MASTERARBEIT / MASTER’S THESIS

Titel der Masterarbeit / Title of the Master„s Thesis

„Multinational corporations (MNCs) through the prism of

technological innovation“

verfasst von / submitted by

Olgica Mocan, Bakk.

angestrebter akademischer Grad / in partial fulfillment of the requirements for the degree of

Master of Science (MSc)

Wien, 2017 / Vienna, 2017

Studienkennzahl lt. Studienblatt / A 066 915

degree programme code as it appears on
the student record sheet:
Studienrichtung lt. Studienblatt / Masterstudium
degree programme as it appears on Betriebswirtschaft UG2002
the student record sheet:
Betreut von / Supervisor ao. Univ.-Prof. Mag. Dr. Josef Windsperger
Table of Contents

Abstract ........................................................................................................................................... 4

Zussamenfassung ............................................................................................................................ 5

Acknowledgments........................................................................................................................... 7

List of Abbreviations ...................................................................................................................... 8

List of Figures ................................................................................................................................. 9

List of Tables ................................................................................................................................ 10

Introduction ................................................................................................................................... 11

1. Analyzing the MNCs through the prism of innovation: ........................................................... 14

Framing the very essential principles of economic progress through innovations ....................... 14

1.1. Schumpeter's theory of profit through innovations: Innovative profits ............................. 15

1.2. Schumpeter's monopolistic practices ................................................................................. 25

1.3. Penrose's perspective on profit and firm's growth.............................................................. 28

2. Technological innovation.......................................................................................................... 31

3. The importance of internationalization and the concept of multi-nationality for large MNCs 35

4. The theory of technological accumulation ................................................................................ 48

5. The evolutionary development of technological competition since the 1950s ......................... 55

5.1. Analyzing the evolution of international technological competition with Vernon's Product
Cycle Model .............................................................................................................................. 57

5.2. Analyzing the evolution of international technological competition with Cantwell's model
based on the theory of technological accumulation .................................................................. 62

5.2.1. Cantwell's model: Conceptual framework ................................................................... 66

5.2.2. The first evolutionary phase of international technological competition .................... 77

5.2.3. The second evolutionary phase of international technological competition ............... 83

6. M&As as technological strategy for greater technological diversification ............................ 103

2
7. Conclusions and critical overview of the Cantwell's model (1989) and the technological
accumulation theory .................................................................................................................... 108

References ................................................................................................................................... 118

Appendix ..................................................................................................................................... 130

3
Abstract

Changes through technological innovations are the principle driving forces for economic
development and progress. On the other hand, economic development and progress are essential
for economic prosperity of firms and of the economy as a whole.

Technological innovation is a continues and endogenous process, developing within the firm.
The firm is the main source of innovations, not some exogenous factors, like the market for
example. Because of their cumulative nature, technological innovations, which are aimed to
improve the production process of a firm, are developed over longer period of time. Moreover,
improvements in the production systems of firms are incremental. Nowadays, we are rarely
witnessing radical innovations that can change the fundamental basis of the established
production systems. Innovations are becoming more of a culture (more of a routine) in successful
companies.

By analyzing the evolutionary progress of successful multinational companies, we can see that
innovations in general and technological innovations in particular, were the key to their success.
Firms with long innovation traditions were and still are the most successful firms in their
respective industries. Creating firm's specific technological competence is a continuous and
cumulative process which takes time. Generally, the competence creation is only exceptionally
an outcome of some breakthrough innovation. Furthermore, even the breakthrough innovations
mostly occur in firms with strong technological competences and long innovation traditions.

Technological innovations are fundamental for the firm's long-term existence, growth and
success. They help the firm to create innovative profits, which differ from the traditional kind of
profits realized by adapting prices and quantities to the current market conditions, and which are
more stable than the traditional ones.

4
Zussamenfassung

Veränderungen durch technologische Innovationen sind die entscheidenden Triebkräfte für die
wirtschaftliche Entwicklung und den Fortschritt. Andererseits, sind die wirtschaftliche
Entwicklung und den Fortschritt unerlässlich für den wirtschaftlichen Wohlstand der
Unternehmen und der Wirtschaft als Ganzes.

