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  • 1. R&D INTERNATIONALIZATION AND CHOICE OF COUNTRY: CONCEPTUAL MODEL AND APPLICATION ANDRÉA GOMIDES School of Economics, Business Administration and Accounting - University of São Paulo Av. Rio Branco, 45 sala 1006 – Rio de Janeiro – RJ - CEP: 20.090-003 andrea_gomides@hotmail.com EDUARDO VASCONCELLOS School of Economics, Business Administration and Accounting - University of São Paulo Av. Prof. Luciano Gualberto, 908-Cidade Universitária – São Paulo-SP – CEP: 05508-900 epgdvasc@gmail.com ERWIN REZELMAN SAP LABs – SAP AG Av. Unisos, 950 – São Leopoldo – RS – Brazil - CEP: 93022-000 Erwin.rezelman@sap.com Global competitiveness is influenced by the capacity to generate sustainable innovation – that is, innovation that adds value for clients, creates a preference for the company’s products and services, and brings results that permit compensation of all other stakeholders. Finding the appropriate degree of R&D decentralization, taking into account the characteristics of each business, is an important factor in obtaining these results. There is a wealth of literature on the advantages and disadvantages of decentralization and the factors that condition the decision to decentralize. When this decision is made, it entails a question of key importance that has been much less widely studied: how does the company choose the country that will host its new R&D unit? Seeking to answer this research question, we developed a conceptual model based on a review of the literature, then selected a company on which to test this model and conducted a case study. The chosen company was SAP, a global organization that had to choose between four Latin American countries to host its new R&D unit. We applied our model to their decision process, although the decision had already been made at the time the present study was conducted. Our results demonstrated the utility of the model for country choice decisions. Additional studies are required to validate the conceptual framework and its applicability to other companies. Keywords: R&D, Internationalization, choice of country, SAP AG, innovation 1. Introduction Technological advance is no longer simply a means of standing out. It has become a guarantee of activity in an increasingly competitive market. Some companies choose to keep their R&D function centralized, generally at the organization’s headquarters, but when they consider competition and the need for speeding up the process of developing products and taking them to market, the centralization strategy is called into question, and arguments arise for the implementation of a decentralized model. There is a wealth of literature on the advantages and disadvantages of R&D internationalization, and on the trends followed by this process. There are few studies on models used to select the location of a new unit. The research question we sought to answer was which factors should be considered when selecting the most appropriate country for a new R&D unit? 1
  • 2. We found the answer at SAP, the world leader in enterprise resource planning software and the first of the world’s major management companies to invest in Brazil. A model for the choice of R&D center locations was outlined on the basis of a literature review and interviews with SAP Labs’ (this is the name for SAP R&D centre) president for Latin America. SAP’s decision to place its new R&D center in Brazil, rather than Argentina, Mexico or Chile, then served to illustrate application of our conceptual framework. 2. Methods We selected the case study as our research method. After an extensive literature analysis, we idealized a conceptual model and devised an interview script. Two in-depth interviews were conducted with, Erwin Rezelman, the President of SAP Labs Brazil. Due to his interest in the subject and his countless contributions to our study, he was invited to co- author the present article, reviewing the text and providing access to internal documents. The use of diverse sources of information was instrumental in ensuring greater information accuracy, in accordance with the triangulation principle (Eisenhardt, 1989; Yin, 1994). The case study is an appropriate method when the context is complex and involves many variables (Easton, 1995; Dubois & Gadde, 2002; Eisenhardt, 1989; McCutcheon & Meredith, 1993; Miles & Huberman, 1994; Yin, 1994). SAP was selected because it went through the process of selecting a country to host its new R&D unit. Data was collected and analyzed over a six-month period. Both in-depth interviews with Mr. Rezelman were conducted within this period, following a semi-structured interview script devised after a conceptual model based on our literature search. When the final model was ready, a table of factors, grouped into three macro factors (market in each country, R&D inputs, and country profile) was devised and filled in by SAP. 3. Centralization and international decentralization of R&D activities Centralization and decentralization of R&D structures has long been the subject of intense discussion by several authors. The specificities