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If you believe that the most successful technology-led companies will be those who make best use of all the resources at their disposal, then it’s obviously important where they locate their research facilities. Choose well and the research process will be infused with talent and ideas, and the innovation process will be able to access new partnerships and make efficient use of the available support measures. Choose badly and it’ll just be another building of offshore employees doing what headquarters says. So how do you decide where to put your next R&D site?
There are two main forces at work in decisions about locating an R&D facility. One is a company’s desire to access new skills and markets. The other is the global competition between countries, regions and even individual science parks to attract such investments. Understanding the interaction between these forces is the key to making a successful choice.
R&D and - for the clearer-thinking administrators - innovation, are now recognised as so important to economic well-being that many countries offer incentives, usually including tax breaks, to attract overseas investment in them. But do these measures actually stimulate better results, or have they become part of the price of attracting inward investment, a form of corporate welfare all must pay in order to be considered?
Jerry Sheehan has studied this issue in his role as a principal administrator in the Department for Science, Technology and Industry at the Organisation for Economic Cooperation and Development (OECD). He has his doubts.
“There are no tax incentives in Finland, despite it coming out well in the list of innovative countries,” he said. “Some countries have even withdrawn their R&D tax incentives.”
But he does see a link between R&D spending and national economic productivity, and suggests there may be a chain of causal relationships that links R&D tax breaks to economic improvement.
Governments struggle with structuring R&D incentives for best effect. One key issue is defining what is acceptable R&D spending. Another is deciding whether to give tax breaks for all R&D spending, or for the extra spending the incentive makes possible. Governments may want to target small companies, those with a track record of working with academia, or of successfully coupling R&D to innovation.
Some countries provide tax credits against taxes owed, while others offer allowances that cut a company’s taxable earnings. Most countries handle tax credits through the corporate tax system but The Netherlands does it by reducing monthly payroll taxes, a simple and popular approach.
Making these decisions, administering the resultant schemes and monitoring their output is a headache for governments, so why do they persist in using them, rather than just giving the companies money? Sheehan says the reason is that tax incentives can be simple, low cost and universal. They also let companies decide their research agendas, rather than expecting governments to pick winners. Governments hope that they will attract global R&D investments, although Sheehan believes that is a very small effect.
So are they effective?
“It’s hard to know because we don’t know much about the costs and about what comes out of research,” said Sheehan. “And it is often hard for a company to know what it did with a tax incentive.”
However, various studies have shown some linkage. One study says that Canada gains $1.38 in additional R&D spending for each dollar of lost tax revenue; another shows that the Netherlands gains €1.02 in the short term, and €1.10 in the longer term, for each lost tax euro. Across the OECD, each 1% decrease in the cost of R&D leads to a 0.1% gain in R&D over the short term, and a 1% gain in the long term. Sheehan says an EC study shows one other key fact: R&D tax credits don’t persuade companies to start doing R&D.
Dr Martin Navratil, chairman and managing director of Czech chemicals company SYNPO, said: “You don’t do more R&D because of tax incentives, but you can afford to do more R&D with the same budget.”
Structuring tax incentives to produce particular behaviours is also difficult.
Dr Claude Jablon, senior vice president, scientific development at Total, says that France caps the amount that can be clawed back under its incentive schemes, which makes them relatively more attractive to smaller companies. Prof Dr Dietmar Theis, head of strategic marketing cooperation and media for Siemens Corporate Technology, says the overall complexity of tax regimes means that direct funding is more effective.
What else influences a company’s choice of where to put its next R&D facility?
Dr Jerry Thursby, professor and chair of the economics department at Emory University, and Dr Marie Thursby, who holds the Hal and John Smith chair
in Georgia Institute of Technology’s College of Management, have jointly researched the issue.
They found that companies that are currently establishing R&D facilities outside their home countries mainly do so to expand. Cost reduction is a side benefit. Almost 70% of companies that put R&D into developing economies do so to be close to a research university. There, they care much more about the growth opportunities and the availability of high-quality R&D staff than they do about costs: “It’s not tax breaks and it isn’t cost – it’s a bunch of things,” said Dr Jerry Thursby.
Intellectual property (IP) protection is also important, with companies trying to run consistent IP strategies worldwide, whether their offshore sites are in the developed or developing world. There is one key difference though: “The important IP is developed in the home country – the good stuff stays home.”
There are other factors that can drive the choice of location, some more subtle than others. One of the most important is the local culture, particularly its attitude to the value of R&D, and to turning such work into valuable innovation. Some cultures still value science but disdain commerce, making linking the two through innovative activities difficult.