Die technologische Innovation ist einen fortlaufenden und innen entstehenden Prozess, der sich
innerhalb des Unternehmens entwickelt. Das Unternehmen ist die Hauptquelle der Innovationen,
nicht irgendwelche sonstige exogene Faktoren, wie zum Beispiel der Markt. Aufgrund ihrer
kumulativen Natur werden technologische Innovationen, die den Produktionsprozess eines
Unternehmens verbessern sollen, über einen längeren Zeitraum entwickelt. Darüber hinaus sind
Verbesserungen in den Produktionssystemen der Unternehmen inkrementell. Heutzutage, sehen
wir selten radikale Innovationen, die die fundamentale Basis der etablierten Produktionssysteme
verändern können. In erfolgreichen Unternehmen werden Innovationen als eine
Unternehmenskultur (als eine Routine) etabliert.

Durch die Analyse des evolutionären Fortschritts erfolgreicher multinationalen Unternehmen

können wir sehen, dass die Innovationen allgemein und die technologische Innovationen
insbesondere der Schlüssel zum Erfolg dieser Unternehmen waren. Unternehmen mit langen
Innovationstraditionen waren und noch sind die erfolgreichsten Unternehmen in ihren jeweiligen
Branchen. Um das Unternehmen eine spezifische technologische Kompetenz zu entwickeln,
braucht es Zeit, weil die Kompetenzentwicklung einen zeitaufwändigen, kontinuierlichen und
kumulativen Prozess ist. Grundsätzlich erfolgt die Kompetenzschöpfung eines Unternehmens nur
ausnahmsweise aufgrund bahnbrechender Innovationen. Darüber hinaus kommen sogar die
bahnbrechenden Innovationen meist in Unternehmen mit starken technologischen Kompetenzen
und langen Innovationstraditionen vor.

Die technologischen Innovationen sind für die langfristige Existenz, das Wachstum und den
Erfolg des Unternehmens von grundlegender Bedeutung. Sie helfen dem Unternehmen,
innovative Gewinne zu schaffen, die sich deutlich von den traditionellen Gewinnen
unterscheiden. Der so genannte traditionelle Gewinn wird durch die Anpassung der Preise und

5
Mengen an die aktuellen Marktbedingungen realisiert, während der innovative Gewinn durch die
ständige gewinnsuchende Aktivitäten verwirklicht wird. Außerdem sind die innovativen
Gewinne stabiler als die traditionellen.

6
Acknowledgments

It has always been in my perceptions profoundly that knowledge is the most precious of
all values, accompanied by learning as the greatest virtue. Being able to learn is a fortuitous
union of possessing abilities and a good luck. In a context of such values, I would first want to
express my unreserved gratitude to professor Josef Windsperger for his wholehearted acceptance
of my thesis, and his precious advices in the topic of concern, which I would hardly think of a
possible parallel. I will be always indebted to all my professors in the Faculty of Business,
Economics and Statistics at the University of Vienna for giving me a unique basic framework for
my future activities. In particular, I would like to emphasize the importance of the basic support
and suggestions given to me by the professor Samuel Sadikario-Kolonomos. He gave me very
valuable and interesting ideas and hints and was my biggest support during the process of writing
the thesis.

In particular, I would like to thank to my family, my mother Suzana, my father Marjan,

my brother Stefan, and my husband Miha for their deep-hearted support and love, as well as all
my friends whose thoughts were always with me.

7
List of Abbreviations

C.E. - Consumer Expenditure

EEC - European Economic Community

GDP - Gross Domestic Product

GNP - Gross National Product

ICT - Information and Communication Technology

MNCs - Multinational Corporations

M&As - Mergers and Acquisitions

PCM - Product Cycle Model

R&D - Research and Development

WWII - World War II

W. - Wages

8
List of Figures

Figure 1 Schumpeter's Mark I vs. Mark II ................................................................................... 17

Figure 2 Mark I vs. Mark II ......................................................................................................... 17
Figure 3 Circular flow of economic life....................................................................................... 20
Figure 4 Schumpeter's economic development model ................................................................. 21
Figure 5 The relationship between the firm's growth (𝑮𝒇) and its rate of profit (𝒓𝒇) ................ 42
Figure 6 Technological accumulation: basic concepts and terms ................................................ 49
Figure 7 Learning as the principle source of innovation ............................................................. 53

9
List of Tables

Table 1 Evolution of subsidiaries and varying determinants of localized R&D .......................... 37

