The New Geography of

Innovation –
Asia’s role in global innovation
networks

© Dieter Ernst,
East-West Center, Honolulu
ErnstD@EastWestCenter.org
 Argument
• Global innovation networks transform the
geography of innovation.
• US firms are key drivers
• Much of the action now is in Asia (driven
by the resurgence of China and India).
• A neglected dimension of Pacific Rim
integration
– dearth of data Æ weak foundation for policy
advice
 Questions

1. Innovation processes in transition. What is

new?
2. How important is Asia’s role? And what forces
are driving Asia’s network integration?
3. Policy Challenges
– Will network integration foster ‘decoupling’?
– Will it reduce entrenched barriers to
innovation in Asia?
– Is there scope for sharing the benefits within
Asia and across the Pacific?
 1. Innovation Processes in Transition
(What is new?)

• Observation (despite poor data):

– globally distributed innovation networks
complement in-house R&D
– multiple new locations for innovation are
emerging (China, India…Korea, Singapore,
Israel, Hungary..)
– But: established centers retain dominance
– new conflicts over sharing the benefits arise
within Asia and across the Pacific
 Asia’s Push to Innovate
• In 2007, Asia spent US-$(PPP) 436.2
billion on R&D (39% of world total), placing
it ahead of the US ($353 billion and a
share of 31%).
• With US-$(PPP) 175 billion, China is now
the second largest R&D investor, after the
US (with $ 353 billion), but ahead of Japan
($143.5 billion).
Asia’s % share in global R&D spending

2006 2007e 2008p

US 32.7 31.4 30.1
Asia 36.9 38.8 40.8
China 13.5 15.6 17.9
Japan 13.0 12.8 12.4
India 3.7 3.7 3.7
EU all 25.2 24.6 23.9

Battelle 2007
 Persistent U.S.-centric concentration
of the sources of innovation
• all 15 leading companies with the best record on
patent citations are based in the United States (9
in the IT industry)
• The 700 largest R&D spenders (mostly large
U.S. firms) account for 50% of the world’s total
R&D expenditures and >2/3 of the world’s
business R&D
• > 80 percent of the 700 largest R&D spenders
come from only five countries (United States
dominates, followed by Japan, Germany, United
Kingdom, France)
© Dieter Ernst
 Explanation (in progress):
• Corporate strategies respond to
– globalizing markets (products,
finance,…technology, knowledge workers)
– pressures to improve R&D productivity
• Asian ‘upgrading thru innovation’
strategies
• Enablers (liberalization, ICT, globalization
of higher education)
• multiple asymmetries (private vs public;
advanced vs emerging economies; large
vs small countries)
 Global innovation networks
I. Global companies “offshore” stages of
innovation to Asian affiliates
¾ intra-firm global innovation networks
II. Global firms “outsource” stages of
innovation to specialized Asian
suppliers
¾ inter-firm networks
III. Asian firms construct their own (mostly
intra-firm) networks
© Dieter Ernst
 2006 Engineer Survey
• 50% of US respondents (up from 46% in 2005)
report that their company has sent electronics
design work offshore.
• Job security and unemployment are the
dominant concern of US-based engineers (69%
of respondents), together with offshore
outsourcing (67%).
• 34 % of Indian respondents report that their
employers are offshoring high-end hardware
design and software development.
The Electronic Engineering Times
Intel’s Global Innovation Network
Location Description
US core technology development in Santa Clara,
(11 labs) Folsom and Austin
Asia „ Bangalore (2700 = largest lab outside US),
(7 labs, leading-edge processor development
more „Penang (500), design implementation
planned) „Shanghai (100++) Linux based solutions for
telecom; new applications for emerging markets
„Beijing (50++), platform and architecture lab

Israel, „Haifa (1400, since 1974), processor research

Russia „Nizhny Novgorod (200++): software

© Dieter Ernst
 ODM Inter-Firm Network -
Notebooks

Tier 1: Flagship Core

Core
Component
Component
Suppliers
Suppliers
Tier 2: ODM
(HDD,
(HDD,Displays,
Displays,
CPU)
CPU)

Tier 3 - Suppliers

Tier 4(and below) - Suppliers

© Dieter Ernst
 New Entrants: Huawei
Kista/Stockholm, base station architecture and system
Sweden design; analog-mixed signal design
(RF); algorithms

