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New directions in R&D: currentand prospective challenges

Jeremy Howells

Manchester Institute of Innovation Research, Manchester Business School, University of Manchester, Manchester, UK. [email protected]

This paper investigates the paradox of research and development (R&D), that is being

increasingly undervalued by firms and nations, and yet continues to grow and prosper in terms

of overall size and reach. The analysis outlines key developments that are currently affecting

the growth and development of R&D activity and highlights the issues and problems that R&D

managers and policymakers may likely face over the next decade.

1. Introduction

T his paper seeks to outline the current andprospective challenges facing research and

development (R&D). There has been recent de-

bate about whether firms and governments

should concern themselves with R&D or instead

focus on the much-wider process of innovation.

Many of the arguments surrounding this are

valid, particularly within the context of advanced

economies as they become more service-oriented

in nature. Moreover, on a more specific company

level, there has been criticism that R&D has just

not delivered in terms of innovative output and

better productivity. There is a continuing R&D

productivity crisis; despite all the heavy invest-ment in research in many sectors, R&D appears

to be yielding less valuable or significant new

products, services and processes (Section 2.6).

The value placed on R&D by companies seems

to be at an all-time low and continues to be

declining. In a recent survey conducted by IBM

(quoted in Radjou, 2006, p. 7), in-house R&D

was only rated 8th in terms of importance as a

source for business innovation.

Yet despite all these recent arguments and

criticisms, R&D continues to develop and grow

both within the firm and at a wider national andinternational level. Why this paradox of criticism

and low esteem of R&D at a time when R&D

worldwide as an activity continues to grow? This

paper will seek to unravel such a paradox and the

concluding section of this paper will cover thisconundrum.

In the context of this debate, there is, however,

a danger of neglecting the continuing significance

of R&D for the success and growth of firms and

economies. Even in terms of its economic size,

R&D is a major activity. In 2000, global R&D

expenditure totalled some $729 billion (National

Science Foundation, 2006, pp. 4–40) and in 2006

R&D expenditure was approaching the $1 tril-

lion1 mark. Similarly, R&D has many millions of

workers employed in the activity worldwide, with

the United States alone employing over 1 million

R&D workers.2 R&D is, therefore, a large-scaleendeavour, which continues to grow both abso-

lutely and relatively worldwide.

The significance of R&D is also reflected at the

firm and the government level. The largest com-

pany R&D spender, Daimler-Chrysler, spent

$7.69 billion alone on R&D in 2005. Meanwhile,

governments still remain concerned about their

national R&D in terms of spending. This is high-

lighted in Europe, with the European Commis-

sion having a target of 3% R&D expenditure as a

percentage of GDP by 2010 (see Commission of

the European Communities, 2002, 2003).The rest of this paper is in two main sections.

The first section outlines some key developments

R&D Management 38, 3, 2008. r 2008 The Author. Journal compilation r 2008 Blackwell Publishing Ltd, 2419600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA

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that are currently affecting the growth and devel-

opment of R&D activity. The second section is

then more prospective in nature and raises the

issues and problems that R&D managers and

policymakers will either face in the future or those

that are currently an issue, but remain, for what-

ever reason, neglected or downplayed by industry

and/or government. It should be noted that the

main focus of the discussion and analysis of R&D

activity will be on business R&D, although as will

be indicated public and not-for-profit research is

closely intertwined with private R&D activity.

2. Changing dynamics of R&D

2.1. Introduction

This section will look at a number of major trends

and issues that are shaping the growth and

development of R&D globally. These are:

1. the increasingly distributed and open nature of

networked research and innovation;

2. this is, in turn, linked to the growth of ex-

ternally sourced R&D (and a consequent re-

lative decline in internally generated R&D)

within firms;

3. overcoming barriers towards the increasedproductivity and effectiveness of R&D;

4. the continued globalisation of R&D, particu-

larly in terms of its spread and reach, asso-

ciated with R&D offshoring; and

5. the relative shift from manufacturing-centred

R&D towards more service-oriented R&D.