Table 2 The total number of US patents granted to residents of the major countries of origin ... 64
Table 3 The growth in exports of European countries and the USA, 1955-1975 ........................ 79
Table 4 The sales of US manufacturing affiliates in Europe and exports from the USA to
Europe, 1957-1975 ($m) ............................................................................................................... 81
Table 5 The index of the relative attractiveness of the USA for the international production of
West German firms, and of West Germany for the international production of US firms ........... 85
Table 6 The geographical distribution of international production in manufacturing by source
country, 1982 ................................................................................................................................ 87
Table 7 The geographical distribution of international production and indigenous firm exports in
manufacturing combined, by source country, 1982 ...................................................................... 88
Table 8 The industrial distribution of international production in manufacturing, 1982 ............. 88
Table 9 The industrial distribution of international production and indigenous firm exports in
manufacturing combined, 1982 .................................................................................................... 89
Table 10 National firms' shares of international production by manufacturing sector, 1974 (%) 91
Table 11 National firms' shares of international production by manufacturing sector, 1982 (%) 92
Table 12 National firms' shares of international production plus domestic exports of
manufactured goods, 1974 (%) ..................................................................................................... 93
Table 13 National firms' shares of international production plus domestic exports of
manufactured goods, 1982 (%) ..................................................................................................... 94
Table 14 Shares of the US patents of the world's largest firms attributable to research in foreign
locations, organized by nationality of patent firm, 1969-1995 (%) .............................................. 97
Table 15 Share of US patents of the largest Japanese-owned firms attributable to research
outside Japan, keiretsu vs. non-keiretsu firms, 1969-1995 (%) .................................................... 99

10
Introduction

In this master's thesis I will elaborate on MNCs in the context of technological innovation. As
the title suggests, the primary focus will be on the economic development of MNCs through
technological innovation. The main research areas are technological innovations and
international business strategies.

Change is as fundamental as existing, because change means improvement. Innovation is a

combination of new ideas and change, and as such is the essence of existence. The purpose of
this work is to emphasize the importance of innovation, especially technological innovation, for
a firm's profit and growth and for the economy as a whole. This work is intended to be a
highlight of the technological innovation as a continuous and cumulative process which
determines the future.

I will try to achieve this purpose through secondary analysis of existing literature elaborating the
topic of concern. I will start by analyzing one of the most influential economists of the 20th
century, J.A. Schumpeter and his Mark I and Mark II. His very progressive thinking, especially
for that time, expressed in his work ("The Theory of Economic Development", 1934 and
"Capitalism, Socialism and Democracy", 1943) has enormously contributed to the understanding
of economic development in general. He gave special importance to the innovation and was
among the first economists, who recognized the great significance of change.

I will continue the analysis with another "creative thinker", as referred to by the economist Sir
Alec Cairncross, Edith Penrose. She also stressed the importance of innovation for the firm's
growth and was the first economist who introduced the Resource-Based View of the firm (RBV
is fundamental for creating firm-specific competitive advantage through effective use of the
firm's tangible and intangible assets). She classified the human resource (especially the
management)as the most important among the intangible assets of the firm.

Reaching the purpose of this work would be impossible without analyzing the work of the
British and American economist, professor John Cantwell. His contribution to the topic is quite
extensive. His work "Technological Innovation and Multinational Corporations" published in

11
1989 is used as the basis for my analysis. Many of his more recent individual works and
collaborations with other authors are included in my research as well.

Besides the above mentioned remarkable economists, the research includes other important
authors who were of interest and have also researched the topic.

The theory presented in this work is supported by some empirical findings in order to show its
reliability and its possible practical implications.

The text is conveyed in the following seven chapters:

1. Analyzing the MNCs through the prism of innovation:

Framing the very essential principles of economic progress through innovations
2. Technological innovation
3. The importance of internationalization and the concept of multi-nationality for large
MNCs
4. The theory of technological accumulation
5. The evolutionary development of technological competition since the 1950s
6. M&As as technological strategy for greater technological diversification
7. Conclusions and critical overview of the Cantwell's model (1989) and the technological
accumulation theory

Chapter 1: The first chapter will elaborate the importance of innovation for MNCs in general. In
this section, the most significant aspects of Schumpeter's theory of profit will be considered.
Schumpeter's monopolistic practices will be analyzed. Penrose's perspective on profit and firm's
growth will be also part of this section.

Chapter 2: The importance of technological innovation for MNCs' long-term survival and
success will be emphasized in the second chapter. Of main interest in this section will be the
question why technological innovation, rather than other types of innovation, is essential for
MNCs?