of each company and business model mean there is no single model of centralization or decentralization to be adopted. The factors we will introduce should be analyzed by each company and checked against their specific decentralization needs to help choose the best location for a new site. For many years, R&D sites were only present in developed countries; they were particularly widely concentrated in Europe, the U.S., and Japan. Companies in these countries either kept their units in their home country or expanded into other major markets, which required customization. Over the past ten years, this scenario has changed, as global companies identified investment opportunities in countries that could potentially constitute new markets, not only for the possibility of sales growth, but because the companies realized that knowledge was no longer centralized at the great economic powers, but rather spread out around the world. In a 2006 survey, Booz Allen Hamilton and INSEAD asked 186 companies in 19 countries – with pooled R&D investments of over US$ 76 billion in 2004 – where they would 2
  • 3. implement or expand innovation/R&D sites over the next 5 years and why. One finding of the survey was growth in the percentage of companies that had decentralized their R&D sites, up from 45% in 1975 to 66% in 2004. Figure 1: Growth in foreign R&D sites Source: Booz Allen Hamilton and INSEAD, 2006. As for the countries that would receive investment over the next 5 years, the survey showed that: 95 new sites were to be installed in China; 76 in India; 75 in the United States, which remained as a key recipient of investment; and 11 in Brazil, which came next to last, but was the only Latin American country to make it into the top 10. Figure 2: Locations of new R&D sites Source: Booz Allen Hamilton and INSEAD, 2006. We may list several aspects that used to justify the geographic centralization of the R&D function at a single unit. To Klaus Brockhoff (1998), these reasons are related to: attempts to achieve economies of scale, by keeping several researchers at a single site; the high cost of communication in case the R&D function is decentralized into several units; ease of managing the R&D portfolio 3
  • 4. and controlling proprietary information; and partnerships with public research institutes at the company’s home country that provide new research perspectives without the need for decentralization. Ove Granstrand and colleagues (1992) also consider control of proprietary information to be one of the main reasons for keeping R&D centralized at the company’s home country. To the authors, such centralization minimizes the risk of competitors gaining access to the research conducted. For these reasons and others, the authors propose that, should it be necessary, decentralization should always be limited to a handful of countries. The authors stress that keeping the R&D unit at a single site minimizes the costs of coordination and control. John Cantwell (1992) also considers cost to be the main factor driving centralization. Nevertheless, centralization may carry a higher total cost; in addition to coordination and control costs, several others that may alter total site cost must be considered, such as the cost of human resources, which may be lower in countries where hourly labor is less expensive. Arnoud De Meyer (1992) summarizes that the main disadvantage to decentralization of the R&D function is posed by communication difficulties, which hamper communication and reduce development speed, eventually leading to decreased productivity. De Meyer believes personal contact is the best form of communication in the R&D setting. Figure 3 below outlines the advantages of a centralized R&D model, showing the necessary inputs for R&D site activity, the reasons that lead to centralization, and the results fed back to site clients. 4
  • 5. Figure 3 – Advantages of the centralized R&D model Source: the authors, after Vasconcellos et al, 2009. Many of the aspects that once justified centralization are no longer considered valid due to recent technological advances, particularly in communication technology. The main advantages of geographic R&D decentralization are presented below. To Klaus Brockhoff (1998), internationalization of sales and manufacturing – which, depending on country, has specific economic and legal aspects – is itself one of the reasons that lead to decentralization. Brockhoff considers the high level of researchers’ technical qualifications to be the main factor of R&D. A company’s home country will not always have the amount of highly qualified professionals necessary for research activities, and this becomes one of the factors that justify decentralization. Some corporate characteristics may actually demand decentralization. To Granstrand et al. (1992), these characteristics may be divided into two categories: demand and resources. Analysis of these factors, beginning with demand, shows that companies generally start their external activities by means of export, only to later – with an increase in the demand of client countries, following the classical process of internationalization – move in with a production unit, which, depending on the type of product manufactured, may require the implementation of an R&D site. 5
