Daria Podmetina
INNOVATION AND INTERNATIONALISATION IN RUSSIAN COMPANIES: CHALLENGES AND OPPORTUNITIES FOR OPEN
INNOVATION AND COOPERATION
Acta Universitatis
Thesis for the degree of Doctor of Science (Technology) to be presented with due permission for public examination and criticism in the Auditorium 103 in the Student Union House at Lappeenranta University of Technology, Lappeenranta, Finland on the 7th of July, 2011, at noon.
2 Supervisor Professor Marko Torkkeli
Faculty of Technology Management Department of Industrial Management Lappeenranta University of Technology Finland
Reviewers Professor Angappa Gunasekaran
Department of Decision and Information Sciences The Charlton College of Business
University of Massachusetts Dartmouth USA
Professor Anna Trifilova
Department of Management and Marketing
Nizhny Novgorod Architecture and Civil Engineering State University Russia
Opponent Professor Angappa Gunasekaran
Department of Decision and Information Sciences The Charlton College of Business
University of Massachusetts Dartmouth USA
ISBN 978-952-265-112-9 ISBN 978-952-265-113-6 (PDF)
ISSN 1456-4491
Lappeenranta University of Technology Digipaino 2011
ABSTRACT
Daria Podmetina
INNOVATION AND INTERNATIONALISATION IN RUSSIAN COMPANIES:
CHALLENGES AND OPPORTUNITIES FOR OPEN INNOVATION AND COOPERATION
Lappeenranta: 2011 105 p.
Acta Universitatis Lappeenrantaesis 438 Diss. Lappeenranta University of Technology
ISBN 978-952-265-112-9, ISBN 978-952-265-113-6 (PDF), ISSN 1456-4491
Increasing globalisation and intensified cross-border cooperation, together with significant technological breakthroughs, create a fascinating gap for the research of the relationship between internationalisation and innovation on national, regional and company levels in Russia. The intensified international trade between countries and regions benefited from favourable institutional conditions, and facilitated the technology transfer and the development of innovations on the national level. This study approaches the same question from the company perspective; if certain companies are more innovative than other domestic companies, will they start internationalisation more easily or get involved in cooperation with international stakeholders? When companies operate in international markets, how do they obtain knowledge?
Moreover, would this new knowledge from the foreign market help then to increase innovativeness, competitiveness and develop operations in domestic/local and foreign markets?
Considering the role of foreign direct investments (FDI), the research in hand tries to find out the role of companies with FDI on the other players on the home market. Do foreigners bring new technology, innovation to the country? Is there spillover effect observed and how local companies can benefit from them?
This dissertation studies the internationalisation and innovation in Russian companies, both from the outward internationalisation and inward internationalisation perspectives. Russian companies developed quickly during the transition period, after the dissolution of the Soviet Union. The common background of these companies, the effects of the change of ownership, and some managerial difficulties make them more sensitive to competitions issues, and in this context, the opportunities brought by the developing innovations are seen in companies and on the governmental level.
Keywords: Internationalisation, innovation, open innovation, cooperation, Russian companies UDC: 001.895:658.11(47+571):334.7
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To my wonderful sons, Filip and Erik, - my greatest source of joy and inspiration
ACKNOWLEDGEMENTS
"Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover." - Mark Twain
Work on this dissertation was long and challenging, but interesting and exciting process. I was extremely lucky to have the very best of people supporting and motivating me on the different stages of this process. I would like to express my warmest gratitude to all of them.
First I would like to thank my supervisor professor Marko Torkkeli, who guided me through the last two most interesting, but difficult years of the dissertation writing. Marko took me to the exciting research field of innovation management and opened the world of open innovation.
Thank you Marko for your patience and flexible deadlines. I have to mention also professor Kari Liuhto, the first supervisor of my thesis and the leader of the first research projects I was enrolled in university. I would also like to thank professor Tauno Tiusanen, the second supervisor of the thesis, his extensive experience in the field of transition economies and amazing life stories made significant contribution to my research. Warm thanks to our dean Markku Tuominen for generous support, encouragement, for providing me with stable working environment and for believing that my dissertation will be finalized one day.
I would also like to thank the thesis pre-examiners professors Anna Trifilova and Angappa Gunasekaran for their effort invested on the late phases of the writing process. My amazing co- authors: Maria Smirnova, Irina Savitskaya, Marko Torkkeli, Juha Väätänen, Vera Rebjazina – without your help, ideas, contribution the dissertation would never be finalized. Thank you all for your support, with you the research work is always fun!
I gratefully acknowledge the financial support received from the Finnish Doctoral Program in Industrial Engineering and Management (Tuotantotalouden valtakunnalinen tutkijakoulu), CIMO, and the Finnish Foundation for Technology Promotion (Tekniikan edistämissäätiö). The research project “Innovativeness of High-tech Enterprises in Russia” was financed by the Academy of Finland and provided significant part of the funding for this research and data collection in Russia.
Very special thanks and deepest respect go to Pirkko Kangasmäki – the secretary of our department, who can make everything possible and impossible in the shortest time. Thank you Pirkko for your work! I would like to thanks also Eeva Häyrinen for taking care of all organizational issues concerning my thesis and Paula Haapanen for fast and effective proof- reading of dissertation. More thanks to professors Eelko Huizingh and Angappa Gunasekaran for significant attempts to improve my academic writing skills.
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I have to mention my great colleagues Kati, Henrik, Juha, Markus, Pekka, Antero and Samuli.
The endless evening writing sessions with tons of coffee and laugher – I will keep these memories forever. Thank you! You guys are the best!
I spend long time to invent some special words for our Russia coordinator Riitta Salminen, but did not find the ones to describe the contribution of this wonderful person to my dissertation.