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Chapter 3: In this chapter the internationalization of large firms will be discussed. This part will
also consider the concept of multi-nationality and will try to show that the nationality and the
multi-nationality are not conflicting trends, but complementary parts of a common process
(Cantwell and Santangelo, 1998, p.138). The evolution of foreign subsidiaries of large MNCs
will be also part of this chapter.

Chapter 4: The fourth chapter will examine the theory of technological accumulation, elaborated
in great details by Cantwell (1989) in his book "Technological Innovation and Multinational
Corporations", but also articulated by some authors before him, like Pavitt (1987), Rosenberg
(1982), Dosi (1984) and others. An extensive number of recently published research papers on
the topic will be considered in my analyses to check the consistency of the theory in question.

Chapter 5: The fifth chapter analyzes the internationalization of large manufacturing firms and
the international technological competition since the 1950s. This chapter is divided in two
subparts - the first part examines the internationalization of manufacturing firms and the
international technological competition since the 1950s through Vernon's PCM, while the second
part analyzes the same phenomena, but using a different model based on the theory of
technological accumulation, which was first proposed and used by Cantwell (1989) to analyze
the same problem.

Chapter 6: M&As as a possible technological strategy for greater technological diversification

will be of principle concern in this section.

Chapter 7: This last chapter brings together all important aspects discussed in this work and tries
to summarize and evaluate the accumulation theory in general and Cantwell's model (1989) in
particular. The major contributions, as well as the major limitations of the theory and the model
will be highlighted. The current status of the theory will be evaluated too. Main conclusions will
be drawn.

13
1. Analyzing the MNCs through the prism of innovation:
Framing the very essential principles of economic progress through
innovations

The essential conditions for technological development and economic progress of firms in a
particular socio-economic environment will be discussed in this chapter. A MNC can be
analyzed only within the structure of a particular socio-economic environment, not separately.
Thus, for deeper understanding of the functioning of a MNC we should firstly understand the
very basic principles of how the environment in which the MNC operates functions.

Today, we can say that we are living in some advanced form of capitalistic society. Since the big
corporations are becoming more and more influential and dictate not only the economic, but also
the political and the social rules, many critics will say that today is the time of corporatism, not
capitalism. However, the corporatism is only a form of organizing the economy and it is not a
complex socio-economic system which gives priority to individuals and their rights. In this
sense, the corporatism is a collectivistic form of economy which represents the interests of
corporations, not the interests of individuals. Nowadays, we can see that both capitalism and
corporatism not only exist, but they can even co-exists. Such hybrid forms of capitalism and
corporatism are supported as an idea by many politicians around the world.

Since capitalism is well supportive of change through innovations, especially through

technological innovations, and to constant technological development and economic progress, in
this work I will focus solely on the functioning principles of capitalism and I will analyze MNCs
only within a capitalistic structure and a capitalistic form of organizing the economy. The
capitalistic society is a dynamic one. The capitalistic dynamism is what Schumpeter defined as a
"necessary evil inseparable from economic progress" (Schumpeter, 1943, p. 106). It would be
impossible to analyze technological innovations in capitalism without considering the ideas of
the brilliant theorist of innovations in capitalistic society, Josef A. Schumpeter. Schumpeter was
among the firsts who understood the modern industrial conditions and who addressed the need of
innovations for profit creation, a firm's growth and a firm's long-term existence.

14
Another important aspect of the capitalism is certainly its inconsistency with the functioning
principles of a perfectly competitive market. The most important condition for economic
development and progress is surely the "destruction" of the perfectly competitive market. Under
perfectly competitive conditions, where all agents involved are in a state of equilibrium, there is
neither the need for the introduction of new, more efficient methods of production nor new
products. There exists no incentive for firms to create and innovate, since there is no possibility
to earn "higher profits" (profits higher than zero). If perfect competition is "destroyed", firms
will have the opportunity to earn positive profits which can compensate their high investments
during the innovation process. The creation of such positive profits through innovations is what I
will term later as "innovative profits". The innovative profits are the key for technological
development and economic progress.

1.1. Schumpeter's theory of profit through innovations: Innovative profits

Schumpeter was among the firsts who recognized the importance of innovations for a firm's
growth and its long term existence. He enriched the economic literature with two highly valuable
works, "The theory of economic development" (1934) and "Capitalism, socialism and
democracy" (1943). In these two works he has spoken about innovations, but in different time
periods and under different economic conditions and developments, so the economic critique
distinguishes nowadays between Mark I and Mark II model of innovation.