  • 6. Foodstuffs are a good example: due to local customs, food products are more commonly produced specifically for each location, even though major companies are increasingly trying to keep global products in their portfolios. One way to assess this, according to Granstrand et al. (1992), is by measuring the volume of customization requests made by each country to the centralized R&D site. A high volume may justify the establishment of a specific R&D center to meet local demand. Another aspect concerns resources, which are truly a decisive factor to R&D decentralization, particularly when key resources are located in another country. De Meyer (1992) considers low cost of human resources combined with proximity to clients and access to technology to be decisive factors for decentralization. De Meyer sees taking advantage of lower overseas costs as a competitive advantage. In the case of acquisition activity, when the acquired company has an R&D site abroad, factor to be taken into account is technological complementary. If the acquired R&D site brings complementary innovation, it should be kept at least until these innovations are absorbed by the main R&D center; often, the cost of keeping a separate site is lower than the cost of unifying a secondary site with the main center. Lars Hakanson (1992) believes that a large number of R&D sites are located abroad because of corporate acquisitions, particularly when companies are acquired for product diversification purposes; in this case, Hakanson considers it the rule that existing R&D sites be kept and expanded. To John H. Dunning (1994), reasons for decentralization are decisive when they truly provide clear competitive advantages, which he divides, in a summarized manner, into four aspects: when they bring improvements in processes, products, or materials; research for raw materials or products; cost rationalization; and when the company obtains innovative activity abroad. Internationalization of R&D is becoming more a strategic issue for Frost (2001) and Frost, Birkinshaw & Ensign, (2002). Multinational companies have R&D facilities outside their home country to explore new knowledge or exploit of their current abilities. According to Steven D. Eppinger et al. (2006), the new technology used to product development process is fully digitally and completely networked, what make easier to decentralize. R&D activities can also be influenced by the governments of each country. Companies may set up R&D sites abroad through fiscal incentives, but the main factor occurs when the government of a country enacts legislation that makes investing in research a condition for the company to operate in the country’s market. The decentralized model requires greater control of R&D activity, particularly because such activity is usually conducted by virtual teams scattered throughout several sites in different countries. A study on R&D decentralization at 3M (Vasconcellos et al., 2009) showed why the Brazilian subsidiary of 3M was authorized by headquarters to adopt the highest possible level of decentralization, which led to the development of new technologies. The study focused on two aspects: how to establish the degree of technological complexity of a decentralized R&D unit and how to identify which strategic technologies should be assigned to each decentralized R&D unit. This study provided evidence of the need to 6
  • 7. implement a worldwide R&D coordination network to minimize the disadvantages of decentralization. Figure 4 summarizes our review of the literature on the advantages of R&D decentralization. Figure 4 – Advantages of a decentralized R&D model Source: the authors, after Vasconcellos et al., 2009. International R&D decentralization is made up of four components that must be analyzed and structured, not only to aid the process that underlies the decision of whether to decentralize, but also to define which activities are to be undertaken and how the R&D site is to be managed. 7
  • 8. Figure 5 – Components of decentralization Source: the authors Geography – Establishment of a new R&D site abroad. This component involves several interrelated decisions on the convenience of decentralization and on country choice. This chapter will discuss the method used to select the most appropriate country for the new site. Activities to be undertaken by the new unit – A decentralized R&D unit may contribute in several ways: product improvement and customization based on technologies developed by headquarters in a centralized manner, customer service, and sales support. In some cases, however, decentralized units conduct research on new technologies, as does Rhodia’s Brazilian R&D site, for instance. Some decentralized units coordinate worldwide R&D projects and spearhead the company’s efforts in certain technologies. Decision-making autonomy – This component involves definition of the degree of autonomy afforded to the decentralized unit in terms of project