How foreign and domestic R&D partnerships impact innovation

In today’s globalized business environment, firms are no longer developing innovations in a vacuum. Instead, companies often work with partners from all over the world to develop innovative strategies and products.

While these networks can be promising in terms of innovation, they are also complex to manage due to the myriad cultural, legal, institutional and other differences that each firm brings to the table. In a new paper, “The Cross-National Configuration of Brokerage Triads: Effects on the Impact and Radicalness of Innovation,” Wharton management professor Exequiel Hernandez and Wharton doctoral student Sarath Balachandran examine what is the optimal mix of domestic and foreign partners in a particular network. What they found is that it depends on what type of innovative solution a firm or group of firms is trying to produce.

The research is supported by Wharton’s Mack Institute for Innovation Management.
Hernandez recently discussed his findings with Knowledge@Wharton. An edited transcript of the conversation appears below.

Knowledge@Wharton: What is the focus of your research?

Exequiel Hernandez: Companies, especially high tech companies, are facing two important trends. One is that technology development is increasingly more complex, so they have to partner with other companies more and more to create research and development alliances and things like that. The other trend is that technology and ideas and markets are more globalized than ever, so firms are not just having to do partnerships, but also international partnerships.

You see companies involved in these global R&D networks. This can be very good, but it also creates a big of a dilemma for companies. On the one hand, if you have partners from all over the world and you’re exposed to new ideas, new ways of doing things, new business systems, that can help you be very innovative. On the other hand, though, you also have to manage a much more complex network, so you have to deal with cultural differences, legal differences, institutional differences, you name it. Think of a pharmaceutical company that has partners in the United States, Germany, Japan, China, India — that sounds like a promising network in terms of innovation, but it’s also complex to manage.

Against that backdrop, we asked a very different question. We thought, “Well, there must be an optimal mix of domestic and foreign partners in your network and how that affects your innovation.” If you think of the most basic unit of a network, which is a simple triad of firms, where I am the firm and I have two partners, there are essentially three basic configurations. Everyone can be foreign, everyone from a different country — that’s an all-foreign triad. Or you can think of everyone being from the same country — that’s all domestic. Or you can have a mix of foreign and domestic. So our question was simply: Out of these three, which one is best for innovation?

To examine that, we had some data from the life sciences or biotechnology industry, involving companies from 57 different countries. We studied the types and amount of patents that they produced from those partnerships.

Knowledge@Wharton: What are the key takeaways from this research?

Hernandez: The key takeaway is that it really depends on what kind of innovation you are trying to produce. When it comes to innovations that we call “radical” — these are innovations that are path-breaking, they really break from the status quo in terms of the knowledge of the industry — those innovations were most strongly associated with the all-foreign partnerships, with the all-foreign networks. Not with the all-domestic and not with the ones that have a mix of foreign and domestic.

In contrast, if you’re going to produce what we call an “impactful innovation” — so this is a type of innovation that’s more incremental; it’s still economically valuable, but preserves the status quo in terms of knowledge — those were associated with having all-domestic network partners in the R&D alliances, not with all foreign or with the mix of foreign and domestic. The other interesting thing is that these general patterns hold even if we account for the ways in which countries are different — so think of cultural differences or institutional differences or anything like that.

“If you’re a manager and you’re in charge of global R&D … you have to be aware of the entire network and the mix of foreign and domestic partners and how that is affecting the types of innovations you produce.”

Knowledge@Wharton: What are some of the practical implications of these findings?

Hernandez: In a nutshell, I think what it tells you is that if you’re a manager and you’re in charge of global R&D, and especially global R&D partnerships, you have to be aware of the entire network and the mix of foreign and domestic partners and how that is affecting the types of innovations you produce and the efficiency with which you can produce innovation. I say that because when I talk to managers, often I see that firms are very good at what I call “the dyadic level.” They’re very good when they are going to form a partnership [in terms of] screening that partner, making sure that they trust that partner, ensuring that partner brings something new, but managers typically don’t look beyond [that] to consider the entire network and how the configuration, especially the global configuration, may affect how innovative they are and what they are getting out of those partnerships.

The other interesting and practical thing is that it seems like you really have to commit: You either have to commit to the all-foreign or all-domestic [partnership]; this mix of foreign and domestic partners isn’t producing much for firms. And of course, that depends on what you expect to get out of it. If you’re going for the home run — radical innovation — you get that out of the foreign partnerships. If you’re going for more the incremental, profitable type of innovations, then those are going to come more from your domestic partnerships.

Knowledge@Wharton: What’s next for this research?

“If you’re going for the home run — radical innovation — you get that out of foreign partnerships.”

Hernandez: The science of networks has advanced a lot in the last 20 years, mathematically and in a lot of other ways. What’s interesting is that there is a gap between what we know about networks purely and how networks and globalization relate to one another. But the paradox, of course, is that we see that firms are involved more and more in global networks. I would like to close that gap a little bit.

For example, the study I just described tells us about the consequences or the outcomes of what you might get from international versus domestic networks. A natural follow up is to see if firms are doing something in their network formation behaviors. Do they account for differences across countries? Do they account for the global pattern of partnerships and the way they structure their relationships, particularly when it comes to seeking innovation and new ideas and knowledge?

The other thing I think is important is to understand not just that you are getting different things out of your networks, but what are the underlying processes? Why is it that it’s hard to manage foreign partnerships, and what can managers do to make that process more efficient, to overcome all those frictions in terms of culture and institutions and just the basic differences across countries to make these … foreign partnerships that seem to be so valuable function more efficiently.

Republished  with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of the Wharton School of the University of Pennsylvania. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Exequiel Hernandez is a Wharton management professor 

Image: Traditional Incandescent light bulbs are seen at an apartment in Munich August 31, 2009. REUTERS/Michael Dalder.