In his first work from 1934 (originally published in 1911) Schumpeter writes about profit as a
result of radical innovations. In this work, known as Mark I, Schumpeter distinguishes between
invention and innovation, where invention was related mainly to independent inventors and
innovation with entrepreneurial firms and commercialization. At that time it was common
practice for independent inventors to offer their inventions to entrepreneurial firms, which were
responsible for their commercialization.

During the twentieth century the situation changed and in-door research and development
became common practice. Schumpeter in his later work known as Mark II (1943) put the focus

15
on large oligopolistic firms as the main source of innovation. Some authors heavily disagree with
this idea that only large firms should be perceived as a source of innovation, addressing that
firm's size does not affect much the firm's innovation potential and innovation capability (Pavitt,
Robson and Townsend, 1987; Audretsch, 1995). I, personally agree that small firms can also be
quite innovative, but the focus here is on large firms because they are constantly creating new
technological improvements through their continuous problem-solving activities (Loasby, 1998),
which can be regarded as a source of further technological development and a source of
innovations for smaller firms. Therefore, large firms should be perceived as a source of
innovation and as a valuable resource for smaller firms with which they co-operate. In Mark II,
Schumpeter shifted his attention from profit creation through radical innovations to profit
creation through incremental innovations, as innovation creation became a continuous process
developing mainly within the firms.

During the nineteenth century most of the newly introduced innovations were radical, thereby
creating completely new firms and establishing new industries. During the twentieth century the
focus shifted from radical towards incremental innovations and the so called "routinized regime"
became a popular term. In Figure 1, the so called "entrepreneurial regime", characteristic for the
nineteenth century and related to Schumpeter's Mark I, and the "routinized regime",
characteristic for the twentieth century and related to Schumpeter's Mark II are graphically
presented. The red line, denoted as radical innovations (Mark I), shows that the marginal costs
decline while the time interval between each following introduction of innovation increases. This
suggests that during the nineteenth century radical innovations were discovered at relatively low
costs. The blue line, denoted as incremental innovations (Mark II), shows that during the
twentieth century the innovative process has become more of a routine, resulting in smoother
cost reduction. The newly introduced innovations didn't completely eliminate and displace the
old ones, but quite the opposite, they improved them. In this case we speak about incremental
changes or incremental innovations.

16
 Figure 1. Schumpeter's Mark I vs. Mark II

Marginal Costs

Radical innovations (Mark I)

Incremental innovations (Mark II)

Time
Source: own representation based on Puetzl, 2016, p. 53

Figure 2. Mark I vs. Mark II

Price Price

Marginal
Revenue 1

WTP i,2
Marginal
Revenue 2 Marginal
WTPi,1 Revenue 2
Marginal
Marginal Costs
Revenue 1
Marginal Costs

Demand 2
Demand 1 Demand 2
Demand 1

Q1 Q2 Quantity Q1 Q2 Quantity

 Radical innovations are  Incremental innovations are

introduced introduced
 Innovations created the  Consumers' willingness to
market: Q i> 0 pay (WTP) has increased:
 WTP i,1 = 0; WTP i,2 > 0 WTP i,1 < WTP i,2

Source: own representation based on Puetzl, 2016, p. 54

17
In the first chapter of his book "The theory of economic development" known as Mark I,
Schumpeter describes the economic life from a standpoint of the circular flow of money. The
circular flow of money is an economic system which tends towards equilibrium, thereby creating
the opportunity for the determination of prices and quantities.

The principle features of the theory of circular flow are: 1. The production processes follow
similar routine and there is no product differentiation, 2. There is no room for asymmetric
information, namely all suppliers know the exact demand and adjust the quantity supplied
accordingly, 3. There is no possibility of wastage of resources, since the economy is able to
produce the optimal level of quantity, 4. All firms cohabit in competitive equilibrium, and 5. The
prices are equal to the average costs. All these characteristics create a picture of perfect
competition and equilibrium.

If we consider these main features of the circular flow theory, we can easily conclude that this
concept is used in the context of static rather than dynamic settings. The transformation of the
model into a dynamic one requires changes. These changes can be created through innovations.
Introduction of innovations into the established channels of the income-flow disrupts the well
settled structure of this circular flow of money and whereby the process of economic
development begins. Innovations represent the foundation of economic development and
progress. The Schumpeterian model of innovation represents exactly that, the disruption of the
established economic structure of the circular flow of income.