portfolio approval, R&D budget, hiring, acquisition of equipment, expansion of lab facilities, outsourcing of R&D services, approval of technology partnerships and technology purchasing, etc. Subordination – When a company’s R&D sites are located in several countries, these sites may be subordinate to a single corporate Director of R&D or similar position (centralized subordination) or they may be subordinate to the directors of distinct business units (decentralized subordination). These business units, in turn, may be subordinate to products, clients, countries, or regions. In some cases, subordination is manifold, and constitutes the use of matrix structures. The above components require integrated treatment, as there are countless interfaces among them. Geographic decentralization, for instance, must be accompanied by a certain degree of activity and authority decentralization if the new R&D site is to contribute towards company results. 8
  • 9. To Frédérique Sachwald (2008), “The traditional contrast between the forces of centralization and the forces of dispersion of multinationals’ R&D does not account for the changes under way. Companies progressively find ways of combining the need for some centralization of research with access to heterogeneous scientific and technological resources throughout the world” This chapter will focus on the choice of country. Several aspects must be considered in this process, from factors that will guide center strategy, such as frequency and complexity of contracts established in the country, to complementary factors such as incentives provided and demands made by each country’s government. These factors should influence R&D performance criteria: costs, deadlines, and quality of solutions. After analyzing the work of several authors on the factors that allow or impede decentralization of R&D units, we collated the main factors that must be assessed for the strategic definition and determination of the most adequate location for international sites. Figure 6 shows a conceptual model meant to aid the decision of choosing which country is most appropriate to host a new decentralized unit. Three critical dimensions – market, R&D inputs, and country profile – were added to the components in Figure 5. For each dimension, we note the influence factors that should be analyzed. 9
  • 10. Figure 6 – Conceptual model for country choice Source: the authors 10
  • 11. On the basis of Figure 6, we constructed a table to assess the importance of each factor for country selection. Mr. Rezelman of SAP Labs Brazil was the respondent. The WEIGHT of each statement to the decision-making process and company strategy was graded on a scale of 1 (little importance) to 3 (very important). Each statement was then graded on a scale of 1 (low) to 10 (high) for each factor in each country, which will determine the comparison between them. The respondent was instructed to leave his answer blank whenever a factor was not applicable or when there was not enough information to support an answer. Table 1 – Instrument designed for collection of information to support country choice Country 1 Country 2 Degree of Degree of Country Country Statements concerning the decision to establish an R&D unit Factor agreement agreement 1 2 in Country 1 rather than Country 2 Weight with with Total Total statement statement Country Market Current market size for SAP products Potential market growth for SAP products Current and potential volume of development and customization activities in the country R&D Universities and institutions providing graduates and Inputs conducting research in areas relevant to company Conditions for obtaining equipment and material for R&D activities at adequate quality and cost levels in the country Competence and size of relevant talent pool Cost of specialists at different career levels Country profile Political and economic stability Proximity/ease of interaction with other countries and headquarters Availability and quality of infrastructure: Internet/broadband, international airport. Country provides adequate intellectual property and confidentiality protection Country has adequate mechanisms and legislation in place to ensure fair competition and contract enforcement The country has potential for innovation in areas that are of strategic importance for SAP SAP competitors have similar units in the country Country’s cultural traits (e.g. language) will facilitate implementation of new unit and cooperation with other R&D units Fiscal incentives for implementation of R&D sites in country Government encourages that investment is made in local R&D Total 11
