IIL work provides no logical reason for substantial support from a local production subsidiary.
The reported AR for SUBSID, of 1.71, makes it the second most prominent source of funding for UK-based MNE labs. This, however, seems to reflect a rather dichotomous status. Thus 57.8% of labs that evaluated SUBSID said it was no part of their budgets, but where accessed it then tended to be very significant with 15.6% considering it their only source and 17.8% a major one (so that only 21.0% of those that accessed SUBSID felt it was only a supporting source of funds). This may confirm the expectation that use of local subsidiary finance is quite precisely related to the strategic positioning of labs. As hypothesised this emerges most decisively for the SL roles. Here SL1 units are the most strongly supported by SUBSID (the only one of the four roles for which this source of funds records the highest AR) and the relationship between SUBSID and SL1 in the regressions (Table 3) is clearly positively signed (though short of statistical significance). No SL2 units recorded any access to SUBSID and the regression relationship is significantly negative as predicted. SUBSID does play the expected substantial, though by no means dominant, role in funding LILs' operations, but the regression result is only weakly positive. Though the regression relationship between SUBSID and IIL is weakly negatively signed (as predicted) the AR (Table 2) is by no means negligible, indicating some participation of UK production subsidiaries in funding the precompetitive research in those labs. This, we have hypothesised, may reflect a prestige-related wish to 'adopt' such a laboratory (with which there will be no operative association) or indicate some acquisition, for local development, of the (essentially more group-oriented) results of these units.
Laboratories in electronics MNEs are the strongest users of SUBSID, in terms of the ARs reported in Table 2. This clearly reflects the particularly localised orientation of these units, indicated by the notable strength of the SL1 and LIL roles in their operations (Table 1). Once these roles are controlled for in the regression (Table 3) the dummy for electronics in the SUBSID test is only very weakly positive. US MNEs' labs are the strongest users of SUBSID (though only weakly positive in the regression), which may be indicative of a strong orientation of their UK facilities to secure the effective commercial operationalisation, for European markets, of existing or new technology (SL1 adaptation and, most notably, LIL product development).
Next, responding labs were asked to evaluate 'funds from the parent company of the MNE group' (PARENT) as part of their budgets. Since we have perceived the SL1 role as being one that is normally implemented at the discretion of an associated production subsidiary, when it considers that it needs such support to continue to effectively assimilate and activate existing technologies, the likely participation of parent funding is likely to be limited. The most plausible exception is likely to be during the establishment of a new subsidiary, when SL1 work might be vital to building the foundations of its successful initial positioning but cannot be funded in-house until adequate profitability is generated. By contrast we noted in the previous section that MNE parent funds are one of the two most logical inputs to the budgets of SL2 units. Though LILs directly support product development in a particular subsidiary we have previously noted the strong potentials for their success in this role to also provide significant spillover benefits to overall group competitiveness. Thus we have predicted some degree of parent funding for such labs. However, the need of IILs to generate significant individualised competences but then to exercise them in a decisively interdependent way in pursuit of group-defined objectives, means these are the type of labs likely to be most strongly dependent on parent MNE funding.
Funding from the MNE emerged as by far the most pervasive source available to MNE labs in the UK. Thus 25.5% of respondents who evaluated PARENT said it was their only source of funding, another 29.8% rated it a major source and 17.0% more a secondary one. PARENT was therefore the only one of the sources available to over half the labs, with only 27.7% not making any use of it. PARENT emerges most decisively as a source of funding for SL2 labs, for which it is overwhelmingly the dominant budgetary input (Table 2). The significant positive relationship between SL2 and PARENT in the regression (Table 3) mirrors the negative one between SL2 and SUBSID. This is clearly in line with the fact that SL work supports other (non-UK) subsidiaries of the MNE, but also indicates that labs playing this role usually do so in a way that is systematically recognised (and therefore funded) centrally by the parent group, rather than representing a series of mainly ad hoc transactions with other parts of the group.
As predicted PARENT emerges as clearly the leading source of funding for IILs, though in the regression the positive relationship is only a very weak one. Again in line with previous discussion PARENT clearly shares with SUBSID the main responsibility for funding LIL operations, though (as for SUBSID) the positive relationship in the regression is very weak. Perhaps the most surprising result here is the relatively prominent position of PARENT in funding SL1 facilities (though the regression does still produce a, very weak, negative sign). We suggested earlier that this could derive from a need for such external funding to help set up an SL to, in turn, help its new associated production subsidiary to itself begin effective operations around use of established technologies of the MNE group. We will note below that this may be especially associated with the recent expansion of Japanese subsidiaries and laboratories in the UK.
Pharmaceuticals emerges as emphatically the industry where UK-based labs tended to depend most strongly on PARENT and, at the same time, were least reliant on SUBSID. This clearly reflects the strategic positioning of pharmaceutical labs (Table 1), which are vastly the most likely to be IILs and equally the least likely to take any of the other three forms (though in the regression for PARENT the pharmaceutical dummy is still quite strongly positive after controlling for lab roles).
Japanese MNEs' laboratories in the UK are somewhat the most likely to use sources of parent funding, a position emphasised by their complementary status as the least likely to have access to local subsidiary funds. As already noted above this may mainly reflect the newness of the Japanese labs and, indeed, of their production operations in Europe. Thus PARENT may be particularly relevant in the early life of these Japanese facilities, partly because their initial role is the transfer of established (and so far centrally-controlled) technology into the new environment and partly because the UK-based production subsidiaries do not yet have either the independent financial scope or the in-house creative momentum to support labs properly. At the early stage it is the home-country HQs in Japanese MNEs that seem to drive, and therefore to fund, decentralised R & D (even though this is mainly related to local application of existing technology) despite its positioning within UK-based production subsidiaries. Subsequently the subsidiaries are likely to broaden their laboratories' aims and make funding them more their own responsibility.