Riitta was one of the very first persons I met during my first days in university. Thank you for you enthusiasm, strength and positive energy.
The very many hugs for Irina and Daria for unfailing support, for your energy, inspiration, for company during long working hours and after-works, for fun, for laugh, for everything.
I thank all my friends for kicking me out of the office, for remembering and understanding. Very special thanks to Natalia and Antonio, for your help and faith in me during all these years.
I give my deepest expression of love and appreciation to my family, my parents and relatives for the courage you gave me for studying since the childhood and for the absolute faith you have in me and for respecting my decisions in work and life. Thanks to Juha for patience and support, especially on the latest stages of the dissertation. And for my kids Filip and Erik, who had not had enough of my time lately, all my love and deepest thanks to you! You showed me that learning is fun, that something new happens every day in our life and we just need to be open for challenges.
Lappeenranta, 23.06.2011 Daria Podmetina
TABLE OF CONTENTS
LIST OF PUBLICATIONS AND AUTHOR’S CONTRIBUTION PART I: OVERVIEW OF THE DISSERTATION
1. INTRODUCTION………..17
1.1. Origins and motives……… 17
1.2. Scope of the research………. 21
1.3. Research gap and research questions……….. 24
1.4. Limitations of the study……….. 26
1.5. Structure of the thesis……….. 28
2. INTERNATIONALISATION AND INNOVATION……….30
2.1. Overview………. 30
2.2. Inward-outward internationalisation……….. 32
2.3. Innovations and inward-outward internationalisation………... 34
2.4. Technology and internationalisation………... 41
3. INNOVATION AND INTERNATIONALISATION IN RUSSIA………48
3.1. Internationalisation in Russia……….. 48
3.2. Innovations in Russia……….. 51
4. DATA COLLECTION AND RESEARCH METHODOLOGY………...57
4.1. Survey………. 57
4.2. Data collection in Russia………. 60
4.3. Summary of the research methodology in publications and limitations………. 67
5. SUMMARY OF PUBLICATIONS AND REVIEW OF RESULTS……….69
5.1. Publication I……… 69
5.2. Publication II………... 70
5.3. Publication III………. 71
5.4. Publication IV………. 73
5.5. Publication V………... 75
6. CONCLUSIONS………78
6.1. Overview………. 78
6.2. Results of the research process………... 79
6.3. Summary of the contribution of publications………. 80
6.4. Model developed………. 84
6.5. Limitations of the research results……….. 86
6.6. Future research……… 87
9 LIST OF REFERENCES
APPENDICES:
APPENDIX I. Core papers Inward and Outward Internationalization and Innovation APPENDIX II: Core Quantitative Studies on Open Innovation
PART II: PUBLICATIONS
Publication I: Innovativeness and International Operations: Case of Russian R&D Companies Publication II: The Role of FDI in the Development of Innovative Capacity: The Case of Russian Companies
Publication III: Open Innovation in Russian Firms: an Empirical Investigation of Technology Commercialisation and Acquisition
Publication IV: Open vs. Traditional Innovation. Does Internationalisation Matter? Case Russia Publication V: Cooperation and Open Innovation in Emerging Economies. Study of Innovation Strategies of Russian Companies
LIST OF FIGURES
Figure 1. Environmental turbulence, globalisation and growth Figure 2. Scope of the research
Figure 3. Research gap
Figure 4. Input-output structure of the thesis Figure 5. Imports and exports in Russia 1992 – 2010 Figure 6. R&D spending in exports in Russia, 1992 - 2009 Figure 7. Innovation “pillars” of Russia and BRICs countries Figure 8. Innovation “pillars” of Russia and other countries Figure 9. Regional GDP of Russian federal districts
Figure 10. Share of high technology companies in Russian federal districts Figure 11. Open innovation matrix
Figure 12. Results of the research process
Figure 13. Open innovation and internationalisation model
11 LIST OF TABLES
Table 1. Research questions, goals, objectives, methods and publications Table 2. Summary of publications on innovation and internationalisation Table 3. Taxonomy for the globalisation of technology
Table 4. Knowledge economy index of Russia and BRIC countries Table 5. Summary of the research methods
Table 6. Summary of the publications and their main findings Table 7. Contribution of the results of publications
Table 8. List of variables for open innovation and internationalisation model
LIST OF ABBREVIATIONS
CIS - Commonwealth of Independent States CIS – Community Innovation Survey
EBRD – European Bank of Reconstruction and Development FDI – Foreign Direct Investment
IB - International Business IM – Innovation Management JV – Joint Venture
MNC (MNE) – Multinational Company (Enterprise) NPD – New Product Development
OECD - The Organisation for Economic Cooperation and Development OI – Open Innovation
R&D – Research and Development RBV – Research-Based View SU - Soviet Union
UNCTAD – United Nations’ Conference on Trade and Development
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LIST OF PUBLICATIONS AND AUTHOR’S CONTRIBUTION
The thesis consists of the introductory part (Part I) and publications (Part II). The publications included in the thesis are listed below. All the publications were done in cooperation with other authors; therefore, the statement of author’s contribution to each publication is included.
PUBLICATION I
Podmetina Daria, Smirnova Maria, Väätänen Juha, and Torkkeli Marko, 2009. Innovativeness and International Operations: Case of Russian R&D companies, International Journal of Innovation Management, Vol 13, No 2, 2009, pp. 295-317.
Publication I addresses the link between outward internationalisation and innovation. The analysis is based on the empirical findings from a companies’ survey in Russia. The author proposed the research idea for this paper as one of the papers contributing to solving the main research question of the dissertation, the Innovation – Internationalisation challenge. The author was also responsible for formulating a theoretical framework and hypotheses; the data collection and analysis were organized in cooperation with other partners. The discussion and conclusion sections were mainly written together with co-author.
