Aija LeiponenImperial College London

and Cornell Universityya.leiponen@imperial.ac.uk

Research designResearch design

How does the “breadth” of innovation approach matter for innovation performance? Objectives Sources of knowledge Sources of knowledge Geographic location

Finnish CIS and R&D survey + employment register (skills data)

Cross-sectional with lagged explanatory variablesvariables

Collaborative work with Constance Helfat(Dartmouth College)(Dartmouth College)

R&D surveyR&D survey

Collected by Statistics FinlandCo ected by Stat st cs a d Targeting all Finnish R&D performing manufacturing firms, plus a set of (R&D g pperforming) service firms

Data on R&D investments, employees, units and location; commercialization of innovations

Every 2 years

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Community Innovation SurveyCommunity Innovation Survey

Collected by Statistics Finland Collected by Statistics Finland Survey instrument and data collection techniques developed by Eurostattechniques developed by Eurostat

All Finnish manufacturing firms with more than 100 employees, plus random sample stratified by100 employees, plus random sample stratified by size and industry of the remainder

72 percent response rate in 1997p p Data on commercialization of innovations, innovation objectives, knowledge sources in innovation, R&D, other information

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Advantages Advantages Representative data for manufacturing (not just pharmaceuticals!)

Innovation outcomes (not intermediate outputs such as patents!)

Unique data from Finland: innovation objectives Unique data from Finland: innovation objectives (CIS 2); domestic R&D units

Disadvantages  Cross‐sectional setup (with lags)  difficult to argue exogeneity

Limited set of organizational variables

Aija Leiponen, Cornell UniversityAija Leiponen, Cornell UniversityConstance Helfat, Dartmouth College

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1 Parallel paths and sampling1. Parallel paths and sampling Nelson 1961; Evenson & Kislev 1976; Baldwin 

and Clark 2003 Technological opportunity is characterized as a 

distribution of innovation outcomesdistribution of innovation outcomes E.g. balls in an urn

Each innovation project is a draw from the di ib idistribution The more times you draw, more likely to find good outcome

Probability of success is improved by conducting multiple parallel searches, but there are decreasing returns to draws/projectsthere are decreasing returns to draws/projects

2 Cognition and uncertainty2. Cognition and uncertainty

Prahalad & Bettis; Gavetti & Levinthal; Tversky & Prahalad & Bettis; Gavetti & Levinthal; Tversky & Kahneman

Dominant logic constrains innovative search and gmakes local search more likely than distant search

Availability heuristic: rely on easy‐to‐retrieve y y yinformation

Adjustment and anchoring: estimate uncertain events by adjusting an initial value/reference point

People (and firms) tend to search narrowly

3 Innovative search3. Innovative search

March: Exploration and exploitation (OS 1991)p p ( ) Katila and Ahuja (AMJ 2002)

Search depth (reuse) and scope (breadth) and their interaction are pos. related to new product introductions

Decreasing returns to depth, not breadthg p , Laursen and Salter (SMJ 2006)

Broad search facilitates incremental improvement; h d th i i t d ith t th ldsearch depth is associated with new-to-the-world

innovation Decreasing returns to both types of searchg yp

What about breadth in innovation objectives? Objective: a technical goal (Cohen and Malerba Objective:  a technical goal (Cohen and Malerba, 2001)

A research program or project A research program or project With a particular objective, e.g., develop a new product reduce labor costsproduct, reduce labor costs

Analogy to technical trials and potential routes to a single innovation (Nelson 1961 Evenson anda single innovation (Nelson, 1961; Evenson and Kislev, 1976)

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CIS Innovation ObjectivesCIS Innovation Objectives1. Replace outdated  6. Increase flexibility of p

products2. Improve product quality 

E d d

yproduction

7. Reduce labor costsR d f i l3. Expand product 

assortment4. Enter new markets or

8. Reduce use of materials9. Reduce use of energy10 Mitigate environmental4. Enter new markets or 

increase market share5. Fulfill government 

l ti t d d

10. Mitigate environmental damage

regulation or standards requirements Scale: not important/not 

used – very important (0–3)

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HypothesesHypotheses

1 Firms that have greater breadth of innovation1. Firms that have greater breadth of innovation objectives experience greater innovation success.