The last intra-MNE source of finance that labs were asked to evaluate was 'funds from elsewhere in the MNE group' (GROUP). The strongest hypothesis that we have derived with regard to the origins of such funding is to pay for SL2-type support. We also suggested that IILs might receive some funding of this type, simply because of expectation that ultimately the benefits of their work can diffuse throughout the group. Whilst SL1 provides no logical reason for such funding we hypothesise that it is least likely for LILs, since the latter work explicitly enables one subsidiary to assert its individualised competitiveness against 'rival' subsidiaries of the group in seeking the product development role. Overall 63.0% of responding labs considered that none of their budget derived from this source, and only 10.9% rated it as more than a supporting one.
As Table 2 shows SL2 units are modestly the most likely to receive funding of this type, but much less than from PARENT. This again underpins the view of SL2 as a centrally-authorised and quite systematically-interdependent form of laboratory positioning. In the regression of GROUP SL2 is the only positively signed laboratory role, though well short of significance. IIL units are also slightly above average in terms of GROUP finance and SL1 perhaps stronger than logically anticipated. As predicted GROUP is weakest in terms of finance for LILs. Chemicals and electronics labs stand out in terms of this type of funding from sister subsidiaries. For chemicals this is clearly compatible with the strong role for SL2 in this industry (though the dummy variable is still positive in the regression after controlling for role). For electronics the relative strength of GROUP is more enigmatic since SL1 and LIL are the dominant lab roles.
Finally laboratories were asked to evaluate two sources of funding from outside of the group, in the form of 'funds from UK government' (UK) and 'funds from EU budget' (EU). These types of funding would be most likely to be available where spillovers beneficial to the local economy could be most realistically expected. These could occur in the form of new types of scientific knowledge (from precompetitive IIL work) or benefits to competitiveness diffusing into the local economy (e.g. to local input suppliers or users, or to local consumers) from successful product development (in LIL supported mandate subsidiaries). The relevance of such funds was never reported as more than a secondary source, and for both the vast majority of respondents (86.7% for UK and 91.1% for EU) said they were not accessed. As hypothesised the very sporadic use of these sources that was reported always related to either LIL or IIL facilities.
Conclusions.
The strongest and most pervasive source of funding for MNEs' R & D laboratories in the UK emerged as being from the parent company of the group. This is considered as being powerfully indicative of the manner in which such decentralised operations are now integral with the ways in which these companies seek to apply existing core technologies and to regenerate and broaden the scope of these crucial knowledge competences. Thus our detailed analysis has been based on the conceptualisation (through a four part typology of labs) of the refocusing of decentralised R & D away from the short-term objective of assisting particular subsidiaries to apply existing technologies to their specific competitive situation, towards positions in the more sustained technological and competitive development of the MNE group.
One aspect of this repositioning is that it now usually involves labs in the generation of specific individualised capacities that are built out of particular areas of distinctive knowledge competence available in the local economy. Where such work is aimed at expanding the knowledge base of longer-term competitiveness (rather than applying the existing base more effectively locally) there is, however, an innate riskiness involved. When such an R & D unit operates within a manufacturing subsidiary (as an LIL) that production unit it likely to also be competing for status within its group (as well as for final markets) through cost effective (directly profitable) supply. Unilateral subsidiary-level funding (i.e. exclusive local bearing of the risk) of the more speculative aspects of the generation of individualised competences cannot be expected. Where MNE groups understand the benefits of decentralised knowledge generation and product development they also accept the need for significant central financial participation, and therefore of centralised strategic validation, as a facilitating and motivating sharing in the perceived risk of coopting potentially valuable but notably specialised dispersed capacities.
The second crucial implication of the generation of specialised scopes within MNEs' labs is that this is expected to provide substantial externalities, in the form of systematic spillover group-level benefits. However decisively a lab focuses specific local scientific attributes on a particular problem the ultimate expectation is that it does not aim to fully coopt the results to a distinct and isolated competitive context, but instead seeks to secure all available synergistic potentials with other group activities. This is most obviously the case with the systematic interdependency of the IIL type of precompetitive work. However, a comparable openness in the product development work of LILs also needs to be inculcated. Not only may the results of LILs have alternative applications elsewhere in the MNE but introverted isolationism in such units can damage their own success and the coherent evolution of group competitiveness. Just as LILs' work can provide positive spillovers to other elements of group technological progress, their own activity may benefit from supportive imports of other facets of group knowledge. Even if a LIL-supported subsidiary does make substantial self-contained product development progress this may ultimately distort the group's technological evolution (through lack of supportive complementarities) and be perceived as an inappropriate and disruptive act of competitive aggression within the MNE's strategic overall development. Once again central financial participation in the funding of laboratories can be seen as crucial in developing the necessary interdependencies between decentralised R & D units, and in securing the cohesive growth of intra-group knowledge flows.
The contemporary MNE is increasingly concerned with the sustained evolution of its technological trajectory (Pearce, 1999b). This technological trajectory needs to be continually enriched from a range of scientific sources that are operationalised through decentralised R & D units. But this can only be done in a cohesive and coherent fashion if these dispersed labs can be induced to open themselves fully to an appropriate range of interdependencies and intra-group knowledge flows. Central funding, alongside a range of supporting sources, seems to play a crucial role in securing these strategic aims of decentralised R & D.
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