PUBLICATION II
Väätänen Juha, Podmetina Daria and Aleksandrova Marina, 2010. The Role of FDI in the Development of Innovative Capacity: The Case of Russian Companies in eds. Soete L and Fu X.
The Rise of Technological Power in the South, Palgrave, MacMillan, UK, 2010.
Publication II analyses the effect of inward internationalisation – FDIs - on the innovation output of local companies. This was planned by the author as the second core paper for the dissertation, discussing the Innovation – Internationalisation challenge. The study is based on the empirical findings from a survey of 200 companies Russia. The author was responsible for planning and designing the research, while the theoretical part was conducted in cooperation with the co- authors. The data was analysed mainly by the author, and the discussion and conclusion were done with the help of the co-authors.
PUBLICATION III
Podmetina Daria, Väätänen Juha, Torkkeli Marko, and Smirnova Maria, 2011. Open innovation in Russian firms: an empirical investigation of technology commercialization and acquisition, International Journal of Business Innovation and Research, Vol. 5, No. 3, pp. 298-317.
Publication III discusses the concept of open innovation and studies the adopting of innovation strategies in Russian companies. The classification of innovation strategies includes different combinations of internal research and development, external technologies acquisition and technologies commercialisation. The role of internationalisation for companies with different
innovation strategies is evaluated. The responsibility of the author included planning and designing the research, data analysis, and writing the introduction and discussion. The theory framework and conclusion were written in cooperation with the co-authors.
PUBLICATION IV
Podmetina Daria, Väätänen Juha and Torkkeli Marko, 2011. Open vs traditional innovation.
Does internationalization matter? Case Russia, submitted to the Conradi. The earlier version is in the Proceedings of the 3rd ISPIM Innovation Symposium, December 12-15, 2010, Quebec City, Canada.
The main idea of Publication IV is to find out how companies select between open and closed approaches to innovation strategies and what the role of internationalisation is in this context.
The empirical findings proved open innovation (OI) to be the most effective innovation strategy;
the more companies involved in OI, the higher their innovation and economic performance is.
The degree of internationalisation was higher for companies with OI. The author was responsible for research planning and design, and for writing the discussion and conclusion. The literature review and data analysis were conducted in cooperation with the co-authors.
PUBLICATION V
Podmetina Daria, Väätänen Juha, Torkkeli Marko, and Smirnova Maria, 2011. Cooperation and open innovation in emerging economies. Study of innovation strategies of Russian companies, accepted to the Divisional Roundtable Paper Session at the 2011 Academy of Management Annual Meeting, August 12-16, 2011, San Antonio, Texas.
Publication V shows that cooperation with external partners clearly depends on the degree of openness of the innovation strategy and the proximity of the partner, both in the sense of importance and intensity of cooperation. The most significant effect of cooperation was detected for companies with a full range of open innovation strategies, both in-bound and out-bound. The degree of internationalisation is significantly higher for companies with open innovation. The responsibilities of the author were the development of the concept, writing the introduction and conclusion. The data analysis and the theory overview were conducted together with the co- authors.
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PART I: OVERVIEW OF THE DISSERTATION
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1. INTRODUCTION
One of the advantages of being disorganized is that one is always having surprising discoveries.- A.A. Milne 1.1 Origin and motives
1.1.1. Origins
Globalisation has had an effect on all possible aspects of our life (Held et al., 1999) and has marked not only the majority of companies but individuals as active participants of the intensified international exchange. Globalisation is analysed on the country, region, and company level through international trade, foreign direct investments (FDI), capital flows and technology transfer measures (Bhagwati, 2004), and is driven by a number of economic, technological, political and social factors (Croucher, 2004). Globalisation processes push companies to enter foreign markets and to acquire specific knowledge, enabling them to implement technology and product innovations. Internationalisation modes, both outward (export) and inward (import), act as effective channels for the technology transfer between countries (Pack, 1993). Globalisation provides opportunities to innovate and improve competitive position for companies from emerging markets (Gorodnichenko et al., 2008) by obtaining skills and knowledge (Bell and Pavitt, 1993).
The common goal of the international business (IB) research tradition is to try to explain why and how companies enter international market and how they operate there. A variety of different theories have emerged to explain the effect of companies’ behaviour and motivation on the decision to internationalize. IB theories contribute to understanding the companies’
internationalisation process relying on their characteristics: size, ownership, location, and strategy (Dunning, 2001). The study of innovations within IB theories, however, is not a new phenomenon. Earlier research stated that superior technology and innovations are important factors for the competitive advantage in international expansion (Dunning, 1970; Johansson and Vahlne, 1977; Vernon, 1966). The difference of technology or innovation internationalisation from “pure product” internationalisation was claimed by the researchers in the last decade (Zanfei, 2000, Cantwell and Piscitello, 2002, 2005; Dunning and Lundan, 2009). Companies differ in terms of their innovations according to the level of internationalisation (Castellani and Zanfei, 2006) and they rapidly increase their research and development (R&D) activities abroad (Dalton, et al., 1999, Belderbos et al., 2006).
The innovation management (IM) perspective contributes to understanding the increased role of innovation systems (national and regional) on the development of technology competence of the local firms and their expansion to the foreign markets (Giuliani et al., 2005, Chaminade and Vang, 2008). According to these studies, a company’s competitive depends not only on the exploitation of their existing capabilities, but also on the search and acquisition of new knowledge (Teece et al., 1994, 1997) on the home market and via cross-border transactions.
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Furthermore, superior technology capability helps companies to achieve better product differentiation and better response to the fast changing environment (Teece and Pisano, 1994).