Finland is widely respected as a model innovation economy, spending almost 4% of GDP on R&D and not being shy to use the resultant breakthroughs to fuel value-adding innovation.
“In Finland the average person thinks it’s good to invest in R&D and innovation,” said Erkki Leppävuori, president of VTT, the Finnish contract research organisation.
VTT is part of the Ministry of Trade and Industry, employing 2700 at 45 knowledge centres. It receives less than a third of its €233m income from the government “so it means we’re business minded and encourages collaboration with industry”.
Leppävuori says Finland is good at innovation for three reasons. There’s strong investment in R&D, a high-quality education system, and strong coupling between the innovative private companies and academia and public research organisations, supported by good interactions with the political decision makers.
Finland’s culture also plays a role in its enthusiasm for innovation, according to Leppävuori. Its Lutheran roots give its people a serious outlook and a commitment to fulfilling their promises that makes for a valuable work ethic. Finland’s harsh history and climate also play a part. The Nokia phenomenon, in which a gumboot maker ended up a global force in mobile phones, also provides a powerful demonstration of the value of innovation. And Finland is a small country, making it easier to adjust national attitudes.
“Finland is not a country, it is a club,” Leppävuori said. This makes it easy to take care of business, but it can have its downside. “Our population is too homogenous to create innovation.”
Like Finland, Ireland has had to take concerted action to stimulate its economy after many years of decline. Ireland’s population slumped from 8.6m in the late nineteenth century to 2.6m in 1964, because of mass emigration. Ireland’s response was to decide, in 1958, that attracting foreign direct investment would be vital to its recovery strategy. In 1967 Ireland made secondary education free for everyone from ages 12 to 18, and in the early 1970s it joined the European Union. By the mid 1980s Ireland’s economy featured a lot of manufacturing work, but little of the R&D or sales work that usually book-ends it. By1987, it was losing 50 000 people a year abroad in search of work, the equivalent of its annual school-leaving population.
The response was a national agreement to create employment and improve competitiveness. This was followed in the late 1990s by a technology foresight exercise. By the turn of the millennium Ireland was being described as a Celtic Tiger economy, with annual growth of 3 to 4%.
“What galvanised Ireland was a sense of crisis and a common purpose,” said Terry Landers, head of corporate affairs for Microsoft Ireland and former chief technology officer of Ericsson Ireland. “The challenge now is, having enjoyed a relatively long period of contentment, perhaps there is no longer a shared sense of crisis.”
Following the dotcom bubble, which knocked growth, in 2003 Ireland cut its corporate tax rate to 12.5% to restimulate the economy. By 2004 growth was back up to 6%, and the target for 2006 is 6% growth, 4% unemployment and 2% inflation.
In 2005 Ireland created 100 000 additional jobs. Its population is now 4m, thanks to massive immigration that saw 110 000 people move to Ireland since May 2005. Ireland has doubled its workforce, to 2m, in 20 years. It had also managed to attract 1200 foreign direct investments, half of them from America, in fields including bio/pharmaceuticals and information and communications technology (ICT).
The Irish government has taken a threefold approach to sustaining its research base, building its academic base, pushing for greater R&D within both home-grown and foreign companies, and striving for increased connections between them.
There are cultural issues at work here, too.
“We’ve heard about the Finland club – perhaps our equivalent is the Irish pub,” said Landers. “It’s about conviviality, where people can come and get together, which I think is a cultural feature. Those who want to replicate this model may find it won’t necessarily work for them.”
Although Ireland is now seeing the benefits of a plan put in place almost half a century ago, it may become a victim of its own success. Foreign direct investment is slowing and EC rules on state aid are changing, in part because Ireland has done “too well”, according to Landers. There are skills shortage too, with 10 000 open vacancies in ICT. It is also hard to keep hold of skilled people: many immigrants go to Ireland to work for American companies, in the hope of then moving to the US.
Minimum wages have risen, to €9 per hour, which is making it less attractive to do low-added-value work in Ireland. The response, according to Landers, is to encourage companies to move their activities in Ireland up a ‘staircase’ of increasing intellectual input and strategic importance.
“As the cost base of the country rises it is imperative you rise up this staircase. What you are working towards is a strategic pivot or apex.”
He says Ireland has the agility to move quickly to preserve its technology economy.
“In a way the country behaves like an SME – through its speed of response, adaptability, insight, and being able to move on things fast.”
