How Multinational Enterprises Develop Innovation

This essay explains how multinational enterprises develop innovation through international exploitation, global development, and techno-scientific collaborations. It discusses the different ways MNEs develop innovation, such as exporting innovative goods, cession of licenses and patents, and production of foreign innovative goods. It also explores the global development of innovation through research and development activities, acquisition of R&D laboratories, and techno-scientific collaborations. The essay provides examples of multinational enterprises and their strategies for innovation development.

TITLE PAGE

A multinational enterprise (MNE) is defined to be a company or a corporation that is registered
and/or functions in more than one country apart from the original home country. It is an
enterprise that manages products and delivers services in a number of countries across the world.
It is also referred to as an international corporation or a multinational corporation (MNC). A
multinational enterprise has been defined by the International Labor Organization as a
corporation which has its headquarters in one country which is known as the home country or the
native country of origin of the organization and other offices or branches in some other countries
apart from the original country known as the host country. While having being located in
different countries is one of the prime criterion for defining multinational enterprises, not all
theorists agree with it. There are many criteria which needs to be full filled before an
organization can be termed as a Multinational Enterprise .Many have argued that an enterprise is
identified as a multinational organization only when the parent company is controlled and owned
by the native citizens of at least two countries and more (Weedmark, n.d.). Apart from
ownership, a business organization that has production units or sectors in several nation states of
the world, has direct control and dominance over all its international functioning units and
operations and has varied investment in foreign production, is known as a multinational
enterprise. The Multinational Enterprises usually enjoy immense benefits that the other business
organizations and normal corporations do not. For example, increased market penetration, huge
assets, increased turnover, reduction in shipping and freight costs and benefits of taxation. The
purpose of this essay is to give a detailed explanation of how Multinational Enterprises work
with reference to the given question.
Where and how is innovation developed by MNEs?
Innovation is the action or process of innovating – of creating something new with the help of
new ideas, new thoughts and new actions or methods. In this process of creating something new,
multinational enterprises play a key role. MNEs have an advantage over other corporations due
to their size and by virtue of serving more than one markets. These companies take a front seat
when it comes to developing innovation - they benefit from the economies of scale of production
and the ability to invest in high risk projects. MNEs have also, in search of developing and
processing innovation, have modified their strategies so as to aim at increasing efficiency,
reducing costs, increasing sales in foreign markets and tapping into previously unexplored areas

and resources for production. MNEs create and develop innovation in various forms and ways.
An effort has been made to categorize these in the following manner:
1. International development and exploitation of nationally produced innovations.
2. Global development of innovation.
3. Development of techno – scientific global collaborations.
These have been explained in detail below.
I. International development and exploitation of nationally produced innovations.
The first manner in which the MNEs develop innovation is by international exploitation of
innovation which is nationally produced i.e. innovation which is produced in the home
country where the MNE is located. Nationally produced innovation, in case of MNEs, is
defined as the innovation which is produced at the lowest level of the pyramid i.e. at the
bottom and arises as a result of necessity (Hilmi, 2012). This exploitation of national
innovation is done in the following ways:
 Exports of innovative goods: The Multinational Enterprises enter the scene of
international development of innovation by export of innovative goods which are
produced in the domicile of the home country. This is probably the easiest form of
developing innovation – simply by exporting existing goods to new countries where
the Multinational Enterprises are expanding their base of operations. An example of
this of a Multinational Enterprise is that of Haier. It is a multinational enterprise
based in China and dealing in consumer electronics and home appliances. The
company (earlier known as Qingdao Refrigerator Company) was near bankrupt in the
early 1980s and revived itself by acquiring Qingdao Air Conditioner Plant and
Freezer General Plant and exporting these the newly launched products to Indonesia.
This was followed by exports to Malaysia and the Philippines. As a result, it provides
a relevant example of how the exports of products to different parts of the world can
be effectively utilized to aid in the growth and development of the organization.
 Cession of licenses and patents: One way by which the multinational enterprises
develop innovation is by the cession of ownership rights, patents and licenses.
Cession means the formal giving up of the rights or patents to use or a product or the