The search for new technology forces companies to cooperate more with foreign partners, customers and suppliers (Smirnova et al., 2009) and to establish strategic alliances in order to develop and commercialize new products, technologies or services (Gulati, 1998). The international aspect is important for understanding processes of cooperative innovations, new product development (NPD), technology transfer, diffusion of innovations, and recently emerged phenomena of open innovations.
The purpose of this thesis is to contribute to the discussion on the role of innovation in the internationalisation process. A literature review has been carried out to summarize those internationalisation and innovation concepts which form the framework for this study. The combination of IB and IM perspectives have significant similarities: companies’ technological capabilities and contribution to improving competitive advantage; the role of cooperation with external partners and the search for new partners; the role of the external environment (home, host or innovation systems) and institutional factors. The contribution of this thesis is to empirically test the theoretical findings on a large spectrum of companies from emerging economies, such as Russia. These companies are in need of new methods and techniques for improving their competitive position in domestic and international markets.
1.1.2. Motives
The impact of entrepreneurship on technology’s progress was discussed by Schumpeter (1934);
his view was that entrepreneurship is able to transfer new ideas into successful innovations and stimulate long-term economic growth. Thus, the technology change became more important than capital gain. The model developed by Solow (1956) and Swan (1956) assumed that at some point in time, a certain increase in capital will not create any growth, and this point can be overcome by inventing new technology (exogenous growth). However, their model lacks sufficient empirical evidence. In 1980s the endogenous growth theory provided mathematical explanations for technology’s progress (Romer, 1986) and the concept of human capital – knowledge and skills as sources to increase labour productivity. The increase of human capital and technological change (innovations) explain the growth rate. In this dissertation, the author considers industrial enterprises as the major developers of new technology and thus, economic growth.
Research of industrial enterprises is a wide and challenging area, and the role of industrial enterprise and functions in the economic environment are complex and significant. A new type of industrial enterprise appeared in the last decades of 19th century and was associated with the so-called second industrial revolution1. The construction of transportation (mostly railroads) and communication (telegraph) networks facilitated large scale supplies, delivery and information exchange. The emergence of large scale manufacturing companies stimulated the creation of new
1 The first industrial revolution occurred in UK at the end of the 18th century with the emergence of mechanical mining, metal production, and the development of the textile industry.
industries, technology breakthroughs and internationalisation (Chandler, 1992). Industrial enterprises carried out significant transformations in the last 20 years due to market and environment turbulence and change.
Companies need multiple business strategies in order to cope effectively with any given environmental condition (Wright et al., 1990; Akan et al., 2006). The business environment was considered relatively stable in the mid to late 1980s, and did not require flexible strategies.
However, in the 1990s, market and environmental turbulence increased and flexibility became a means for company survival (Pine, 1993). In order to cope with environmental and market contingencies, companies ought to diversify their strategies, aiming towards exploring opportunities and avoiding threats created by the changing markets (Porter, 1979).
The world economy has entered a new era of uncertainty, characterised by increased risks and turbulence, and consequently, chaos. Enterprises need to establish new strategic behaviour (warning system, scenario construction system and quick response system) which allow them to manage during the time of recession (Kotler and Caslione, 2009). Kotler and Caslione claim that the main forces of globalisation and technology have caused an increased fragility in the economy, which have resulted in intensified periods of turbulence. Currently, this intensified turbulence is already accepted as normal for the economy and companies have learned how to behave in this situation. What was considered extraordinary and stressful for companies 20 years ago has become an everyday situation for modern companies.
The environment turbulence is a threat for companies, which they have to fight, but it is also an opportunity, which companies need to investigate and explore. Turbulence and chaos (Kotler and Caslione, 2009) lead companies to switch the management paradigm; companies need to develop new set of actions (behaviour) for interacting within its system and with other systems at a new level. Flexibility and openness at all structural levels of companies are the skills which help to develop the innovative and learning capabilities of industrial enterprises. The survival of the competition fight in the long run is possible for most open, innovative and cooperative companies. The technology paradigm (Dosi, 1982) clarifies the direction of technological change - towards future technological improvements. The combination of environmental turbulence, market conditions, technology change, globalisation and the other factors make enterprises to rethink their management and operation methods (Figure 1). The role of these forces in the enterprises’ management paradigm shift toward “openness”, flexibility and cooperation is an important research question for industrial organisation studies. The ways to manage these forces are forming the strategic behaviour of industrial enterprise, the structure of their target markets and interactions with stakeholders.
Globalisation tends to remove the barriers between national borders in order to facilitate the flow of goods, services, capital, knowledge and labour. It could be considered as a trend towards global openness but there are restrictions set by many countries in order to protect certain
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industries from foreign competition. However, the pace of globalisation is quickening and its impact on businesses is growing.
Figure 1. Environmental turbulence, globalisation and growth
As discussed earlier, the technology revolution stimulates the development of new types of companies, and the expansion of these industrial companies, both within the home market and externally, takes them to a new level of development. The intensification of production requires a modernisation process involving social change, economic development, and technology innovation. Intensified production and further transformation towards openness introduces mind change, when people take a different attitude towards nature, society and the economy. They learn rationalisation. The combination of rationalisation with skills in the fast utilisation of new emerging technologies and adopting innovations are likely to support the intensification of production and stimulate economic growth.
Technology development is often confused with technological progress. Traditionally technology change is understood as an ongoing process and the technology progress as certain distinct achievements of technology, radical innovations. Technological change is a continuous process of invention, innovation, diffusion of technology and innovations (Schumpeter, 1934; Jaffe et al., 2002). This involves continuous innovations at all stages of research, adoption, development, diffusion and use.