2.2. Distributed and open R&D

The increasingly distributed nature of innovation

is associated with firms linking with other firms

and organisations not only on a regional andnational basis but also in an international con-

text. This is not a new phenomenon, especially in

relation to the pharmaceutical industry (Sander-

son, 1972; Liebenau, 1984), but it has continued

to expand steadily. This is evident both in more

traditional forms of international linkage, for

example, in the growth of R&D collaboration

and partnerships (see, for example, Powell, 1998;

Tapon and Thong, 1999; Orsenigo et al., 2001;

Hagerdoorn, 2002), as well as in newer forms

(Chen, 1997), such as outsourcing of clinical trial

work overseas. Increasingly, firms have extensiveexternal research and innovation linkages form-

ing complex distributed innovation networks

(Coombs and Metcalfe, 2002; Chang, 2003), and

leading to industries with highly open research

and technical systems. This has been charac-

terised by Chesbrough (2003a, b) as part of the

‘open innovation’ phenomenon.

What is less discussed in relation to the growth

of R&D collaboration and networking is that

these increasingly extensive networks incur high

scanning, coordination and learning costs asso-

ciated with establishing and maintaining these

networks. In addition, most studies adopt a very

static view of R&D linkage networks. It is not just

the cost of building these networks it is their

maintenance that can pose a heavy burden to

firms. Some highly dynamic networks may in-

volve considerable churn in network partners.The departure of a key collaborator, (a), may

involve a cascade of changes with related partners

of (a) departing from the network. However,

although a highly dynamic pattern of network

change may cause complications, equally, too little

change, associated with the stasis and ‘lock-in’ of

research networks, can also represent a hazard.

Moreover, as the number of partners increases in a

network, the more likely there will be potential

conflict between partners within the network. Ex-

clusive deals and licenses with one partner firm

may exclude collaboration with another firm.Lastly, there are increased dangers of intellectual

property (IP) loss with increased number of colla-

borators unless firms also spend time and money

monitoring and guarding against such loss.

R&D networking may therefore indeed be ne-

cessary (and indeed become a core competence of

the firm; Madhavan et al., 1998, p. 445); however,

as the cost and complexity of R&D continues to

grow it may also impose an increasing resource

burden to the firm seeking to master such pro-

cesses. Firms need to review constantly the benefits

and costs of R&D collaboration and networking;

it may not always be as good as it seems.

2.3. Growth and extent of external R&D activity

Firms are sourcing more of their research and

technical requirements externally, with their over-

all level of spend increasing significantly over the

last few years (Howells, 1999; Jones, 2000; Ho-

wells et al., 2003). The growth in R&D outsour-

cing is also reflected in the overall and relative

spend by firms on outsourcing R&D. In 2003,R&D performing firms in the United States spent

$10.2 billion in contract R&D to other domestic

Jeremy Howells

242 R&D Management 38, 3, 2008 r 2008 The Author

Journal compilation r 2008 Blackwell Publishing Ltd

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firms. Moreover, the average annual growth rate

of contracted out R&D from 1999 to 2003 was

double the growth rate of in-house R&D in the

United States (9.4% compared with 4.9%3; Na-

tional Science Foundation, 2006, pp. 4–33). How-

ever, extramural R&D is still low for the United

States at around 5.7% of total R&D in 2003

(compared with 3.7% in 1993). For other coun-

tries it is much higher. Thus, data from Ireland

for 2003 revealed that R&D outsourcing

amounted to some h156.4 million compared with

total business expenditure in research and devel-

opment (BERD) of h1,075.6 million in the same

year (Forfas, 2005, pp. 7, 37), equivalent to 14.5%

of the total Irish industry R&D expenditure. It

should, however, be noted that R&D outsourcinghere included the sourcing of R&D from other

parts of the parent company (within the formal

definition of the firm), but outside the business unit

or enterprise in Ireland (see Section 2.6).

This growth in external R&D spending can also

be seen at the firm level. To take one example of a

survey of R&D outsourcing in the UK pharma-

ceutical industry, the number of firms outsourcing

grew from 56.6% in 1998 to 71.7% in 2003, while

in terms of expenditure the percentage of the

R&D budget being spent externally increased

from some 13.8% of the R&D budget spentexternally in 1998, to 25.8% by 2003, a doubling

over the five-year period (Howells et al., 2008).