Regional authorities are competing to attract talent as hard as some countries do. The question, according to Jane Davies, CEO of Manchester Science Park, is: “Once you’ve chosen your country, how do you choose where to be within it?”
Her science park exists on four sites in this northern English city, once a key part of the global cotton trade. As that trade moved east, Manchester’s economy slumped. Davies says Manchester is now adding £29bn less value per year to the national economy than it would, if its economic performance matched the UK average. But she believes Manchester has the scale to make a difference to the national economy, pointing to the region’s airport, road and rail links, its four universities and the 100 000 students who study at them.
“We have attracted various inward investments because of our labour pool,” she said.
Davies says the growth in the Manchester economy over the past five to eight years has stemmed from the private sector, particularly in biomedical and healthcare; ICT; the cultural and creative industries; and the financial and professional service sector.
“You can’t build your knowledge economy without financial and professional services,” she said. “People are now beginning to realise that you don’t have to go to London to get the skills to do the deals.”
Davies defines a science park as an organisation managed by professionals with the primary aim of increasing the wealth of its community, by encouraging innovation and the competitiveness of its associated businesses and knowledge based institutions. The well-run science park, then, can be a self-priming pump for the local economy.
“In the UK, the property business is a very good means to an end,” she said. “You can make your money from the property and then spend it on contributing to economic development and building your knowledge economy.
“A lot of regional development agencies in the UK have set up science parks to support economic development. They buy a brown-field site, go into partnership with a property company and call it a science park. But I think the jury is out on how successful those will be in terms of supporting knowledge transfer and economic development, unless you have got around them the whole regeneration package of social regeneration, of infrastructure development, of residential regeneration.”
The first Manchester Science Park site was in one of the city’s most deprived areas, and was intended as an economic development tool. “We have been part of the regeneration of that area and part of the commercial focus for activities, while the regeneration company did all the other things. It didn’t really happen for us until we had all the surrounding processes going on.”
What do the various stakeholders get out of backing a science park? Davies says the city gets employment, economic activity, and a strong sense of corporate social responsibility. The universities get a home for spin-outs and jobs for their graduates, while the tenants get the opportunity to network and any structured support the park offers. For the commercial investors, things may be even more attractive:
Davies wants to integrate more activities on to her campus, perhaps putting business incubators amongst, or even within, the science buildings. One example of how this idea might develop is One Central Park, a new building on Manchester Science Park which, Davies claims, “has everything a 16-year -old would need to move from playing computer games to running a company that writes them”. This includes facilities for further and higher education, training and enterprise development.
Davies’ argument is that the more successful good science parks will be able to demonstrate that they are closely integrated into their local community and economy, as well as having access to physical space and intellectual talent.
Some science parks become part of successful clusters of expertise, as has happened in Sophia Antipolis in the south of France. According to Laurent Londeix, head of the BIZZ/DIAM Research Laboratory for France Télécom R&D, and president of Telecom Valley, Sophia Antipolis is Europe’s leading science park, with 1276 companies, of which 148 have some foreign investment. The park supports over 26 000 jobs, of which around 4000 are in R&D.
The park hosts SMEs and large multinationals, public research organisations, higher education and professional associations. They focus on telecommunications, ICT, life sciences and fine chemicals. France Télécom has 100 people working at a facility on the park, partly because of the local telecoms expertise and partly because INRIA and EUROCOM, two key public telecoms research organisations, have facilities there.
The park’s telecoms focus is reflected in the establishment of Telecom Valley, a non-profit business association of 80 companies specialising in ICT. It exists to promote collaboration and to share knowledge among its members. It has also helped form the underpinnings of a French government effort to create a world-class cluster of organisations to work on secure communications solutions. That effort is backed by tax incentives, public subsidies and reduced employee taxes for those involved.
VTT, the Finnish organisation that started in 1942 as a technology provider, has recently been reassessing its structure and role as it starts to focus on being an innovation provider within an open innovation network.
“Most innovations are based on existing knowledge, so research doesn’t have such as strong link to innovation in many industries,” said Leppävuori.
To become a successful innovation partner, VTT wants to develop greater intimacy with its customers, so it can understand their businesses and processes. It wants to improve its management, so it can better understand changing business models and processes. And it wants to maintain its scientific leadership, but now sees this as achievable as much within its network as internally.
“Research organisations should widen their offerings to match the innovation processes of their industrial partners,” said Leppävuori. These skills should be backed up with business strengths, an understanding of the social aspects of innovation, and market strength, although, once again, these skills don’t have to be in-house so long as they are present within the network.