  • 12. When SAP decided to set up a R&D centre in South America it considered a host of countries, but in particular, Mexico, Chile, Argentina and Brazil. In the initial round the above model was used, but with a focus on availability of talent (technical and language skills), relative costs (labor and infrastructure), market size and potential, the country’s economic and political stability and the opportunity for growth. The final round was between Brazil and Argentina. 4. The company SAP is a multinational business software company. As of December 2008, it employed 51,536 people around the world. Founded in 1972 as Systems Applications and Products in Data Processing in Germany, it has since become the largest maker of enterprise resource planning software in the world. It began operations in Brazil in 1995, through a marketing and sales subsidiary. The company began innovating with a development of enterprise software. After the launch of SAP R/2, which allowed integrated management of corporate processes (particularly in the manufacturing area), the firm expanded its product and solution portfolio, with SAP R/3, CRM (Customer Relationship Management), and SCM (Supply Chain Management), currently reaching SAP Business Suite, in addition to products for the mid- size and small business segments and others. Figure 7: Transformation from a One-Product Company to a Multi-Product Company Source: SAP AG, 2009 SAP stands out not only in software development, but also for implementing innovation in its corporate processes, which undergo continuous change and evolution. In 1984, the company began its internationalization process, expanding its sales of SAP R/2 into other countries besides Germany. In 2008, it reached more than 12 million users in over 120 countries, with earnings of 11,567 million Euros (Figure 8). 12
  • 13. Figure 8: Evolution of SAP, 1999–2008 Source: SAP AG. Revenue and income in million Euros, 2009. One may say that corporate management systems first appeared in the 1970s with MRP (Material Requirement Planning), and then evolved to ERP (Enterprise Resource Planning), which involves not only the materials area, but practically every process in the company. After ERP came CRM, SCM, BI, and other acronyms that have become popular with companies in general, all with the same objective: informatization of corporate processes. A management system must adhere to company processes. Internationalization therefore requires much more than translation into the local language: identification of specific needs and specific processes and true localization using the language of the segment. The localization process seeks to develop specific modules and processes requires by the legislation or culture of each country. A good example is the tax law framework of Brazil, which featured unique characteristics that must undergo localization before they can be implemented as part of a management system. One may note that the internationalization of a management system is far more complex than the translation of software such as operating systems, word processors, etc. It requires, for one, both country specific functional and legal requirements to be incorporated. Many companies that developed management software were acquired by larger organizations over time, and, as of 2007, more than 50% of market share was held by three major software makers: SAP, Oracle, and Microsoft. Multinational ERP software makers only reached Brazil in 1995, due to several factors, including the country’s closed market policy, technology gap, and localization difficulties; SAP was the first such company to enter the Brazilian market. Meanwhile, local companies – Microsiga and Datasul, now subsidiaries of the Totvs group – developed specific systems to meet the requirements imposed by Brazilian legislation. In 1995, SAP entered the Brazilian market and began the product localization process. This process used to be conducted by means of separate modules, but since 2003 has been built into the system “Core”, making it a 13
  • 14. global product, allowing easier updates, and making new versions of localized packages available simultaneously at worldwide launch dates. 5. R&D Strategy In 2008, SAP invested 14.1% of its earnings towards R&D, slightly down from the previous year, but an increase on 2006. SAP had 15,547 employees dedicated to research and development activities as of 2008 – a 20% increase from the 2007 figure. The company’s R&D function contributes significantly to its product portfolio and expansion of market leadership, through the identification and development of emerging IT trends and the generation of technological advances. The product areas and development labs work on new software functions and versions, and the research sites explore opportunities that have not yet been developed into any product on the market. These opportunities may become products 2 to 10 years in the future. Figure 9: R&D Centers Source: SAP AG, 2009 SAP’s business model for research and development is based on innovation through collaborative research with more than 520 organizations: universities, partners, clients, and product groups from within SAP itself. SAP R&D sites are divided into different categories: specific research centers, development centers, service centers, and research laboratories working in cooperation with other research institutes. As shown in Figure 9, these sites, which may be in a single location or in different places, are present in 16 countries (Australia, Brazil, Bulgaria, Canada, China, France, Germany, Hungary, India, Ireland, Israel, Japan, Korea, South Africa, Switzerland, and the United States). The main unit is located at SAP headquarters in Walldorf, Germany; 48% of the company’s R&D employees work there, although this percentage has been decreasing in recent years (2006: 52%; 2005: 57%), as the company has increased its overseas investment. 14