Similarly, given that approximately a quarter of

all pharmaceutical R&D expenditure is spent

externally in Britain, this equates to a market in

just one manufacturing sector in the United King-

dom of some $1.5 billion (d800 million) in 2004,

not a minor sum for just one industrial sector in a

single country. R&D outsourcing should, there-

fore, not be seen as a minor or a quaint appen-

dage to the wider outsourcing debate.

In terms of factors leading to such growth in

external R&D, activity time, cost and lack of in-house R&D and technical expertise come out as

the most highly rated factors associated with the

decision to outsource. Undertaking research and

technological activity in-house, or seeking exter-

nal sources for it, is all about maintaining future

competitiveness of the company and the future

core competencies and capabilities of the firm.

Other factors in the decision to source externally

are the degree of task modularity and knowledge

tacitness. In terms of the research or technical

activity, i.e. how easy or difficult was it for the

firm to decompose or separate out a particularresearch or technical task and to then parcel it out

to another firm or organisation to undertake (see

e.g. Mikkola, 2003). Thus, where a research or

technical activity’s boundary is very indistinct and

involves closely interrelated and complex linkages

with other research and technologies, outsourcing

would be less likely to compare with an activity

that forms a very distinct component and where

its relationship with other research areas or tech-

nologies is simple and clear. The degree of tacit-

ness of the knowledge being transferred is also

seen as a factor hindering research and technol-

ogy transfer, which may in turn influence

the R&D outsourcing decision; the less explicit

the know-how is, the more difficult it is to assim-

ilate it (Cohen and Levinthal, 1990; Lane and

Lubatkin, 1998). Clearly, the degree of tacitness is

likely to affect the ability to absorb the researchprocess back into the firm. Indeed, absorption

issues, such as different research cultures between

the two or more organisations involved, can be

seen as a more general outcome factor influencing

the decision of whether to outsource or not.

2.4. The cost, productivity and effectiveness of R&D

The late 1980s and the early 1990s marked the

beginning of significant attempts by firms toreduce their R&D expenditures. This was initially

more about cost savings, less about increasing the

productivity and efficiency of R&D as firms in

advanced industrial economies sought to reduce

the overall cost base in the face of recession.

Savings in R&D expenditure was of immediate

benefit to the firm’s ‘bottom line’ and in the short

term did not have a significant impact on the

performance of the firm. However, it was often

associated with, or resulted in significant, organi-

sational change, the most crucial here being the

closure of central, corporate R&D laboratories

and the shift towards flatter R&D structures,devolved to operational contexts lower down the

organisation, namely Divisions and Strategic

Business Units (SBUs).

By the late 1990s, firms had moved away from

simple cost savings towards improving productiv-

ity by targeting R&D in terms of improving

efficiency. This was often associated with identi-

fying and closing down unsuccessful projects ear-

lier on and by fast tracking products that seem to

have greatest chances of success, which has been

most marked in the pharmaceutical industry (see

e.g. DiMasi et al., 2003, p. 171; see also DiMasi,2000). One of the sectors that moved early here

was the pharmaceutical industry, where R&D

New directions in R&D

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costs, especially development costs, had been

spiralling but with no commensurate growth in

novel drug output; indeed, productivity levels had

been declining relative to outputs of new chemical

entities (NCEs). Thus, fewer than 5% of all

compounds that are screened enter pre-clinical

development, and only 2% of these candidates

enter clinical testing. Of all drugs that enter Phase

I trials, approximately 80% fail in the develop-

ment stage (Bolten and DeGregorio, 2002).

However, these efficiency and productivity im-

provement initiatives remain a new phenomenon

for most other sectors and firms. There remains a

lot more to be done here. Interestingly, although

these initiatives, in the short run, have led to a

constraint on the growth of R&D expenditure, inthe long run, it will improve the ability of R&D to

deliver new products, processes and services and

thereby encourage more R&D investment.