Schumpeter understands economic development as a "spontaneous and discontinuous change in

the channels of the flow, disturbance of equilibrium, which forever alters and displaces the
equilibrium state previously existing" (Schumpeter, 1934, p. 64). Innovations responsible for
inducing the process of economic development do not arise from the consumers' needs, but they
are initiated from the producer. The producer is the one that starts the economic change, which
will eventually lead to economic development (Schumpeter, 1934, p. 65). Using the modern
economic terminology, we term these type of changes as technology-push innovations. One
important characteristic of technology-push innovations is that, first the innovation is introduced
and then the market for that innovation is created. Of course, this is mainly true in the theoretical
sense, because in reality the economic logic always prevails over the technological one
(Schumpeter, 1934, pp. 14-15).

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Schumpeter defines innovations as "new combinations" in the production process of a firm.
Improvements in the production process arise from the producer's ability to combine the existing
materials and existing methods of production differently. In this sense, economic development
comes as a result of such new combinations in the production process (Schumpeter, 1934, p. 66).
Schumpeter distinguishes between the following five categories of innovations which can break
the established circular flow of money: 1. Introduction of a new good or new quality of an
existing good (product innovation), 2. Introduction of a new method of production, which needs
to by no means be founded upon a new scientific discovery but can also exist in a new way of
handling a commodity commercially (process innovation), 3. Opening up of a new market, in
which the particular manufacturing branch of the country in question has not previously been
entered, whether or not this market existed before 4. Conquest of a new source of supply of raw
materials of half-manufactured goods, whether or not this source already existed, and 5. The
carrying out of the new organization of any industry, like the creation of a monopoly position or
the breaking up of the monopoly position (Schumpeter, 1934, p. 66).

As long as the circular flow is static, perfect competition can be secured. When this concept is
extended to include innovations as well, perfect competition can no longer exist. The destruction
of the perfect competition should not always be interpreted as a negative event, thereby
highlighting the argument that in a market with anomalies one agent can benefit only at the
expense of some other agent (the so called zero sum game) (Hens and Rieger, 2010, p. 120). On
the contrary, in my opinion this destruction should be regarded as a motivator for firms to
become more innovative. The innovative firm will surely benefit at the expense of some other
less innovative firm, which I perceive as a very natural event. In markets with certain anomalies
(imperfect markets) firms get the chance to introduce new, value-added products which will
differ from the products of their competitors and to charge higher prices for them. Using the
imperfect conditions in the marketplace firms can yield profits, which otherwise could not be
obtained. Moreover, firms will also satisfy the specific needs and requirements of the consumers,
which were formerly unsatisfied. This surely can be perceived as a trigger which drives firms to
act. Changes introduced through innovations are highly uncertain and innovators will always ask
to be compensated for the undertaken risk. The higher this risk, the higher would be the
compensation that the innovator will expect. Therefore, the innovators will always look for
higher returns. As long as firms coexist in perfect competition, there is no need for further

19
economic development. When the circular flow of income is disrupted by innovations and the
perfect competition is destroyed, the process of economic development starts. The concept of
circular flow of economic life and Schumpeter's model of economic development are visualized
in Figures 3 and 4. As we can see from Figure 3, changes (innovations) appear in the area of
industrial and commercial life and not in the sphere of consumers' needs, which confirms
Schumpeter's proposition that innovations (and economic development) are initiated by
producers and not by customers (Schumpeter, 1934, p. 65).

Figure 3. Circular flow of economic life

Goods and Services

Consumer
Expenditure

Firms Households
Wages, Rents,
Dividends

Factors of Production

Source: own representation based on Daraban, 2010

20
Figure 4. Schumpeter's economic development model

Changes: Innovations
Circular
flow of
income

Goods and
Services Entrepre
neur

Firms C. E. House- Entrepreneurial

W. holds profit
Capitalist
Factors of
production

Industrial and
commercial
sphere

Source: own representation based on Chandradas and Vishnu, 2012, p. 14

According to Schumpeter (1934), there are two ways of creating profit, the traditional one which
is related to adapting prices and quantities to market conditions in order to create profit, and the
new one which is related to profit creation through novelty-creating economic activities
(Cantwell, 2000/2001, p. 6). Therefore, we distinguish between the traditional or standard kind
of profits and innovative profits. In the traditional context of profit creation, a firm should have a
certain degree of market power in order to impose prices and quantities in a way that would be
beneficial for it. In this sense, profits are created through adjustment of prices and quantities in
the market by firms that have enough market power to conduct such adjustments (Cantwell,
2000/2001, p. 6). According to this traditional way of creating profits, an innovative firm is
focused simply on profit maximization rather than on innovation.