  • 15. Twenty-five percent of employees are stationed at development units in China and India, and the remaining 27% throughout the company’s other sites. Figure 10: Example of an R&D structure of SAP AG Source: SAP AG, 2009. SAP follows a distributed development model, coordinated by so-called Business Units that keep development teams in the R&D sites of several countries. As shown in Figure 10 and 11, this is a matrix model, which requires rigorous control to guarantee a standard quality and efficiency so in the end an SAP product is produced, irrespective where it comes from. Figure 11: SAP AG team matrix Source: SAP AG, 2008. The decision to decentralize occurred in the early 1990s, as the company sought to come closer to the market, its clients and partners, technology, better practices, and talent. A global company must also be present in many locations in order to better understand the needs of the 15
  • 16. market and those of its clients. In the same manner in which SAP keeps R&D centers in Shanghai and Bangalore to support its activities in Asia and part of Europe, the São Leopoldo center in Brazil supports its activities in Latin America. 6. SAP’s new R&D unit: the choice of country After assessing all of SAP’s investments on R&D sites, the question remains: why did the company set up a site in Brazil? We applied our proposed model to the SAP case, giving particular consideration to the final dispute between Brazil and Argentina. Brazil Argentina Degree of Degree of Brazil Argentina Statements concerning the decision to establish an R&D Factor agreement agreement Total Total unit in Country 1 rather than Country 2 Weight with with statement statement Country Market Current market size for SAP products 2 3 1 6 2 Potential market growth for SAP products 3 3 2 9 6 Current and potential volume of development and customization activities in the country 2 3 1 6 2 R&D Universities and institutions providing graduates and Inputs conducting research in areas relevant to company 3 3 3 9 9 Conditions for obtaining equipment and material for R&D activities at adequate quality and cost levels in the country 2 2 2 4 4 Competence and size of relevant talent pool 3 3 3 9 9 Cost of specialists at different career levels 3 3 2 9 6 Country profile Political and economic stability 3 3 1 9 3 Proximity/ease of interaction with other countries and headquarters 2 3 3 6 6 Availability and quality of infrastructure : Internet/broadband, international airport, 2 2 3 4 6 Country provides adequate intellectual property and confidentiality protection 1 3 1 3 1 Country has adequate mechanisms and legislation in place to ensure fair competition and contract enforcement 2 2 2 4 4 The country has potential for innovation in areas that are of strategic importance for SAP 2 2 2 4 4 SAP competitors have similar units in the country 1 2 1 2 1 Country’s cultural traits (e.g. language) will facilitate implementation of new unit and cooperation with other R&D units 3 2 3 6 9 Fiscal incentives for implementation of R&D sites in country 2 2 2 4 4 Government encourages that investment is made in local R&D 1 1 1 1 1 Total: 95 77 16
  • 17. We identified the following as the main factors (weight grade 3) for SAP to establish an R&D unit in a certain country:  Potential of market growth for SAP products. Demand is one of the most important factors when choosing the location of a new R&D site, because the country with the greatest demand may be better served by a nearby site. This factor is directly tied to stability, as political and economic stability ensures demand and return on investment.  Country’s political and economic stability.  Universities and institutions providing graduates and conducting research in areas relevant to company. The presence of universities and other institutions conducting research in areas that interest the company is considered important, because research institutions allow the establishment of partnerships and provide highly qualified professionals (which is also a relevant factor).  Competence and size of relevant talent pool. R&D sites require highly qualified professionals if research and development activities are to provide satisfactory results. The country needs talent to justify investment. This also justifies the fact that the major IT firms have R&D sites in India, as it is considered a major hub of highly qualified IT professionals.  Cost of specialists at different career levels. To SAP, the cost of experts – lower than in Germany – is a factor that complements the preceding one, because it makes site implementation feasible.  Country’s cultural traits (e.g. language) will facilitate implementation of new unit. These factors were confirmed in the survey conducted by Booz Allen Hamilton and INSEAD (Doz et al., 2006), with variations in their percentage from country to country, but nonetheless considered most relevant (see Figure 12). 17