2.5. Globalisation of R&D and theincreasing spatial division of R&D:the geographical widening and deepening of R&D

The globalisation of R&D continues, but is now

entering a new phase. Advanced industrial nationsstill perform most of the worldwide R&D. OECD

member states, for example, accounted for an esti-

mated 82% of the total worldwide R&D in 2000

(National Science Foundation, 2006, pp. 4–40). The

global expansion of R&D has, therefore, been

largely one of investment by multinational enter-

prises (MNEs) from one advanced economy going

into another advanced economy (Howells, 1990a,b).

This was associated with either supply-side reasons

related to ‘asset augmentation’ factors (i.e. to gain

access to labour, resources or know-how readily

available in the parent headquarters’ home country),

or for demand-driven ‘asset-exploiting’ reasons

(namely, adapting products to foreign markets and

to be able to lend technical support to offshore

manufacturing plants). Global expansion of R&D

up until the end of 1990s could therefore be char-

acterised as ‘more of the same, in similar locations’.

However, we are now entering a new phase of

the globalisation of R&D associated with the

geographical widening and deepening of R&D in

relation to the internationalisation of R&D. This

has three new closely interrelated characteristics:

(1) after a period of limited expansion, R&Dglobalisation is now entering a period with a

much wider geographical span from the

North to the South and from the West to

the East;

(2) the search for lower cost solutions via R&D

offshoring (linked to productivity and effi-

ciency drives in R&D; Section 2.4); and

(3) the desire to get closer to consumers in the

rapidly growing economies of China, India

and Brazil.

The complete globalisation of R&D still has a

long way to go; large parts of Africa, South

America and central Asia still remain off the

global R&D map. However, recently, there has

been a dramatic growth in R&D activity within

China, India and southeast Asia. These changes

are indeed being reflected in the changing valueplaced on China and India as destinations for

R&D investments in recent years. Thus, in 1994,

China was only ranked 30th in 1994 ($7 million)

in terms of where US firms conducted their R&D,

but 11th by 2000 ($506 million; National Science

Foundation, 2005, pp. 4–69). More specifically,

the most recent UNCTAD survey of the largest

R&D spenders among MNEs for 2004 revealed

that China was now the third largest global

destination, behind the United States and the

United Kingdom, and India the sixth most im-

portant location (UNCTAD, 2005, p. 133). Of the

885 R&D-oriented greenfield FDI projects an-

nounced in the Asian region, covered by the

UNCTAD survey, three-quarters (723) were in

China and India. This is in part associated with

the lowering of barriers to undertaking R&D in

China (Gassmann and Han, 2004).

Part of this shift is linked to the phenomenon of

R&D offshoring (although in reality it is difficult to

distinguish this from the more general process of

R&D globalisation). R&D offshoring can be asso-

ciated as both an intra-firm and an inter-firm activity

(Figure 1). What has been seen as being distinct

about R&D offshoring, compared with previousrounds of international R&D activity, is that:

(a) it is a more cost-led process;

(b) because of this, it is more closely linked to

investments in less developed economies; and

(c) in its inter-firm form, it is closely linked to the

process of R&D outsourcing.

As noted above, it is difficult to untangle R&D

offshoring from the wider process of R&D glo-

balisation, although at a firm level there is some

evidence that MNEs are certainly themselves

defining certain types of low-cost R&D invest-ment as R&D offshoring, particularly in less

developed but rapidly growing economies (see

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Zedtwitz et al., 2004). It is perhaps too early to be

able to determine fully the phenomenon of R&D

offshoring overall, and in particular in terms of

cost criteria (see e.g. Jones and Teegan, 2003).However, there is evidence of close links between

offshoring and outsourcing. Thus, in Ireland, of

the h156.4 million of R&D activity outsourced,

some h101 million, nearly two-thirds (64.6%),

was spent outside Ireland. Eighty-eight percent

(h138.8 million) of outsourcing was undertaken

by foreign-owned companies, usually via related

companies (parent, subsidiary or affiliate compa-

nies); this might be seen as intra-firm offshoring

(Section 2.3; category 4) (Figure 1).

