Innovation by MNEs in emerging markets

Innovation is a key competitive advantage for companies in the 21st century. R&D and other innovative work was traditionally carried out by MNEs in their home countries, although it spread to some affiliates in other developed countries in the late 20th century, and to some emerging markets more recently. This paper analyzes the assignment of innovative activity, particularly R&D, by MNEs to their affiliates in emerging markets. Using both aggregate data produced by government organizations and company-specific interviews and published commentaries, we find that MNEs assign more responsibility for R&D and innovation to affiliates in emerging markets that have larger markets, lower human resource costs, greater overall R&D activity and to some extent greater activity of the company in question. China and India are huge exceptions to the rule that MNEs tend to assign only development work to emerging market affiliates: they are increasingly assigning core R&D to these two large countries. Corporate strategy can be adjusted to take advantage of low-cost R&D capabilities, particularly in these large markets, and to pull innovations from those affiliates throughout the rest of the firm. Public policy to attract R&D by MNEs should look at offering companies better access to sizable markets, offering incentives for R&D activity and building up R&D activity in the local economy, by companies and government alike.