Environmental and Market Turbulence
Globalisation Technology
Change and Innovations
Industrial Growth
Management Paradigm Shift
1.2. Scope of the research
Enterprises from transition economies are unique phenomena in current industrial enterprise research. Considering the very long lasting process of industrialisation and globalisation in the developed countries, enterprise in transition economies provide us with the opportunity to observe a short and intensive transformation process. The enterprises from transition economies face double pressure from global turbulence and local transformation processes; they had to quickly learn to compete, both in internal and external markets, and with local and foreign companies. In this perspective, Russia represents one of the most interesting but challenging cases for analysis due to its large size, regional economic heterogeneity and political constraints.
This study provides insights to better understand the connection between innovation and internationalisation processes in Russian companies. This specific aim requires the elaboration of knowledge from three research fields: international operations, innovation (and more specifically, open innovations and collaborative innovations), and the heritage of transition reflected in the companies’ background (Figure 2).
Figure 2. Scope of the research Internationalisation
Internationalisation is a two-way process of gradual involvement in international activities. This involvement may happen through international inward operations, such as importing and in – licensing, international outward operations, such as exporting and out – licensing, or through international cooperation (Korhonen, 1999). Some companies internationalise due to external reasons, when their rivals or customers have become globalised (Ohmae, 1990), others internationalise due to internally-pushed factors, such as improving the firm’s profitability (Gerliner et al., 1989). Dunning (1980; 1988) suggests that cost minimizing is not the only factor influencing internationalisation, but also ownership-specific advantages must be obtained. The
International Business Studies
Innovation Management Studies Studies of
Transition Economies
Research Focus
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stage models indicate that internationalisation is linked with managerial learning.
Internationalisation is defined as a step-by-step process from the simplest form (export) to manufacturing abroad (Luostarinen, 1994). This process combines getting experience and knowledge and increasing resource commitment to foreign markets.
The network perspective draws on the theories of social exchange and focuses on firm behaviour in the context of inter-organisational and interpersonal relationships. This perspective emphasises the role and influence of social relationships in business transactions (Johanson and Vahlne, 1990; 1993). Companies are connected by networks, developing the interaction between them. In the network context, internationalisation means that the firm develops business relationships in networks in other countries through international extension, penetration or international integration (Johanson and Mattson, 1988). The network approach is especially important in turbulent, high technology industries (Johanson and Vahlne, 1990).
Transition
A transition process describes the change from a centrally-planned economy to a free market, and includes economic liberalisation (letting market forces set prices and lowering trade barriers) and macroeconomic stabilisation (inflation control, restructuring and privatization) (Kornai, 1990). The transition process is characterised by the restructuring of existing enterprises, the emergence of new private enterprises, and the transformation of the government’s role (Falke, 2002).
The trade liberalisation of 1992 in Russia stopped the government monopoly on foreign trade, giving companies the opportunity to internationalise. In Russia, the process of transforming into market economy has proceeded according to two guiding principles (Kornai, 1990): the liberalisation of markets via price liberalisation and the enforcement of hard budget constraints via the privatisation of state-owned companies. The Russian government abolished price controls and freed prices in 1992. The share of foreign trade increased from the Soviet Union’s 4% of GDP for exports and imports in 1985 to Russia’s 28 % of GDP for exports (31 % in 2008) and 20 % of GDP for imports (22% in 2008) in 2009 (World bank, 2011). This development exposed Russian companies to increased international competition, both domestically and in export markets.
Innovations
Innovation is recognised worldwide as a tool that supports local firms in becoming or staying competitive in the global market. Transitional countries should be the most dramatic beneficiaries of globalisation, especially from the transfer of capabilities of FDIs (Sutton, 2007).
Competition from foreign companies should strengthen domestic companies.
The traditional strategy orientation states that companies have to diversify strategies in order to use opportunities and avoid threats emerging due to market turbulence (Porter, 1979). Moreover,
as was discussed earlier, the business environment was considered still relatively stable in the mid to late 1980s. Since the beginning of 1990s, market and environmental turbulence has increased and companies were forced to fight competition and flexibility became a means for company survival. In that time, companies were inclined to control all stages of the innovation process themselves and most R&D was produced internally (Wheelwright and Clark, 1992). Not only R&D, but new product development (NPD) and technology innovations, along with the commercialisation of new products and technologies, were conducted within company borders.
This approach is currently referred to as the traditional or closed approach to innovations.
Due to the degree of turbulence, increased competition and newly emerged technology opportunities, companies have intensified the use of both internal and external knowledge (Cohen and Levinthal, 1990; Klevorick et al., 1995). It has become obvious that the traditional approach to innovation and R&D does not fit with this changed environment. Thus, many companies have started to transition towards a new, more open policy on innovations.
Companies need to develop more open business models if they want to get the best use of their internal R&D, search for and acquire new technologies and use effectively commercialisation channels, decrease costs and save time (Christensen, 1997). When Chesbrough (2003, 2006) launched the term “Open Innovation” to describe the new phenomena, it was just in time to describe the latest transformation processes in this field of innovation. At present, the open approach has become essential for many companies’ innovation practices. The organised search for new ideas is important for open innovation framework development (Laursen and Salter, 2006). Open innovation can be exploratory (emergent innovation process) and focused (predetermined search) (Holmes and Smart, 2009). There is empirical evidence that the turbulence of technology and competition on technology markets strengthen the effect of outbound innovations on companies’ performance (Lichtenthaler, 2009).