Thirdly, there has been the rapid expansion of

the economies of China, India and Brazil, coupledwith the desire to get closer to consumers in

relation to R&D activity (Section 3.4). Despite

the many supply-led claims of R&D globalisation,

the demand side is strongly correlated with the

expansion of foreign R&D activities (and still

associated with overseas R&D activities helping

to adapt technologies and products to local market

requirements). There is also evidence that shows

that MNEs rarely internationalise R&D to com-

pensate for technological weaknesses at home. A

study by Le Bas and Sierra (2002) showed that,

most often, R&D offshoring takes place in loca-

tions that are strong in technology and in technol-ogies where the parent firm has an advantage.

The picture of R&D globalisation is therefore

changing, but is associated with a complex mix of

both supply and demand factors that are also

operating at a more specialised and multilateral

geographical level (OECD, 2005); this is particu-

larly true in relation to the offshoring of R&D

(Chen, 2004).

Lastly, in addition to managing (inter-firm)

R&D offshoring (category 4, Figure 1) are the

ongoing spatiotemporal pressures of managing

R&D worldwide (Howells, 1995). Many multi-national companies are not only facing ever

shorter development cycles (see e.g. Stalk and

Hout, 1990) but at the same time also confronting

wider geographical spans4

of their R&D estab-lishments. For some firms, it may be a gradual

process (firm A, Figure 2), but for others they are

facing squeezed developments cycles at the same

time as they are expanding their R&D capabilities

more widely (firm B).

2.6. The growth of service R&D

Service sector R&D is growing rapidly. Thus,

between 1990 and 2001, service-sector R&D5 in-

creased at an average annual rate of 12% across

OECD member countries, compared with ap-

proximately only 3% for manufacturing sectors.

Thus, by 2002, the European Union (EU) average

for the share of services in BERD had increased to

over 15%, although for some countries, such as

the Portugal, Denmark, United States and Greece,

this was much higher at over 30%. In the United

States, nearly 40% of all business R&D is per-

formed in the service industries, whereas in the EU

this share is only 15% (Figure 3). However, since

1997, an increasing proportion of business R&D is

being performed in the services sector in Europe

(from 11.5% in 1997 to 15.1% in 2002).The increasing importance of services sector

R&D is perceived to be due mainly to three

factors (European Commission, 2005, p. 37):

an improvement in the measurement of

services sector R&D;

a growth in R&D intensity in the services

sectors; and

an increase in the outsourcing of R&D by

both the business and the government sectors.

Obviously, within the overall services segment,

there is an important sector for R&D activity – theR&D services sector. This sector covers the NACE/

ISIC schema 73, namely ‘research and development

Home (Domestic)

Country

In-House

R&D

1) Domestic,

In-House R&D

3) Domestic,

Outsourced R&D

4) Offshore,

Outsourced R&D

2) Offshore,

In-House R&D

Foreign (Overseas)

Country

Outsourced

R&D

Figure 1. Typology of R&D Outsourcing and Offshoring.

R&D

Development

Time Span(months/years)

R&D Establishment

Spatial Span

(adjusted concentration index)

1

4

32

1

2

3

4

Zone of

Spatio-

Temporal

Challenge

Zone of

Spatio-

Temporal

Comfort

Firm B)

Firm A)

Figure 2. Stages in the Spatial–Temporal Complexity of R&D.


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services’. It is a significant sector in its own right

and obviously an important generator and provider

of R&D to other parts of the economy. Thus, in2002, across the EU25, the value added by R&D

services was h13.3 billion, although most of this

was accounted for by the EU15 – h11.9 billion.

EU25 employment in R&D services was 365.5

thousand (EU15 – 289.7 employees).

Over the next 10–20 years, service R&D is likely to

become the dominant form of R&D activity in many

developed economies. Increasingly, both service and

manufacturing firms are undertaking or contracting

in more service-like R&D as they seek to get closer

to customers and gain high value added. As yet,

though, very little analysis of this rapidly growing

segment of the knowledge-based economy has beenundertaken and both firms and nations remain

ignorant around these particular changes in R&D.