Moscow, Russia algorithms; RF design

Bangalore, India Development of embedded SW and

platforms

Plano/Texas total solutions for CDMA; G3 UMTS;

(Dallas telecom CDMA Mobile Intelligent Networks;
corridor) mobile data service; optical; VoIP

© Dieter Ernst
Global Innovation Network - Handsets
„ Telcom service provider defines system architecture (China)
„ ODM suppliers of handsets (China)
„ IDM provides design platform (US)
„ IP providers (UK; Taiwan)
„ fabless design houses (US; Taiwan; China; India)
„ foundries (Taiwan, Singapore and China)
„ chip packaging companies (Taiwan; China)
„ tool vendors for design automation and testing (US and
India)
„ design support service providers (various Asian countries)

© Dieter Ernst
2. How important is Asia? And what
forces are driving Asia’s network
integration?
 2005 Survey of the world’s largest R&D
spenders
• China is the 3rd most important offshore
R&D location (after the US and the UK)
• India is 6th and Singapore 9th
• China is the most attractive location for
future foreign R&D, ahead of the US and
India
• Leading global corporations also intend to
expand their offshore outsourcing of R&D
to Asian firms
UNCTAD World Investment Report 2005
 EIU 2006 Survey
• India and China are the 2nd and 3rd
most important offshore R&D location
(after the US and ahead of the UK)
• Leading global corporations consider
India, the US and China to be the
best overseas locations for future
R&D
 Systemic nature of driving forces
• return-on-investment must exceed risk-adjusted
market average Æ reduce development cost
• demand: proximity to Asia’s markets and global
factories
• exploit Asian markets for knowledge workers
(from ‘labor cost arbitrage’ to external sourcing of
complementary innovative capabilities)
• global markets for technology facilitate
innovation offshoring
• Asian policies: tax and financial incentives;
combine liberalization with proactive and flexible
industrial and innovation policies
© Dieter Ernst Interviews with 120 companies in the US, Asia and Europe
China Market
„ largest market for telecom equipment (wired &
wireless) (test bed for 3G)
„ ditto for semiconductors and handsets (launch
market)
„ 2nd largest market for cars
„ Lead market for digital CE (#2)
„ Leading export market for US, Japan, Taiwan
and Korea
„ ‘bottom- of-the-pyramid’ markets for less over-
engineered products and services with
substantially lower costs of acquisition and
operation
© Dieter Ernst
Annual Cost of Employing a Chip
Design Engineer* (US-$), 2002
Location Annual Cost
Silicon Valley 300,000
Canada 150,000
Ireland 75,000
Taiwan <60,000
South Korea <65,000
China 28,000 (Shanghai)
24,000 (Suzhou)
India 30,000
*=including salary, benefits, equipment, office space and other infrastructure
Sources: PMC-Sierra, Inc. Burnaby, Canada (for Silicon Valley, Canada, Ireland, India); plus interviews (Taiwan, Korea,
China)

© Dieter Ernst
Wadhwa 2007
China – growth of science & engineering
PhDs
„ 70% of the 23,500 PhD degrees in 2004 are
in S&E
„ between 1995 and 2003, first year entrants
in science and engineering PhD programs in
China increased six-fold, from 8,139 to
48,740
„ China will produce more S&E
doctorates than the US by 2010

NBER - Freeman, 2005

 3. Implications and Policy Challenges

• Will network integration foster

‘decoupling’?
• Will it reduce entrenched barriers to
innovation in Asia?
• Is there scope for sharing the benefits
within Asia and across the Pacific?
Will network integration foster ‘decoupling’?
• Trade: Will reliance on “triangular” trade give
way to an “Asianization” of trade and investment,
centered on China?
• Talent pool: Can Asian countries replicate
the US model of attracting top talent from the
global market for knowledge workers?
• Innovation system: Can Asian universities
become trend-setters in reforming innovation
systems?
• Innovative capabilities: Can Asian firms
enter the “global innovation race” as sources of
new technology and global standards?
© Dieter Ernst
 Strategic Dilemma for Asia’s emerging
knowledge economies
• Innovative capabilities continue to lag
substantially behind industry leaders
• Reducing the gap will take time.
• Is network integration a poisoned chalice?
• Or is it a catalyst for reducing entrenched
innovation barriers?

© Dieter Ernst
 Network integration – A Poisoned Chalice?