Cooperation is the core of an open innovation framework (Chesbrough, 2006) and the number of cooperative partners and quality of cooperation play an integral role in the success open innovation principles adopting (Kock and Torkeli, 2008). This cooperation gives companies the opportunity to access knowledge and technologies in order to increase their innovativeness, and decrease costs and risks (Faria and Schmidt, 2007). There have been multiple studies on the collaborative approach to innovations (Freytag, 2002; Andrew et. al, 2006; Blomqvist and Levy, 2006; Miles et al, 2004; Johnsen and Ford, 2000; Ford and Johnsen, 2001; Hakansson and Eriksson, 1993). Some studies focus on innovation cooperation with foreign partners (Faria and Schmidt, 2007) and stress the strong relationship between internationalisation and innovation, especially when international technology transfer is a form of export per se (Robinson, 1988;
Filipescu, 2007). Having entered foreign markets by selected entry modes, firms have acquired specific product and market knowledge that enable them to implement more technological innovations (Filipescu, 2007). Innovations and R&D play an important role in overcoming barriers to internationalisation, but being conditional on having entered the export market, R&D
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does not increase the export intensity level when it is treated as endogenous (Harris and Li, 2008).
1.3. Research gap and research questions 1.3.1. Research gap
The research gap of this thesis has been developed as elaborating the opportunity offered by two streams of theories: international business (IB) and innovation management (IM). The IB perspective contributes to the understanding of the role of superior technology and innovation for companies’ competitive advantage in different stages of internationalisation process (Dunning, 1970; Johansson and Vahlne, 1977; Vernon, 1966; Castellani and Zanfei, 2006), relying on company characteristics, such as size, ownership, location and strategy (Dunning, 2001). The IM perspective considers the increased role of innovation on developing the technology capabilities (Teece and Pisano, 1994) of firms to achieve better product differentiation and better response to the fast changing environment and to the expansion to foreign markets (Giuliani et al., 2005;
Chaminade and Vang, 2008). The combination of these two streams of research provides wide opportunities to speculate on the typology of innovation strategies and their dual relationship with international activities. The empirical evidence on the dual relationship between innovation and internationalisation exists in a number of publications (Filipescu, 2007, Castellani and Zanfei, 2006; Wakelin, 1998; Rodriguez and Rodriguez, 2005).
The challenge of the dissertation’s research gap comes from the transition theories approach. The opening of borders in post-communist countries was highly anticipated by people and companies. However, together with the obvious benefits of free trade, investments and economic development, there are a number of threats for domestic companies, which have to be taken into consideration. Market liberalisation affected Russian companies by increasing competition from imported goods, foreign direct investments and emerging new effective companies. Companies had to learn to be competitive and find their own niche either in the domestic market or in the global one. In the communist system, domestic companies did not have to put much effort into improving the quality of products and services, personnel training, and innovation and marketing research, because they were involved in direct sales, the barter system or had guaranteed governmental orders. The centralised research institutes were in charge of conducting research and providing technology development opportunities. The supply of technology was not often in balance with the demand from enterprises. This imbalanced connection between research institutions and companies still remains the weakest link in Russia (Krot, 2008). One of the most important factors that could contribute to market players’ changing behaviour is the firm’s attitude to innovations, technology development, technology transfer and the commercialisation of innovations.
Figure 3 presents the research gap which is created as a combination of challenges and opportunity identified in the literature. By combining challenge and opportunity, the overall
research question considers what the relationship is between innovation and internationalisation in Russian companies.
Figure 3. Research gap
1.3.2. The objectives and research questions
According to the research gap discussed above, the overall research question of this study is
“What is the relationship between innovation and internationalisation in Russian companies?”
This overall research question is divided into specific research questions (RQ 1, RQ 2 and RQ 3) addressed in the publications (Table 1):
Research Question 1: How are innovations and internationalisation related?
Publications I and II address the first research question through a quantitative analysis of 176 Russian companies.
Objectives 1: To study the relationship between innovations (innovation activities, R&D expenditures, NPD) and internationalisation (outward – exports and inward – FDIs)
Research Question 2: How do Russian companies implement open innovation and what is the role of internationalisation?
Publications III and IV address the second research question through a quantitative analysis of 150 (Publication III) and 206 (Publication IV) Russian companies respectively.
Objectives 2: To research the innovation strategies applied, based on the open innovation framework (internal R&D, external technology acquisition and commercialisation through external channels); to propose tools for analysing open innovation strategies and to estimate the role of internationalisation.
Turbulence and Transformation in
Transition theory
Globalisation and Technology Change
DISSERTATION RESEARCH GAP
OPPORTUNITY:
Analysing relationship of innovation and internationalisation Theories of
Internationalisation
Innovation Management
Theories
CHALLENGE:
How internationalising companies from a transitional economy (Russia)
can benefit from innovations?
26
Research Question 3: What is the role of cooperation with local and international external partners in an open innovation framework?
Publication V addresses the third research question through a quantitative analysis of 206 Russian companies.
Objectives 3: To analyse the open innovation strategy of the companies and estimate the importance of R&D cooperation with local and international external partners
These objectives are set in order to elaborate new knowledge on the phenomena of innovation and internationalisation strategies in transitional economies, such as Russia. Due to the very small amount of empirical research related to the internationalisation and innovations of Russian companies, the research questions are descriptive and exploratory in nature rather than explanatory. The research problem is examined through the sets of quantitative data and by means of different statistical methods.
1.4. Limitations of the study
The focus of this thesis is on the role of innovation and internationalisation, based on the assumption of international business and innovation management theories. The approach to the research question extends from the internationalisation stage theories (U- and I-models) with core items of analysis as exports, imports, inward and outward FDIs. By stating this, other IB theories of internationalisation are beyond the scope of this study (MNC theories, FDI theories, RBV, contingency approach).
There are also limitations on the general applicability of the stage models. This study does not consider the influence of external and institutional factors, like governmental effect and environment, however, the competition effect and cooperation with stakeholders are analysed.
Hence, there is limited evidence of the implication of IB theories in Russia, and no evidence concerning the relationship of innovation and internationalisation, the implication of these theories in other transition countries can be studied. The limitations also imply that the analysis is conducted at the company level. Therefore, the alliances of the firms or integration into the networks are not subjects of this research.