3. Prospective trends in R&D

3.1. Outline

This section of the paper now takes a more

prospective look at R&D trends in relation to

what the author sees as becoming more significant

over the next 5–10 years, or what is already a

significant issue but remains overlooked by man-agers, policymakers and academics. These key

issues are as follows:

1. the supply and availability of R&D talent

worldwide;

2. the changing nature of R&D itself – its spreadand intertwining with other activities;

3. the blurring between producers and consu-

mers of R&D, both internal and external to

the firm;

4. the control/creativity trade-off issue in R&D;

and

5. the new forms of R&D organisation; and,

closely linked to this; and

6. the emergence of new R&D actors.

3.2. Competing for global talent: supply

and availability of high-level R&Dworkers

Section 2.5 has already described recent changes

in the globalisation of R&D, but there is one

aspect of this ongoing process that deserves a

separate mention. It is a basic issue, but one that

nevertheless will increasingly frame and deter-

mine the development of R&D over the next

decade, namely the lack in the supply of talented,

creative R&D workers. With the continued

growth in R&D activity, there has been a growing

realisation and concern about the availability of

skilled R&D and technical staff due to demographictrends and patterns in university enrolment. The

prospect that China and India would provide a new

0.0

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Figure 3. Share of Business Expenditure in Research and Development Performed in Services (%), 1997 and 2002.

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stream of untapped R&D workers that could be

used by existing large R&D players has failed to

materialise as Chinese companies acknowledge they

too are running out of key R&D workers. Thus,

although the number of R&D workers increased

from around 531,000 in 1999 to around 811,000 in

2002, the volume of R&D investments has been seen

to grow even faster, with the real-term average

annual R&D growth in China being 15.2% between

1991 and 2002 (UNCTAD, 2005).6

This is also at a time when the quality of R&D

supply is cited as the key locational criterion for

attracting in new business investment in R&D to

a locality. Thus, the lack of suitably qualified

R&D personnel is also reflected increasingly in

R&D location decisions. It has been found thatthe number of university- and PhD-trained scien-

tists and engineers in a locality is positively

associated with foreign R&D investment in that

country (Jones and Teegan, 2003). It is highly

trained scientists and engineers who are therefore

being sought, and who attract foreign investment

in R&D. Thus, some MNEs seem to be setting up

operations overseas in order to tap into knowl-

edge and technology sources in centres of scien-

tific excellence located worldwide. The supply of

creative and science and engineering talent is

going to become ever more crucial over time.

3.3. The changing nature of R&D

R&D activity has been constantly evolving and

changing. This, in part, has been reflected in

changes in the definition of R&D used by govern-

ments and official organisations. The most widely

adopted definition of R&D is that defined by the

OECD under the Frascati definition, the latest

version being published in 2002 (OECD, 2002).

The manual has undergone three revisions since

the definition first appeared in 1963 (OECD,

1963, 1981, 1989, 2002). Changes, associatedwith redefinition, are therefore not a new phe-

nomenon, while links with other key functions,

such as production and sales and marketing, have

also been acknowledged for a substantial time.

However, changes associated with its expansion

and blurring of R&D especially with other cor-

porate activities are arguably more recent and

substantial.

The most significant and earliest of these

changes has been that of R&D and design, which

started to emerge in the early 1990s and was

associated with the shift towards electronic designtools, in particular computer-aided design

(CAD), as well as the need to improve integration

of R&D with other key activities. It was particu-

larly visible with a number of key manufacturing

sectors including the automotive sector and elec-

tronics. Because of their increasingly close links,

studies examining globalisation of R&D in these

sectors often grouped the activities together under

the heading Research, Development and Design

(R, D&D7; see e.g. Miller, 1994). Links with

design have also been coupled with closer links

downstream with computer-aided modelling, ra-

pid prototyping techniques and rendering of

computer graphics, in turn allowing effective

simulation or emulation of key processes.

Another activity that has also become more

inter-linked with R&D is that of testing, mainte-

nance and monitoring, which was always linked todevelopment activities, but has become closer be-

cause of advances in technology. These include

rapid prototyping, Laboratory Information Man-

agement Systems (LIMS) and Laboratory Infor-

mation Systems (LIS), a range of electronic and

design testing developments [associated with e.g.

engineering valuation test (EVT) or design valua-

tion test (DVT)] and remote monitoring and testing

developments. Here industrial consumers are clo-

sely linked with the co-development of such new

pieces of equipment. A third area where R&D has

also become close to other corporate functions is inthe ‘softer’ side of market research and strategic

forecasting associated with increasingly specialised

marketing and core strategy functions within the

firm. This is particularly true in fast-changing,

consumer-led technologies where tastes and de-

mands are changing every three to six months.