• global firms compete for Asia’s limited talent

pool (‘brain drain’)
• weak linkages with local universities
• limited knowledge sharing
• reverse knowledge transfer (‘institutional
arbitrage’)
• bridgeheads for platform leadership strategies
• IP barriers
Network integration – a catalyst for reducing
innovation barriers?

• pressure to upgrade technological and

management capabilities and skill levels of
workers
• exposure to leading-edge technology and (tacit)
knowledge about technology and management
• catalyst for reforming national innovation
systems (?)
• links with markets and financial institutions
• access to intellectual tools and sources of
knowledge
 Avoid the ‘commodity price trap’

• Just competing as lower-cost R&D

contractors may leave them in a
low-margin “commodity price trap”.
• Asian firms need to create unique
products and solutions, addressing
important user needs that incumbent
market leaders have neglected.
 Innovation Strategies Matrix
low Global integration high
high
II: mission-based IV: global market
complex technology leadership
systems (space, • technology leadership

R&D intensity
military, energy, • technology
environment, climate) diversification
I: ‘bottom-of-the- III: Global R&D factory
pyramid’ innovation (contract support and
(essentials for lower- R&D services)
tier urban markets and
rural poor) low

© Dieter Ernst
 Sharing the benefits?

1. China’s resurgence
¾ Japan; Taiwan; Korea; ASEAN
2. India’s resurgence
¾ India-China; South Asia; East Asia
3. Redefining triangular
relationships
¾ US-Japan-China
¾ US-China-India
• …
US-Asia division of labor in innovation -Scenarios
„ Hierarchical: selective and tightly
controlled offshoring of lower-end innovation
tasks and capabilities
„ Complementary: U.S.-led global innovation
networks combine system integration
capabilities in the United States with lower-
cost offshore development of intellectual
property
„ Unequal interdependence: architectural
innovations and new standards are
developed both in the US and in Asia, but the
US will continue to shape the terms of
interdependence
© Dieter Ernst
EWC Innovation Research

1. Innovation System Dynamics in the Global

Knowledge Economy - A Comparative
Analysis of Leading Asian Export
Economies
2. Globalization of Knowledge Work - Why is
chip design moving to Asia ?
3. Governing the Global Knowledge Economy:
Mind the Gap! (with David M. Hart, George
Mason University)
EWC innovation publications(1)
„ Ernst, D., 2007, “Beyond the ‘Global Factory’ Model:
Innovative Capabilities for Upgrading China’s IT Industry,
International Journal of Technology and Globalisation
(MIT)
„ -, 2007, “Can Chinese IT Firms Build Innovative
Capabilities Within Global Production and R&D
Networks?”, in: China's Quest for Independent
Innovation (M. Gong Hancock, H. S. Rowen, and W. F.
Miller, editors), Shorenstein Asia Pacific Research
Center and Brookings Institution Press
„ -, 2007, “Innovation Offshoring - Root Causes of Asia’s
Rise and Policy Implications”, in :
Multinational Corporations and the Emerging
Network Economy in the Pacific Rim (Palacios, Juan J.,
ed.), London: Routledge. Co-published with the Pacific
Trade and Development Conference (PAFTAD)
EWC innovation publications (2)
„ Ernst, D., 2006, INNOVATION OFFSHORING: Asia’s Emerging Role in
Global Innovation Networks, East-West Center Special Report, in
cooperation with the U.S. Asia-Pacific Council, July
http://www.eastwestcenter.org/fileadmin/stored/pdfs/SR010.pdf
„ - , 2005, “Complexity and Internationalisation of Innovation: Why is Chip
Design Moving to Asia?,” in International Journal of Innovation
Management, special issue in honour of Keith Pavitt, Vol. 9,1: 47-73
„ -., 2005, “Limits to Modularity - Reflections on Recent Developments in Chip
Design,” Industry and Innovation, Vol. 12, No.3: 303-335
„ -., 2005, “The New Mobility of Knowledge: Digital Information Systems and
Global Flagship Networks,” in: R. Latham and S. Sassen (eds), Digital
Formations. IT and New Architectures in the Global Realm, published for
the U.S. Social Science Research Council, Princeton University Press,
Princeton and Oxford
„ -., 2005, “Pathways to innovation in Asia’s leading electronics-exporting
countries - a framework for exploring drivers and policy implications,”
International Journal of Technology Management, special issue on
“Competitive Strategies of Asian High-Tech Firms"; Vol. 29, 1/ 2: 6-20