technology of manufacturing a product. There are various circumstances in which the
Multinational Enterprises assign these patents or licenses (Andrade, 2018). The first
situation is when the host country does not have the ability to create that innovation,
market it or commercialize it by selling it to the target consumers. The second is by
giving a routine task to the host country offices to develop a particular innovation for
sale. The third way usually employed by MNEs is by way of strategic mergers and
acquisitions. When a company agrees to give its license or its patent to another
company in its host country, innovation is said to be developed. This strategy is also
welcome by local authorities as it gives way to new technology and processes in the
country (Azuayi, 2016). An example of this is Arla Foods Company based in
Denmark. It is one of the top farmer owned dairy and dairy products producer in the
world and it has become so by following various strategies of internationalization.
One of these is entering into licensing agreements. Arla Foods has entered into a
licensing agreement with Starbucks giving it the right to market and distribute
Starbucks premium milk – based ready – to – drink coffee beverages in the European
Region.
 The production of foreign innovative goods internally designed and developed:
Multinationals develop innovation by encouraging foreign production of goods which
have been designed internally i.e. within the home country. These corporations
encourage local designing and development of innovative goods but at the same time
allow production of these to happen in host countries as a way of internationalization.
MNEs enter into agreements with local producers in host countries whereby the
designing of a new product will happen in the home country but production of these
designs will be allowed in the host countries. The biggest example of multinational
enterprise allowing foreign or in a sense, production which is local to the host country
is Coca-Cola. Coca-Cola is a global company with a local focus i.e. it is a
multinational enterprise which allows local production and distribution of its
products. According to its official website, the company is not identified as a single
entity but operates through the functioning of multiple local channels. Coca-Cola just
owns the brand but does not restrict production. It allows host country bottling
partners to manufacture, package, merchandise and distribute the final products

within their countries. It is the local vending partners that then sell the final product to
the customers. The headquarters in the home country do not interfere in the day – to –
day activities of the host countries and therefore, allow them to develop and sell
innovation.
II. Global Development of Innovation
Multinational Enterprises encourage international development of innovation which is
produced nationally but at the same time allow global production and development of
innovation. MNEs from advanced countries harness global R&D to extend to
emerging markets. Organizations from both developing and developed nations are
devising strategies for the rapid integration of global innovation networks (Ujjual and
Patel, 2013). There is a high degree of integration between the level of capabilities
between host R&D facilities and the extent of global network integration of the home
country MNEs. The two ways by which MNEs lead to global innovation networks are
discussed below:
 Research and development innovation activities both in the home or
native country and the host country: The multinational enterprises all
across the world are responsible for conducting research and development
activities both in the home country and their host countries. Multinational
enterprises participate in the acquisition of new advanced technology for
various production, distribution and marketing activities. This leads to an
increase in the flow of cross – border knowledge, both inside the
multinational enterprises and outside it involving different innovative
systems (Hamida and Piscitello, 2013). Multinational enterprises which
focus on R&D in the foreign industries are likely to succeed in the
transferring of this highly invaluable technology to the home country.
Thus, leading to the development of innovation by investing in the asset –
seeking innovation processes. An example of this has been seen in Swiss
MNEs. Switzerland based MNEs usually undertake foreign investments in
R&D and innovation activities as a way of increasing their market share
(Hamida and Piscitello, 2013). Their explicit motive of investing in R&D
of foreign countries is to gain access to new technologies and lead the way

