Innovation and R&D in emerging Russian multinationals.

• Author: Filippov, Sergey

1. Introduction

   Innovation is widely recognized as a major driver behind corporate growth and performance. Multinational companies devise and execute global innovation strategies in order to access technology, knowledge and competences worldwide. Multinational companies with home bases in advanced economies spend billions of US dollars on research and development (R&D) annually. Innovation is a critical force not only for advanced multinationals from developed economies; more importantly, it is a significant factor for emerging multinationals. In the case of emerging market multinationals their expenditures on domestic R&D are limited and therefore to address such limitations these emerging market multinational enterprises have attempted to invest domestically and internationally to either catch-up or leap frog their developed market competitors.

   Recently Russian companies have started to emerge as international players, along with companies from China, India, Brazil and others, in the market for creating innovative products and utilising innovation as means to increase quality and productivity.

   While the academic body of literature on emerging multinationals has matured in the recent years, innovation strategies of emerging multinationals remains an under-researched topic, particularly in the case of Russian emerging multinationals. Russian companies represent an interesting case for a variety of reasons.

   The main objective of this paper is to examine innovation strategies and processes of large Russian companies and emerging Russian multinationals. More specifically, I seek to examine the patterns of innovation processes within these companies in Russia (e.g. in terms of cooperation with research institutes, in-house R&D departments, acquisition of former state-owned research institutes). Secondly, I aim to understand the role of access to knowledge and expertise in the internationalization strategies of Russian multinational companies (and access to knowledge overseas).

   The complexity of this subject compels the author to adopt a multifaceted approach and a holistic view. The qualitative approach will enable to gather an in-depth understanding of the organisation of innovation and innovation processes in Russian multinationals. These descriptive analysis and desk research rely on academic and business literature, a variety of secondary data sources, such as company reports and media releases, as well as prior studies. The overall findings are validated in interviews with several scholars and practitioners in the field.

   The paper is structured as follows. Section 2 reviews the relevant literature. Section 3 addresses the topic of innovation in Russia from a macro, national perspective and from the company view. A typology of innovation strategies is formulated. Further, Sections 4 and 5 examine innovation strategies pursued by Russian companies, respectively, in Russia and abroad. Finally, Section 6 concludes.

2. Theoretical Background

   2.1. Multinational Companies from Emerging Economies and Russian Multinationals

   The origins of research on multinationals from 'the third world' can be traced to the late 1970s--mid-1980s (Agmon and Kindleberger, 1977; Lall, 1983; Wells, 1983). The rapid change in the global economy since the early 1990s has changed the focus of research into multinationals from developing economics. It is however in the most recent period that internationalisation of companies from emerging economies received an increasing attention from scholars and practitioners. Their growing importance was studied and underlined, inter alia, by Dunning (2006), Mathews (2006), Narula (2006), Sauvant (2009), Sauvant et al. (2010). The strategies of multinationals from emerging economies have also became a focus of analysis by international organisations, think-tanks and consulting companies, such as BCG (2006), EIU (2006), UNCTAD (2006).

   Research on emerging Russian multinationals has been growing in the recent years, but it is still lacking its critical mass. Several studies explored international presence of selected Russian companies (Bulatov, 1998, Kalotay, 2007, 2008, Lisitsyn, et al., 2007, Vahtra and Liuhto, 2005, Ehrstedt and Vahtra, 2008). These papers have examined the first forays of Russian firms to reconnect with Soviet trade and production networks, to expand into the "near-abroad" of Commonwealth of Independent States (CIS), and to search out resources or assets to enhance or compliment domestic production.

   Scholars approached this topic from different perspectives. Kalotay (2005) studied Russian outward foreign direct investment (FDI) on the macroeconomic level. Several studies addressed the export strategies of Russian multinationals, taking into account the impact of foreign partners' presence, turnover of senior management, product development strategies on export intensity and so on (Filatotchev et al., 2001; Filatotchev and Nolan, 2001). Liuhto and Vahtra (2007) proposed a typology of Russian multinationals on the basis of the ownership structures and the level of state involvement in their operations. The focus on ownership structure and the state involvement provide a strong indication about an important role of the Russian state in the internationalisation strategies of many Russian companies.

   The Uppsala Model (Johanson and Vahlne, 1977) explains how firms gradually intensify their activities in foreign markets. It suggests that firms start their internationalization from culturally and/or geographically close countries and move gradually to culturally and geographically more distant countries. Further, they start their foreign operations by using traditional exports and gradually move to using more intensive and demanding operations, i.e. show more commitment to the host market. Specifically in the case of emerging multinationals, Dunning (2006) suggests that their internationalization proceeds via two stages. Firstly, they invest in more advanced economies to access or augment their ownership advantages; this is in contrast to classic models that explain internationalization as process wherein firms exploit their of ownership advantages during the process of international expansion. At the second stage, emerging multinationals would internationalize according to the tenets of Ownership-Location-Internationalization paradigm. This difference is based on the inherent ownership disadvantages of firms originating form weak country level institutional environments.

   Dunning (1988) outlines four motives of FDI (market-, resource-, efficiency- and strategic assets-seeking), valid for multinational companies from advanced economies. While these motives hold for emerging Russian multinationals too, scholars (Ehrstedt and Vahtra, 2008, Liuhto and Vahtra, 2007, Vahtra and Liuhto, 2005, Kalotay, 2005, 2007) suggest that they do not completely explain their internationalization strategies. Narula (2010) argues that firms engaging in strategic asset-seeking are primarily seeking learning opportunities rather than seeking to invest for strategic purposes in specific assets. This is in line with the claim that emerging multinational companies internationalise in order to enhance their ownership advantages.

   To sum up, many Russian multinationals have become distinctive players on the global scale. Their origins can be traced from 'red multinationals', although the modern Russian multinationals have little in common with their ancestors (Andreff, 2002, Filippov, 2010). Still it is reasonable to examine Russian multinationals in comparison to companies from other transition economies.

   2.2. Multinational Companies and R&D

   The extant body of literature has widely acknowledged that large multinational companies are the drivers for the globalization of R&D and innovation activities. Firms based in developed markets have expanded their R&D efforts beyond their borders in attempt to access host market research capacity and to develop country-specific products. While the authors have studied strategic behaviour of western multinationals, strategies of emerging multinationals have received less attention, and particularly the strategies of asset-seeking motives. Moreover, the extant body of literature on this topic has tended to focus on China, whose outward FDI policy is guided by the governmental strategy. Chinese companies establish subsidiaries abroad in technologically-advanced region to benefit from technology spillovers (Jiang, 2000). Chinese multinationals are likely to become knowledge and competence seekers as they internationalize given that they have few firm-specific advantages.

   In a similar fashion, the same reasoning holds for Russian emerging multinationals might benefit from technology transfer through FDI, considering their lower level of technology usage. Outward FDI and establishment of foreign subsidiaries might influence the technology base of the whole multinational company. Foreign subsidiaries may serve as listening posts for the home base (Frost, 2001). Russian FDI patterns indicate that Russian investors are seeking so-called technology assets in both a narrow focus on firms with high levels of R&D and through the acquisition of manufacturing firms where high levels of technology have already been implemented.

   In the international race to acquire and exploit innovation capacities MNC must also remain cognizant of the cultural fit between their home market R&D and production activities and the host market R&D capacities. Selection of the right location to engage in R&D activities has been demonstrated to be significant for financial and innovation performance. Perrino and Tipping (1989) found that it takes a substantial time to integrate into the existing scientific community of new assets into the acquiring company and that the risks related to selection of a R&D centre are greater than an operations centre (Kuemmerle, 1997). Culture is especially important when...