What does all this mean for R&D? It indicates

that R&D has become even harder to define and

delimit at a time when control over these re-

sources and activities, especially in terms of costs

and efficiency, has become ever more critical to

the success of the firm. This issue is also closely

associated with the growth in the co-production(and co-consumption) of R&D, which is now

discussed below (Section 3.4).

3.4. Co-production and co-consumptionof R&D

Increasingly, activities related to research and

innovation are ‘co-produced’ and indeed ‘co-con-

sumed’. Thus, the issue of who is producer and

who is consumer of research is often becoming

less clear. Even with ‘arms length’ contracting out

of R&D (Haour, 1992), there is a high degree of interaction and as we move through the spectrum

of more informal reciprocal collaborations, there


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Indeed, firms continue to experiment with types

of R&D organisation. An example is the rise of

co-located research groups, involving a mix of

firm and university or public research establish-

ment staff; this has grown rapidly since the 1980s

to enable companies to tap into and work to-

gether with research groups involved in longer

term basic research projects (e.g. Rolls Royce has

a worldwide network of University Technology

Centres). Firms have also sought to establish new

organisational arrangements to help bridge the

often-difficult transition between basic research

and development or between R&D and produc-

tion. Thus, in the former case, GlaxoSmithKline

(GSK) has established Centres of Excellence for

Drug Discovery (CEDD) to help bridge the gapbetween discovery and development activities.

Table 2 seeks to take a more prospective look at

what new forms of R&D unit may emerge over

the next 10–20 years. Some units have already

emerged in their nascent form such as shared

research facilities, exemplified by SEMATECH

in the United States in the semiconductor re-

search field, or R&D bridging units, already

highlighted in the case of GSK’s CEDDs.

Firms have to operate much more flexible and

permeable R&D structures. The R&D boundaries

of the firm have become much more open andfluid (Pisano, 1990). The increasing complexity of

R&D organisation is, however, not just in terms

of organisational forms, it is also in terms of how

firms organise their human resources (HR) within

the context of R&D. Companies are increasingly

having to operate Extended Internal Labour

Markets (EILM). These EILM are associated

with a core group of R&D workers with stable

jobs surrounded by a more fluid periphery made

up of temporary workers or those on secondment

from specialist contract service firms specialising

in scientific and technical services or in providing

specialist contract workers (Lam, 2005). The coreand periphery model is, however, a fluid organi-

sational structure that responds to changes in the

firms’ labour demands. R&D staff capable of

performing gatekeeping and boundary spanning

functions are seen as crucial in maintaining the

organisational and cultural coherence of these

more fluid, permeable R&D structures.

3.7. Emergence of new R&D actors

Although the main growth in R&D over the past

decade has been in private, business-level R&D,we should not ignore the emergence of new R&D

actors within the research and innovation system.

Although most studies focus on the traditional set

of actors involved in R&D, such as firms, uni-versities and public or government research estab-

lishments, there is an increasing number of more

diverse set of more hybrid R&D organisations.

These represent a much wider and more varied

type of R&D facility, often involving new combi-

nations of public–private partnerships, such as

the Institute for One World Health.

However, despite this growth, we remain woe-

fully ignorant of what might be termed the

ecology of R&D of our respective national re-

search and innovation systems. We need to rectify

this if we are to help manage the overall nationalsystem of innovation, as well as to help advice and

support firms themselves.

Table 2. New forms of R&D organisation: a prospec-tive vision

New organisa-tional form Description

1. Shared laboratories

Where two organizations sharethe same research laboratory towork on the same researchtopics, for example:

(a) a firm and anotherorganisation, such as universityresearch group or publicresearch establishment unit; or

(b) two firms together (customeror supplier, for example). Large(multi-firm) shared facilities arealready common, such as the

creation of SEMATECH in theUnited States in 1987.2. ‘Pico’ R&D

establishmentVery small R&D unit set up in a

particular part of the firm (forexample, factory) to work on aspecific set of research ordevelopment issues.