  • 18. Figure 12 – Factors influencing the selection of locations for implementation of R&D sites Source: Booz Allen Hamilton and INSEAD, 2006. The market potential factor was found to be most relevant in practically all countries, except for India, Germany, and the UK, where it came second to quality of workers (which, in turn, came second in Brazil, with 21%). As clearly shown, these factors were considered relevant, and may be taken to be deciding factors for the decentralization process. In 2007, Latin America accounted for 9% of SAP’s global earnings, and Brazil accounted for 40% of this figure. Latin American earnings increased 12% as compared to the previous year, in accordance with SAP’s worldwide goal of double-digit yearly growth. SAP considered four Latin American countries in its initial analysis: Mexico, Chile, Argentina, and Brazil. In summary, Mexico was considered to have a great talent pool and adequate infrastructure for implementation of an R&D site. The two main reasons that prevented investment in the country were that due to its proximity to the North America site, it had relative higher costs of talents and infrastructure. In analyzing Chile, SAP noticed extensive government incentives for the IT sector. Due to a small SAP product client base and limited talent availability, which would only be adequate for the initial stages of implementation but not for the desired growth plan, the company did not believe Chile would be the best option. In light of these analyses, the choice was down to Brazil or Argentina. A comparison of Brazil and Argentina using the methods proposed in this chapter yielded 95 points for Brazil and 77 for Argentina. The score was the same for both countries on several factors, such as specialist competence, infrastructure, and others, but some differences favored Brazil as the chosen site. 18
  • 19. Argentina fared better with regard to the following factors: 1) Availability of Internet, airport, personal security, and contract enforcement infrastructure in the country. For this factor, we may stress the ease of obtaining flights from Argentina to Germany and to other countries in which the center must operate. 2) Country’s cultural traits (e.g. language) will facilitate work of new unit in the region. As Argentina is a Spanish-speaking country, choosing it would greatly facilitate communication with other countries in Latin America. This is a disadvantage for Brazil, where Portuguese, not Spanish, is the national language. Brazil stood out on the following factors: 1) Local market: – The size of the current market for SAP products is greater in Brazil; – Brazil offers greater growth potential for SAP products, and is part of BRIC (group of emerging economies that includes Brazil, Russia, India, and China); – The volume of development and customization activity requested by Brazil is greater than that of Argentina, which is justified by the size of the existing client base. Overall the revenue base is considerably larger than Argentina as well. 2) R&D inputs: – The cost of specialists is lower in Sao Leopoldo compared to Buenos Aires. In addition in Brazil talents are split over several cities, whereas in Argentina they were mainly concentrated around Buenos Aires, which impacts flexibility. 3) Country profile: – The political and economic stability of Brazil was also considered to be an advantage over Argentina, which, in addition to political instability, has higher inflation than Brazil, and therefore poses a greater degree of investment risk; – The country provides adequate protection for intellectual property rights and confidentiality. Brazil is ranked on par with Canada by the US IP watchdog; – SAP competitors have similar units in the country. Google, Microsoft, HP, Dell operate similar centers in Brazil though with a smaller scope. It was shown that it is also the most likely location for future expansion. In light of these factors, Brazil was chosen in 2006 to host the newest SAP research and development site. 7. SAP LABS at São Leopoldo On June 5, 2006, SAP opened its Brazilian R&D site at the Unisinos (Universidade do Vale do Rio dos Sinos) campus in São Leopoldo, Rio Grande do Sul. The city of São Leopoldo was chosen because of the University and the linked Technology Park (TechnoSinos), which is one of the oldest in the state. The campus is also very green, providing the right environment for creativity and innovation. Overall, the cost is 30% to 40% lower there than in São Paulo. São Leopoldo is also safer, has the necessary 19