VTT has restructured its organisation so it is almost as much to do with customer relations as it is to do with R&D. Innovation is now most likely to happen at the boundary of disciplines, Leppävuori says, so improved knowledge sharing is vital.
“Without good modern IT tools this kind of organisation would not be impossible.”
IMEC, the Interuniversity Microelectronics Centre in Leuven, Belgium, has long been this sort of collaborative research centre. Its customers from the semiconductor industry upgrade their manufacturing processes every two years. But semiconductor research is expensive, and the industry’s growth is slowing so many chip companies have shut their research groups. The result for IMEC has been more business with more customers, who share the cost of developing basic technologies that they can all use without losing their competitive differentiation.
“The approach has driven a shift from exclusive R&D for everything to shared R&D for generic problems,” said Dr Marc Van Rossum, strategic adviser and strategic planner at IMEC. “It means that reusable technology platforms have become very important.”
But he warns that the model cannot be transferred to every industry sector.
“More than 90% of hardware is based on one technology that dominates the sector and so is almost ideal for this model,” he said. “It would not work if we had to go into product development. The approach needs a lots a reusability in its results.”
IMEC runs its research as a set of industrial affiliate programs to which individual companies subscribe. Companies that join the program can have access to three forms of IP. Everyone can licence shared IP that draws on the knowledge that IMEC and the other partners create. Each partner can also co-own, with IMEC, any results to which they have contributed. Finally, there are limited opportunities for a partner to work with IMEC to develop proprietary extensions of the shared IP.
According to Van Rossum, this means each partner can create a unique ‘IP fingerprint’, defining its differentiation, by choosing how it engages with each affiliate program.
“The advantage of working this way is the real cost sharing and risk sharing among a number of partners. You also have early insight into results and access to the IMEC background information,” he said.
Context is important for IMEC, too. Van Rossum believes political stability has been vital for IMEC’s success.
“I think the continuity of the local government is important, though they have changed three times in 20 years,” he said, although he also admits that IMEC has been given a lot of independence simply because what it does is not well understood.
He also believes that IMEC’s emphasis on research programs, rather than projects, has been a benefit, as has a properly founded business model: IMEC now gets 82% of its funding from commercial contracts: “In some ways our business model is well adapted to the present business environment.”
So if those are some of the issues to look out for, how has one company chosen where to put its latest facility?
Boeing spends €2bn ($2bn) per year, or 4% of sales, on R&D. Most of that is spent within the business units on research of direct relevance to products. But around €600m ($600m to $700m) is spent on Boeing’s Phantom Works, a virtual corporate R&D effort to develop the enabling technologies that can address shared problems and opportunities. Most of Boeing’s Phantom Works is embedded in its widely distributed business units, but it has now created a real facility, based in Madrid, Spain.
Francisco Escarti, director general, Boeing Research and Technology Europe, says Boeing had three options when it decided to make greater use of European research talent: rely on its relationships with academics; partner with another company to create a joint facility; or open its own facility.
To decide, a group of 27 senior Boeing executives were asked three questions: should they have a more global R&D facility; what would it do; and what would the barriers to establishing it be?
The survey suggested that any overseas facility should focus on safety and environmental research, since these are suitably supra-national issues. It also revealed some difficult issues that had to be overcome to establish the facility. Some US budget holders simply didn’t want to spend outside their organisations. There were also issues about international arms trade legislation, and the costs of moving intellectual property between countries.
Boeing’s choice of Madrid was driven by its desire to access a new pool of talent: Boeing already had relationships with 24 universities in the UK and Germany, which made those countries a poor target for a dedicated Phantom Works site. Boeing was also attracted by moderate operational costs, Madrid’s ability to attract people from all over Europe, and its links to Latin America.
Cultural issues also played a part here, with Boeing keen to use its Madrid base to understand the safety issues that misunderstandings between cultures may cause. One air accident investigation, for example, raised a question of whether a Russian pilot, trained in the command economy of the USSR, had been more likely to listen to an erroneous instruction from air traffic control than a correct warning from onboard equipment.
It’s clear that positioning an external R&D centre is a big decision for any company. But Walter Steinlin, chief technology officer at Swisscom, has boiled the issue down neatly to three key questions. Does the location offer the necessary pool of IP? Does it have the necessary local market pull, be it from the entrepreneurial spirit of the populace or from a rich set of SMEs, to do something with the research that emerges? And are the framework conditions correct? If these three issues line up, then you’ve got a chance.
doi:eiq-2006-007-0014
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