Multiple draws increases probability of successMultiple objectives counteracts diminishing returns within each objective

2. Firms that have greater breadth of knowledge g f gsources for innovation experience greater innovation success.

As the number of innovation objectives or knowledge sources increases the positive impact on innovationsources increases, the positive impact on innovation success diminishes.

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Innovation Success (R&D survey)Innovation Success (R&D survey)

INNOVATION INNOVATION Binary (0,1) variable indicating whether the firm introduced any new‐to‐the‐firm technological productintroduced any new to the firm technological product or process innovations in 1996‐98 Probit regression

NEW PRODUCT SALES Percentage of firm sales revenue in 1998 from technologically new products introduced in 1996‐98 Tobit regression Tobit regression

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Objectives and Sources (CIS)Objectives and Sources (CIS)

OBJECTIVES Sum of the binary scores for innovation objectives that 

bt i l ti f 2 3 l f 0 3obtain an evaluation of 2 or 3 on a scale of 0‐3

SOURCES SOURCES Sum of the binary scores for knowledge sources that obtain an evaluation of 2 or 3 on a scale of 0 3obtain an evaluation of 2 or 3 on a scale of 0‐3

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PRODUCTPRODUCT

PROCESS

Control VariablesControl Variables

Log of number of firm employees Log of number of firm employees Log of R&D expenditures Business group (0 1 subsidiary of larger firm) Business group (0,1—subsidiary of larger firm) Ratio of export to total sales revenues % employees with PhDs % employees with technical college degrees Industry dummy variables

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Results OBJECTIVES is significant in tobit for product sales; SOURCES is significant in both probit forsales; SOURCES is significant in both probit for prob(innovation) and tobit for product sales multicollinearity

Diminishing returns not very clear; stronger for knowledge sources than objectives

Optimal breadth is quite high! and many firms don’t seem to reach it – cognitive li i i ?limitations?

Sensitivity analyses with product and process objectives; individual objectivesobjectives; individual objectives 

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ImplicationsImplications Innovation objectives (and objectives more Innovation objectives (and objectives more generally) matter Tend to be overlooked in innovation researchTend to be overlooked in innovation research

Need to decompose innovation activity into underlying componentsunderlying components Provides greater precision regarding the determinants of innovation successof innovation success

Improves the ability to derive meaningful managerial implicationsp

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Aija Leiponen, Cornell UniversityAija Leiponen, Cornell UniversityConstance Helfat, Dartmouth College

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What Does Multilocation of R&D Entail?

Multiple geographic locations of R&D activity within a single firm

Geographically separated from headquarters some degree of organizational decentralization

“GEOGRAPHIC DECENTRALIZATION”“GEOGRAPHIC DECENTRALIZATION”

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Benefits vs. costs of geographic decentralization

1. International Business/FDI and Knowledge-Based View (KBV):Based View (KBV):

Focus on benefitsbenefits

2. Organizational Economics (organization form and incentives):form and incentives):

Focus on costscosts

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1. International Business & Knowledge-Based View of the FirmBased View of the Firm

Firms need information about foreign markets Firms need information about foreign markets, technologies This knowledge is often tacit

f Requires that firms co-locate geographically

Technology transfer is associated with gysubstantial transaction costs (Teece 1977)

The multinational corporation arises out of superior efficiency in knowledgeknowledge transfertransfersuperior efficiency in knowledgeknowledge transfertransferacross borders (Kogut & Zander 1992, 1993)

Reference pointReference point:: outsourcing or alliances (communicationoutsourcing or alliances (communication Reference pointReference point: : outsourcing or alliances (communication outsourcing or alliances (communication across org. boundariesacross org. boundaries))

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Implications of FDI + KBVImplications of FDI + KBV