to innovation in both their home and host countries. This
internationalization of MNEs by way of development of innovation should
be measured by way of measuring their performance in the asset –
development activities.
 Acquisition of existing Research and Development laboratories or
field Research and Development investment in host countries:
Multinational enterprises have led to the development of worldwide
innovation by way of not only creation of new Research and Development
facilities but also by way of acquisition of existing Research and
Development laboratories and green fields in the host countries where they
have expanded their operations. The host countries have also accepted this
acquisition because it leads the way for the introduction of new investment
in the country. Along with investment, this has also led to the creation and
accumulation of knowledge that goes beyond national boundaries and
forms networks of technological cooperation all around the world
(Uzunidis and Boutillier, 2012). An example of this form of acquisition to
develop innovation is the Silicon Valley based company Peel. It is a
multinational enterprise focused on development of smart home control
systems. Recently, it acquired Cloud R&D division of Hyderabad (India)
based Fission Laboratories which will know be known as Peel India. As a
result of this acquisition, Peel will lead the way to the smart home –
control innovation in India by specializing in high – end cloud based
solutions, data analytics, and web and mobile applications.
III. Development of techno – scientific global collaborations: Yet another way by the
multinational enterprises develop innovation is by developing techno – scientific
collaborations. This collaboration has emerged rapidly since the recession of 1990-92
and often termed as the globalization of technology and innovation. In this urban
world, many companies especially in the domestic countries face the risk of takeover
by the multinationals. To reduce this risk and the avoiding of public exposure of
company assets, the locals enter into collaborations with the global partners. These
collaborations are generally of a technical and scientific nature and are done keeping

in mind the business strategies and management models. These techno – scientific
collaborations are done in the following ways:
 Joint scientific projects – Joint ventures for specific projects of an
innovative nature: The first form which the techno – scientific collaborations
take is by way of local corporations and MNEs entering into joint ventures for
the production, distribution and marketing of products and services of an
innovative nature. Techno – scientific collaborations are also made by way of
sale of technology, spare parts and use of foreign brand names for the final
products. These collaborations have led to the growth of sales of the MNEs as
well as the corporations in the host countries. A leading example of techno –
scientific collaborations is the company Phillips. Phillips is based in
Amsterdam, Netherlands. Phillips has collaborated with Germany – based
Nivea to launch a beard shaver that dispenses the conditioner directly onto the
skin of the individual using it as a part of the Nivea for Men collection.
Similarly, Phillips has partnered with Belgium – based InBev which owns
major beer brands such as Stella Artois and Budweiser – to launch a home
beer draught system to offer draught beer at home. Phillips has also entered
into a techno – scientific collaboration with Ireland based Organization known
as Aerogen which would help in the developing of the NIVO Nebulizing
system which would help patients who suffer from breathing problems. This
device helps in receiving ventilation by non-invasive face masks rather than
the invasive breathing tubes. Similar agreement has been entered into by
Philips with Austrian company Swarovski. This collaboration is for the
purpose of developing certain hearing accessories such as the USB storage
devices that amalgamate the state of the art technology and elegance of both
the firms (Turiera and Cros, 2013).
 Productive agreements with host countries for exchange of technical
information and equipments: Another form of development of innovation
by multinational enterprises is by entering into agreements with companies in
host countries for the exchange of technical instruments, equipments as well
as technical information. Usually multinational enterprises or the

collaborating companies might possess the knowledge to create innovation but
might not possess the right kind of machinery and equipment to actually lead
that innovation to production. This kind of collaborations help in reducing the
investment required for new ventures but at the same time help in increasing
the sales. These products produced by the joint efforts of both the countries
usually have high demand in both the countries. An example of this initiative
is Social Car which is a company based in Spain. It allows the owners of the
cars to rent out their vehicles for a few hours of the day to those who are in a
temporary need a vehicle. This aids the owners to earn an additional income
during the time that they were not using their cars. But for expanding their
company in other countries, Social Car has entered into agreements with the
local car dealers so as to encourage renting vehicles. This was necessary
because it was essential that the car owner as well as the renter be in as much
proximity as possible (Turiera and Cros, 2013).
Multinational Enterprises have so far been successful in the creation and development of
innovation. The various ways in which these Multinational Enterprises develop innovation have
been discussed above. With the increase of globalization as a result of development of
Multinational Enterprises and the world turning into a local village, all these methods of
innovation discussed above have been successful. Whether it is by way of export of nationally
produced products, by way of entering into licensing agreements, by way of acquisition of
research and development laboratories and field work areas or by entering into technological and
scientific collaborations, Multinational Enterprises have developed innovation. The only
drawback of this innovation being developed, is that it leads to exploitation of the potential of the
host countries by tapping into and injudiciously using the previously reserved resources for the
benefit of already successful multinational enterprises.

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