  • 20. infrastructure available, and has excellent IT talent in the area (including Porto Alegre and Novo Hamburgo). The main focus of this center is development and support of SAP products for the Americas, Italy, Spain, and Portugal. The center customizes products, develops new ones (such as electronic invoicing technology and specific products for certain segments such as the oil industry), conducts product testing and conducts product research in association with other SAP centers. SAP’s development is set-up as a truly global organization in that it also distributes core development to its Labs Network, to align with availability of talents, know- how, innovation and costs. Most other multinational software companies maintain a central core development site in their home country and only distribute localization and translation to foreign sites. The São Leopoldo Center is part of the SAP R&D network: it receives requests from business units to take part in development and research of SAP products. The percentage of development activities exceeds that of research, although the research portion of site activities is expected to expand over time. This factor also features as a market strategy in the survey conducted by Booz Allen Hamilton and INSEAD (2006). Figure 13 – Activities of Home-Base and Foreign R&D Sites Source: Booz Allen Hamilton and INSEAD, 2006. In foreign R&D sites, 55% of activities were found to focus on development rather than research. The São Leopoldo Center has a highly productive and scalable structure, comparable to that of sites in India and China, which is a pre-requisite for its future growth potential. As of Sept 2009, the site had 258 employees, a figure that is expected to grow to 370 by late 2010 and 800 in 2013. Ninety-seven percent (97%) of employees are from the São Leopoldo/Porto Alegre area, which allows achievement of another of the center’s goals – the development of local talent. The remaining 3% are from other SAP locations to help with the set-up, knowledge transfer and implementation of SAP best practices. 20
  • 21. As part of SAP’s sustainability initiative, the São Leopoldo Center has since June 2009 moved into a custom build, modern campus; the building was constructed and will be run according to the US Green Building Council’s LEED Gold “good environmental practices” certification. With an environment free of toxic substances and materials, ample availability of natural light, fresh air, and a focus on the well being of its employees, this site may even exceed the results obtained in China and India, helping Brazil reveal major talents in the IT field and, through these talents, perhaps influence other areas of knowledge. Each company must assess the most adequate R&D structure model (centralized or decentralized) according to its characteristics. Our suggested methodology proved useful for choosing the most adequate country to host an R&D site. Correct strategic decisions bring returns on investment within estimated timeframes, and allow corporate growth. Brazil currently has several characteristics that are very relevant to receiving R&D investment, particularly economic stability and sustained growth figures, which allows other companies to invest in the country. We acknowledge the need for further studies if our conclusions are to be generalized, as the case study method does not allow this. On the other hand, analysis of the SAP case demonstrated the potential of our model for use in other organizations if necessary adjustments are made. 8. References Asakawa, K., & Som, A. (2008). Internationalization of R&D in China and India: Conventional wisdom versus reality. Asia Pacific Journal of Management, 25(3), 375-394. Belderbos, R., Lykogianni, E., & Veugelers, R. (2008). Strategic R&D Location in European Manufacturing Industries. Review of World Economics, 144(2), 183-206. Brockhoff, K. (1998). Internationalization of Research and Development. Springer. Cantwell, J. (1992). The Internationalisation of Technological Activity and its Implications for Competitiveness. In O. Granstrand, L. Hakanson, & S. Sjolander (Eds.), Technology Management and International Business: Internationalization of R&D and Technology, Chichester: Wiley. Coeurderoy, R., & Murray, G. (2008). Regulatory environments and the location decision: evidence from the early foreign market entries of new-technology-based firms. Journal of International Business Studies: Part Special Issue: Institutions and International Business, 39(4), 670-687. Dachs, B., Ebersberger, B., & Lööf, H. (2008). The innovative performance of foreign-owned enterprises in small open economies. Journal of Technology Transfer, 33(4), 393-406. De Meyer, A. (1992). Management of International R&D Operations. In O. Granstrand, L. Hakanson, & S. Sjolander (Eds.), Technology Management and International Business: Internationalization of R&D and Technology. Chichester: Wiley. Doz, Y., Wilson, K., Veldhoen, S., & Altman, G. (2006). Innovation: Is Global the Way Forward. A joint study by Booz Allen Hamilton and INSEAD. Booz Allen Hamilton & INSEAD. Dubois, A., & Gadde, L.E. (2002). Systematic combining: An abductive approach to case research. Journal of Business Research, 55(7), 553–560. Dunning, J. H. (1994, January). Multinational Enterprise and the Globalization of Innovatory Capacity. Research Policy, 23(1), 67–88. Easton, G. (1995). Case research as a methodology for industrial networks: A realist apologia. Proceedings of the 11th IMP Conference, Manchester, 368–391. 21
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