Analysing Russian companies forced the author to put a limitation on the transition effect; the background of companies is taken into consideration, and the role of ownership is discussed, however, the transformation of the management systems and the role of transition are not the subjects of this research.
27
Table 1. Research questions, goals, objectives, methods and publications Research questionsGoal Method and data Objectives of publication Publication arch Question 1: w innovations and ternationalisation ? To study the relationship between innovations (innovation activities, R&D expenditures, NPD) on internationalisation (outward – exports and inward – FDIs)
Survey of 176 firms, Quantitative To estimate the role of innovation on the internationalisation process by analysing the impact of innovation activities, R&D expenditures, competition and NPD on the export intensity
Publication I Innovativeness and International Operations: Case of Russian R&D companies To study the role of FDIs on the development of innovative capacity of Russian companies based on the R&D intensity and patent activity
Publication II The Role of FDI in the Development of Innovative Capacity: The Case of Russian Companies arch Question 2: w do Russian panies implement n innovation and what e role of ternationalisation?
To research the innovation strategies applied based on the Open Innovation framework (internal R&D, external technology acquisition and commercialisation through external channels). To propose tools for analysing open innovation strategies and to estimate the role of internationalisation.
Conceptual, exploratory & quantitative, Survey of 150 firms To study the innovation strategies of and the OI Framework applied in Russian companies, and to estimate the role of internationalisation on the strategy choice.
Publication III Open innovation in Russian firms: an empirical investigation of technology commercialisation and acquisition Exploratory, quantitative (206 companies)
To study companies’ innovation and internationalisation and propose the framework for the analysis of OI standard portfolio and cooperation with local and international external partners.
Publication IV Open vs Traditional innovation. Does Internationalisation matter? Case Russia arch Question 3: at is the role of operation with local d international external ners in the open novation framework?
To analyze the open innovation strategy of the selected companies and estimate the importance of R&D cooperation with local and international external partners Exploratory, quantitative (206 companies) This paper aims to study the role of R&D cooperation with external stakeholders in the framework of the open innovation concept.
Publication V Cooperation and open innovation in emerging economies. Study of innovation strategies of Russian companies
28 1.5. Structure of the thesis
The structure of this thesis is presented on the input-output figure (Figure 4). The first chapter of the dissertation provides the background of the study and introduces the scope of the research and research objectives. The second chapter starts with a literature review, where the objective is to structure the current understanding of innovation and internationalisation phenomena.
Figure 4. Input-output structure of the thesis
The third chapter discusses previous research on internationalisation and innovation in transitional economies, and provides the highlights of innovations and international activities in Russia, at the national and regional level. The fourth chapter summarizes the methodological
INPUT PART I
Background Motives
Build inter-disciplinary scope of the research:
Links between innovation and international operations in the prior literature
Data collection process, justification of selection of methodology and analysing the data
Characteristic of internationalisation and innovation in Russia on national and regional level Chapter 1
Introduction
Research Gap Objective of the Study Research Questions OUTPUT
Previous research on internationalisation and innovation
Chapter 3 Innovation and internationalisation in
Russia Chapter 2 Internationalisation and
Innovation
Chapter 4 Data collection and
methodology Innovation and
internaitonalisation in Russia on the country level
Data description and choice of methodology
Chapter 5 Summary of publications
and review of the results Publications, objectives
of the papers and results
Summary of the publications and review of the results
Chapter 6 Conclusions
Summary of theoretical and managerial contributions of the thesis revealed in the results
Results of the study
PART II The publications
issues of the thesis and included publications, the survey techniques, the construction of the questionnaires and the collection of the data in Russia.
The fifth chapter describes the content of the included publications. The role of the publications is to study: the role of innovation on the internationalisation process by analysing the impact of innovation activities, R&D expenditures, competition and NPD on export intensity (Publication I); the role of FDIs on the development of the innovative capacity of Russian companies, based on R&D intensity and patent activity (Publication II); the innovation strategies of and the OI Framework applied in Russian companies, and to estimate the role of internationalisation on the strategy choice (Publication III); how companies select between open and closed approaches to innovation strategies and what the role of internationalisation is in this context (Publication IV);
the role of R&D cooperation with external stakeholders in the framework of the open innovation concept (Publication V). The sixth and final chapter contains the conclusions of this dissertation.
30 2. INTERNATIONALISATION AND INNOVATION 2.1. Overview
This chapter introduces the phenomena of firm level internationalisation and innovation from the international business (IB) and the innovation management (IM) perspective. The chapter begins with a description of internationalisation models, aspects of inward and outward internationalisation, and studies the role of knowledge and innovation for the internationalisation process. The chapter also includes a summary of technology and internationalisation aspects, discusses the role of international cooperation for innovation and the emerging possibilities for internationalising companies with the introduction of the open innovation paradigm.
The IB perspective contributes to the understanding of the role of superior technology and innovation for companies’ competitive advantage in the different stages of internationalisation process (Dunning, 1970; Johansson and Vahlne, 1977; Vernon, 1966; Castellani and Zanfei, 2006), relying on company characteristics: size, ownership, location, strategy (Dunning, 2001).
The IM perspective considers the increased role of innovation on the developing the technology capabilities (Teece and Pisano, 1994) of firms to achieve better product differentiation, and better response to the fast changing environment and to the expansion to foreign markets (Giuliani et al., 2005; Chaminade and Vang, 2008).
The main difference in the existing terminology is the object of the research; it can be: the understanding of internationalisation as the innovation of the firm – so called I-Models of internationalisation (Bilkey and Tesar, 1977; Cavusgil, 1980, Czinkota, 1982);
internationalisation of innovation or technology, which is different from the internationalisation of the product or service (Zanfei, 2000; Cantwell and Piscitello, 2002, 2005; Dunning and Lundan, 2009); and the internationalisation of companies’ R&D activities abroad (Dalton, et al., 1999; Belderbos et al., 2006).