Clear advantages for knowledge Clear advantages for knowledge acquisition of multiple R&D locations Access to more knowledge sourcesAccess to more knowledge sources Access to more knowledge sourcesAccess to more knowledge sources Greater likelihood of successful innovationGreater likelihood of successful innovation Wider range of innovation outputWider range of innovation output Wider range of innovation outputWider range of innovation output

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2 Organizational Economics 2. Organizational Economics Geographic distance requires at least some

d l ti d d t li tidelegation and decentralization At least of dayAt least of day--toto--day operationsday operations And perhaps strategically as wellAnd perhaps strategically as well And perhaps strategically as wellAnd perhaps strategically as well This increases the costs of monitoring and costs of monitoring and

coordinationcoordination

Knowledge transfer itself is costly too.

Reference point: single R&D locationReference point: single R&D location

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When is it advantageous to decentralize?

More market- and customer-specific (more applied) R&D○○ Less need to transfer knowledge within the Less need to transfer knowledge within the

firm (and bear the associated costs)firm (and bear the associated costs)○○ Decentralized incentives, decision makingDecentralized incentives, decision making

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Benefits AND Costs: Hypotheses

1. Firms that have multiple locations of R&D activity i i i b hexperience greater innovation success, but there

are diminishing returns to the number of R&D locationslocations

-- FDI/KBV + costs of organizationFDI/KBV + costs of organization

(C diti l H1) A iti i ti2. (Conditional on H1) Any positive association between multilocation of R&D activity and innovation success reflects access to a larger o at o success e ects access to a a genumber of different sources of knowledge outside of the organization

FDI/KBV ( f /i ti t )FDI/KBV ( f /i ti t )-- FDI/KBV (vs. org. form/incentive arguments)FDI/KBV (vs. org. form/incentive arguments)

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Benefits vs. Costs: Hypotheses

3. (a) Firms that have multiple R&D locations generate a widerwider range of innovation output than firms that have a i l R&D it (KBV)single R&D unit (KBV)

Vs.Vs.(b) Firms that have multiple R&D locations generate a ( ) p gnarrowernarrower range of innovation output (org. form + incentives)

4. Multilocation of R&D activity is associated with greater innovation success for “imitative” than “novel” innovations (org. form + incentives)-- Implications for research on patents, which reflect novel innovationsImplications for research on patents, which reflect novel innovations

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Empirical setting

Manufacturing sector in Finland Manufacturing sector in Finland

Uniquely detailed data on innovation Uniquely detailed data on innovation outcomes and R&D locations of individual firmsfirms No information on command and control No information on command and control

structure within firmsstructure within firms

Arguments apply within as well as between countries

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Can we study geographic decentralization within one small country?

YesYes! Finland is geographically and ! Finland is geographically and economically diverseeconomically diverse Long distances between major cities and hot Long distances between major cities and hot

spots – surface area about the same as CA; 50% larger than the UK

A few specialized “hot spots” – electronics in the North; A few specialized hot spots electronics in the North; pulp, paper & machinery in South East; medical research on the West coast

4 technical universities, 10 universities in distinct ,locations

Helsinki metro area = largest market; two other major industrial concentrations (Turku Tampere)major industrial concentrations (Turku, Tampere)

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Primary sources of datayAn almost representative sample of R&D An almost representative sample of R&D performing manufacturing performing manufacturing firmsfirms

R&D survey 1998 R&D locations R&D spendingR&D spending Size (employees) Other controls: firm structure (business group; M&A activity;

divestments), exports

Innovation survey 1998-2000 Innovation output measures Importance of knowledge sources

○○ Customers, suppliers, competitors, universities, government Customers, suppliers, competitors, universities, government research institutes, patents and databases, trade and professional research institutes, patents and databases, trade and professional meetingsmeetings

Technological innovations only32

Characteristics of the samplep

469 R&D performing manufacturing firms 469 R&D-performing manufacturing firms 354 employees on average in 1998 (5–22,000) R&D/sales average 4.3% in 1998 (0–93%)g ( ) 67% product innovators (“new to the firm”) 46% process innovators