21
In a novelty-creating economic environment the attention shifts from using the market power to
create profits towards a constant search for new value-adding activities that will secure higher
profits. These profit-seeking activities disrupt the circular flow of income (Cantwell, 2000/2001,
p. 6).According to Cantwell (2000/2001), Schumpeter in his later work "Capitalism, Socialism
and Democracy" (1943) termed the disruption of the established circular flow of money as a
"creative destruction". This term is often misunderstood, since "creative destruction" refers to
the creative process and not to the circular flow of income (Cantwell, 2000/2001, p. 6). Profits
created through value-adding activities significantly differ from the profits derived from using
the market power. Using the market power at a given point in time can help the firm to increase
its profit rates, but only in that particular point in time. The innovative profits are a result of a
continuous creative process and can raise the firm's profits for a longer period of time. They are
more constant and stable profits, securing long term existence of the firm. These profits are not
created by exercising the market power of the firm. Furthermore, the firm's increased market
power comes as a result of innovations, which create the innovative profits.

Either by using the standard analytical tool grounded on the traditional economic theory of
circular flow of income or by using the new one which is based on the continuous creation of
new value-adding activities to analyze the origins of profits, we come to the conclusion that in
both cases Schumpeter speaks about earning profits higher than zero, only using different
economic mechanisms. In accordance with the traditional way of profit creation, we discuss the
pure profit maximization, while according to the new way, we speak about constant "search for
higher profits" (Nelson and Winter, 1982). Such higher profits can be acquired only if perfect
competition is destroyed and the firm starts to compete in more aggressive economic
environment. In the eighth chapter of his second book "Capitalism, Socialism and Democracy"
(1943), Schumpeter discusses the monopolistic practices and explains why the concept of perfect
competition and a perfectly competitive market is inconsistent with innovation and economic
development. His viewpoints expressed in this chapter are often misinterpreted, as he speaks
about monopolistic positions not as a source of innovative profits but just as an incidental by-
product (viewed from the perspective of the income circulation) (Cantwell, 2000/2001, p. 7).
This misinterpretation of Schumpeter's monopolistic practices in the context of profit creation is
known as the "Schumpeterian hypothesis", which claims that the market power is the main
source of innovation, thereby providing resources and safeguarding against the potential

22
downside of risk-taking activities (Cantwell, 2000/2001, p. 8). In the very same chapter, he
clearly makes a difference between innovative profits and profits that come as a result of
increased market power, claiming that the latter are coincidental source of profits. The following
quotation demonstrates very clearly that Schumpeter is misinterpreted by many authors trying to
analyze his monopolistic practices and it also disputes the "Schumpeterian hypothesis": "Thus it
is true that there is or may be an element of genuine monopoly gain in those entrepreneurial
profits which are the prizes offered by capitalist society to the successful innovator. But the
quantitative importance of that element, its volatile nature and its function in the process in
which it emerges put it in a class by itself. The main value to a concern of a single seller position
that is secured by patent or monopolistic strategy does not consist so much in the opportunity to
behave temporarily according to the monopolistic schema, as in the protection it affords against
temporary disorganization of the market and the space it secures long-range planning."
(Schumpeter, 1943, pp. 102-103). The only logical answer to the question why Schumpeter is so
often misinterpreted and even criticized with regard to the monopolistic practices, is probably
because his ideas were too progressive for his time to be understood appropriately.

Schumpeter, as many modern evolutionary economists after him and many classical authors like
Smith and Marx before him, also insisted on the priority of innovative profits over the standard
ones. The relative importance of innovative profits continues to increase and it is expected to
increase further in the future, with the growing internationalization of firms (Cantwell and
Santangelo, 1998, p. 132). Cantwell and Santangelo (1998) claimed that the creation of
innovative profits is encouraged by new, more flexible forms of organizations. Thus, they
believe that in the future more flexible forms of organizations are to be expected (Cantwell and
Santangelo, 1998, pp. 131-132). Another important reason for the increasing importance of
innovative profits is the internationalization of firms. Strong international competition has
decreased the possibility for using market power to maximize profits. Innovative profits also
gained priority with the increasing significance of the international knowledge flow, which
enables easier creation of "new combinations" and creation of innovations. The establishment of
international corporate networks smoothes the knowledge transfers between firms and
accelerates the learning process, which is an essential condition for the creation of innovations
and for the creation of innovative profits. When analyzing MNCs in the context of technological
innovations, innovative profits have a prevalent role.