Wang and Kafouros (2009) mention three main theoretical streams contributing to understanding the differences in innovation performance: the role of international trade (Falvey et al., 2004;
Pla-Barber and Alegre, 2007; Rodriguez and Rodriguez, 2005); the role of FDI (Blomstrom et al., 2000); industrial R&D (Davis and Meyer, 2004; Hall and Mairesse, 1995; Kafouros et al., 2008; Tang and Koveos, 2008). Industrial R&D refers to all R&D conducted in a given country, both by local companies and by foreign investors.
The other perspective of the research in this field is the significant growth of international knowledge, know-how and technology expertise transfer in the world economy. The institutions and countries possessing higher technology and scientific capabilities and output benefit most from the globalisation process (Archibugi and Pietrobelli, 2003).
Most of the empirical evidence on internationalisation and innovation comes from manufacturing company studies (for example, Coviello and Munro, 1997, Castellani and Zanfei, 2006). In practice, most of the information comes from multi-national enterprises (MNEs) and to a lesser extent, from service and retailing companies (Dawson, 1994; Coe and Hess, 2005), and from small and medium sized enterprises (SMEs), especially within the “born global” phenomena (Knight and Cavusgil, 1996).
The dual relationship between internationalisation and innovation is not studied thoroughly from the international business perspective. Hence, in global and fast changing environment companies try to improve their competitive advantage, it is important to understand how innovative companies can develop their internationalisation capabilities, and how internationalising companies can develop their innovation capabilities though learning in international markets and cooperating with foreign stakeholders. The interconnection of internationalisation and innovation is rather industry and country sensitive:; the institutional factors, risks and uncertainty differ when the international or domestic market is concerned, the reason being the fact that the knowledge transferred requires its adaptation for local markets. At the same time, the dynamism of internationalisation models is observed in the response to learning in the international markets (Welch and Welch, 1996).
The globalisation process is also well noticed as being behind the companies’ growth, diversifying innovation activities and making the innovation process more complex from an organisation perspective. The patterns of co-creating or adopting technologies are observed for larger amounts of firms. A small number of companies can be fully independent and rely only on internally developed technologies and innovations. The interdependencies between different stakeholders, both in the domestic and international market, become more noticeable in the field of innovation; companies tend to cooperate on R&D and innovation development, outsource parts of the innovation process, acquire or commercialise technologies or a part of them at different stages of the innovation process, therefore getting involved in the “open innovations”
framework.
From the internationalisation perspective, together with the growth of international trade and FDIs (both inward and outward), we are witnessing significant social, political and economic changes in societies; the opening up and growth intensification of developing countries, the opening and transformation of eastern European and post-soviet countries towards market economies, and the access to the global market (with all its pros and cons) to all players.
Throughout academic research, governmental regulation and business, the core issues behind internationalisation and innovation concepts lie in the analysis of the full range of new opportunities provided by the international market and internationalised organisations, including innovation capabilities, and innovation and technology outputs (Archibugi and Michie, 1995;
European Commission, 1998; OECD, 1997; Patel and Pavitt, 1991).
32 2.2. Inward-outward internationalisation
2.2.1. Definition of inward-outward internationalisation
Starting with Hymer (1976), the importance of knowledge, learning and innovation capability for internationalising companies is widely accepted (Coviello and Munro, 1997). The traditional definition of internationalisation, applied to all types of international activities, describes it as a gradual process of involvement in international operations (Welch and Luostarinen, 1988). Some companies internationalise due to external reasons, for example their rivals or customers enter foreign markets (Ohmae, 1990). Other companies internationalise for internally-pushed reasons, such as improving the firm’s profitability (Gerliner et al., 1989). The evolution from product innovation in the home market to export as the initial stage of the internationalisation process involves the proper knowledge of the market (Vernon, 1966). Companies get involved in the inward and outward internationalisation operations according to their life cycle and internationalisation is not necessarily a continuous incremental process, it can also include periods of de-internationalisation (Fletcher, 2001, Fletcher, 2008; Welch and Benito, 1996).
Internationalisation is not only outward driven but also inward driven (Welch and Luostarinen, 1988; Korhonen, 1999; Fletcher, 2001, 2008; Karlsen et al., 2003). The traditional outward internationalisation modes include exporting, outward FDIs, joint ventures (JV), licensing and franchising to name a few Furthermore, at the same time, companies can have inward international activities, such as importing, inward licensing and franchising, and inward FDIs,.
Internationalisation is a two–way process when companies become involved in international activities. This involvement may happen through international inward operations, such as importing and licensing, international outward operations, such as exporting and licensing, or through international cooperation (Korhonen, 1999). The analysis of the existence of inward- outward connections (Korhonen, 1999; Welch and Luostarinen, 1993) and their influence on the internationalisation process indicate their importance to the early stages of internationalisation;
connections become less important when an organisation grows (Karlsen et al., 2003).
There are two, somewhat overlapping, stage models of internationalisation (see Andersen, 1993, for review): Uppsala internationalisation models (U-Models) (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977) and innovation-related models (I-Models) (Bilkey and Tesar, 1977; Cavusgil, 1980).
2.2.2. U-Models
According to Johanson and Wiedersheim-Paul (1975), companies enter international markets with greater psychic distance step by step. The psychic distance means factors (language, culture, politics, education, industrial development) preventing the flow of information from and to the market (Johanson and Vahlne, 1977). In this sense, a lack of knowledge about foreign markets is considered as a barrier to internationalisation and knowledge about foreign markets can be obtained by internationalising companies themselves through experiential market knowledge.