3. TransitoryR&D unit

A ‘limited life’ R&D unit, similarto a pico R&D establishment,often to resolve a specificresearch or technical problem.

4. Automated R&D factory

Virtually un-manned R&D unitundertaking highly automatedresearch and test procedures;results are remotely monitored

and supervised.5. Consumerengaged research unit

Facility to work directly with keyconsumers, either personal orindustrial consumers (the lattercase may be linked to 1 above).

6. R&D bridgingunit

To aid bridging the research anddevelopment divide withinR&D or the R&D andproduction side. Becomingmore established.


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4. Conclusions

What do all these current and prospective changes

mean for R&D and for R&D managers? How does

it help explain the paradox of continued growth in

R&D despite the apparent low esteem and value

placed upon R&D by firms? Undoubtedly, the

worldwide growth in R&D has been spurred by

the very rapid increase in research capacity parti-

cularly in China and India, and also in Brazil and

the smaller economies of east Asia, including

Taiwan and Korea. These countries, and the com-

panies within them, need R&D to meet their

objectives of successful expansion and growth.

More particularly, the answer lies in the fact that

successful firms (and nations) still find R&D highlyvaluable. For these firms (and nations), R&D still

delivers in terms of generating value added in terms

of new and improved products, services and pro-

cesses. More particularly, at the individual project

level, R&D projects meet the risk/value return that

the company has specified, despite the overall scepti-

cism that senior management may have about R&D

actually delivering adequate results. At the national

level, governments also still see R&D as an impor-

tant part of the innovation infrastructure to make a

national system of innovation successful and in terms

of becoming a proper Knowledge-based Economy.This is, moreover, not solely in direct terms. R&D

aids the absorption into a firm or an organisation of

knowledge and technology from outside. Employing

R&D workers also has significant local and regional

economic and employment multiplier effects. They

also have a wider cultural and social significance. In

short, R&D workers are good people to have in an

area; they create significant spillover effects in the

rest of the economy. However, at both the firm and

the national level, we still remain poor at adequately

measuring the benefits of R&D.

Acknowledgements

This paper arises out of funding by the UK

Economic and Social Research Council (ESRC)

through ESRC Centre for Research on Innova-

tion and Competition (CRIC) centre-related

funding (Grant Number ESRC M549285002)

and Manchester Business School. The views ex-

pressed are of the author’s alone.

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Notes

1. All prices are in US$. Unless otherwise stated.

2. It is estimated here that there were at least 4 million

people employed in R&D worldwide in 2006. In

addition to the United States with 1 million, Japan

had some 676,000 workers in 2001 and China some

811,000 in 2002 (although OECD estimate this to be

only 443,000).

3. See Commission of the European Communities

(2002; 2003)

4. After adjusting for inflation.

5. As measured by mean spatial concentration

indexes.6. Covering ISIC categories 50–99.

7. This, however, has been a concern as far back as the

late 1980s when the Commission of the European

Communities (1989) estimated that the United

States would face a shortfall of 500,000 scientists

and engineers by 2010.

8. This is being extended further with, for example,

the European Commission now using the

term Research, Development and Innovation

(R, D&I).

Jeremy Howells is Professor and Executive Direc-

tor of the Manchester Institute of Innovation

Research (MIoIR) and Head of the Innovation

Management and Policy (IMP) Division at Man-

chester Business School, University of Manche-

ster. He received his PhD from the University of

Cambridge. He has published in the International

Journal of Technology Management, Pro-

metheus, R&D Management, Research Policy,

Science and Public Policy, Service Industries

Journal and Technology Analysis and Strategic

Management. His current research interests are

on R&D outsourcing and offshoring, industry-

academic links, service innovation and technol-

ogy transfer. His research has been funded by UK

Economic and Social Research Council (ESRC),

the Engineering and Physical Sciences Research

Council (EPSRC), the European Commission,

OECD, the European Science Foundation,UNIDO and UNCTAD.

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