13% had multiple R&D locations in Finland (in 2000) 2 locations: 7 5%2 locations: 7 5% 2 locations: 7.5%2 locations: 7.5% 3 or more locations: 5.3%3 or more locations: 5.3%

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Dependent variables Binary indicators of innovation success

Indicate whether the firm introduced at least one inno ationinnovation

Any type of innovation: process, new-to-the-market product, new-to-the-firm product

Product sales revenue from innovation All types of products, new-to-the-market, or new-

t th fi lto-the-firm only

Breadth of innovation impact1 BOTH d t d i ti1. BOTH product and process innovations2. Innovation impact survey measures (product range,

quality, market share, new markets, production flexibility, capacity costs environmental effects regulations andcapacity, costs, environmental effects, regulations and standards)

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Explanatory variablesp y

Number of R&D locations Number of R&D locations 2 locations; 3 or more locations

Number of important external knowledge sources Original responses on a Likert scale

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Control variablesControl variables

Firm size (log employees) Firm size (log employees) R&D expenditures (log) Business group subsidiary or parent Business group subsidiary or parent Export revenues (log) S l th f M&A l Sales growth from M&A or sales

reduction from divestment Foreign subsidiaries (log) Foreign subsidiaries (log) Industry

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Findingsg

1. Multiple R&D locations are associated with greater innovation successgreater innovation success

Diminishing returns to multiple locationsDiminishing returns to multiple locations

2 Effect of multiple R&D locations on innovation2. Effect of multiple R&D locations on innovation success is correlated with that of external sources of knowledge

C i i h di iC i i h di iConsistent with mediationConsistent with mediation

3. Multiple R&D locations are associated with a b d i t f i tibroad impact of innovations

4. Multiple R&D locations are associated with t th fi (i it ti ) b t t t thnew-to-the-firm (imitative) but not new-to-the-

world innovations37

Conclusion: Towards a Nuanced Approach to R&D Location

R&D l il i i i d i h R&D multilocation is associated with: Greater innovation success but diminishing returns

○○ Both information benefits and organizational costs matteBoth information benefits and organizational costs matterrgg Wider access to external sources of knowledge, and Wider applicability of resulting innovations

○○ Consistent with KBVConsistent with KBV○○ Consistent with KBVConsistent with KBV

Benefits from R&D multilocation for imitativeinnovationsinnovations

○○ As predicted by org form/incentivesAs predicted by org form/incentives

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Contributions of the study

1. Bring together two largely separate literatures regarding geographic decentralization of R&Dgeographic decentralization of R&D Organizational economics and international business/KBVOrganizational economics and international business/KBV

2. Measures of innovation success beyond patents2. Measures of innovation success beyond patents Across many industries; representative sample Across many industries; representative sample Compare Compare novelnovel (new(new--toto--thethe--world) vs. world) vs. imitativeimitative(new(new--toto--thethe--firmfirm) )

innovationinnovationinnovationinnovation

3. Test whether access to more external knowledge sources explains the effects of R&D multilocation on innovation outcomes Prediction of the knowledgePrediction of the knowledge--based viewbased view

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Methodological issuesMethodological issues

Measurement – survey data Measurement survey data Cross-sectional setup (with lagged

explanatory variables) – endogeneityexplanatory variables) endogeneityissues

A lagged dependent variable – biased A lagged dependent variable – biased coefficients

What really causes innovation?What really causes innovation?

Not search Not search Not location Not R&D Not R&D

h ld f i tit tishould we focus more on institutions, incentives, opportunities, cost of resources for innovation?resources for innovation?

Research opportunitiesResearch opportunities

Combine CIS with other sources of Combine CIS with other sources of representative data

Need conceptual/theoretical novelty to break p / ythrough to major journals

Geography is a hot (overheated?) area g p y How do firms (other than pharma, software) deal with globalization?

Service innovation may respond differently?

Cognition: Apply insights from behavioral econ, psych into empirical research on innovationpsych into empirical research on innovation