23
Besides the fact that Schumpeter made a clear distinction between innovative profits and profits
generated with help of market power, he also distinguished between innovation and imitation in
order to determine the allocation of innovative profits (Cantwell, 2000/2001, p. 11). Schumpeter
held the opinion that initial innovators, compared to imitators, should earn a higher share of the
innovative profits. Other economists, like Cantwell for example, do not share the same opinion
with Schumpeter about profit distribution. Cantwell (2000/2001) characterizes Schumpeter's
perspective on innovative profit allocation as a drawback, because in his opinion the initial
innovator of a successful innovation is not necessarily the one that performs the best in the
market (Cantwell, 2000/2001, p. 11) and therefore, should not always receive the highest share
of the profit. Very often we are witnessing how "followers" (or "imitators") are becoming
technological leaders and not necessarily the "first movers" (or "innovators"). Thus, in the actual
socio-economic environment Schumpeter's distinction between innovation and imitation blurs. I
personally understand Schumpeter's idea of profit distribution, especially from a standpoint of
social fairness; "first movers" should be rewarded for their courage to involve themselves in
innovative processes, which are highly uncertain, risky and highly demanding. However, from a
standpoint of the fast technological and economic progress, I think that the distinction between
innovation and imitation should not be of great importance, since both innovations and imitations
accelerate the overall process of technological development and economic progress. I believe
that not only the initial innovators, but all firms operating in a certain industry should have
access to the advanced knowledge and information in order to innovate. Only if they have such
an access, the knowledge transfer between firms in the industry will be effective, fast and
continuous, enabling rapid technological development and encouraging innovation. Nowadays,
MNCs are aware of the importance to have access to the existing international knowledge flow
in order to innovate. Therefore, they are actively building international corporate networks which
help them to obtain such access.

24
 1.2. Schumpeter's monopolistic practices

Schumpeter strongly believed that such a thing as a perfect competition and perfectly
competitive markets had never existed and would never exist. Perfect competition is simply not
an attractive economic environment for innovators, since it secures zero profit. Therefore, it is
not a suitable environment for technological development and economic progress. Innovators
will always look for higher profits (positive profits) in order to justify the high risk they are
facing during the innovative process. Therefore, in my work I analyze MNCs under imperfect
market conditions and in imperfect competition.

After briefly explaining the difference between innovative and standard profits, the discussion
may continue to the second important topic for my analysis here, namely the Schumpeterian
monopolistic practices. In the previous section I clearly emphasized that the primary source of
Schumpeter's innovative profits is not market power and the monopolistic practices arising from
that power, but innovation. However, the fact that an innovative firm may enjoy greater market
power after successful introduction of an innovation is undeniable. Still, this great market power
should be regarded as an expected outcome of a successful introduction of an innovation, and not
as a leading motive for a firm to innovate.

Schumpeter speaks about monopolistic practices (or "restrictive practices") in the eighth chapter
of his book "Capitalism, Socialism and Democracy" (1943). Knowing his perspective on
innovative profit distribution, we can easily conclude that he emphasizes the "restrictive
practices" as possible options for an innovative firm to protect its innovation and to compensate
the undertaken investment. Since he holds the opinion that an innovator should earn a higher
share of the innovative profits than an imitator, it is reasonable to expect that he will also advise
how an innovator can achieve this task in practice. First, Schumpeter discusses patent protection
as a possibility for a firm to protect its innovation and to secure a monopolistic position for a
certain period of time. Patents are quite an interesting topic to be discussed, especially because of
their, so to speak, dual nature. The question of whether patents are a restrictive practice which
legally inhibits innovations or quite the opposite; encourages them, still remains to be answered.

25
Besides the fact that patents impose legal restriction on the use of specific information or
practice, there is also another perception of patents, as they increase firms' incentive to create and
innovate (Glezos, 2010). By offering legal protection, a patent ensures the innovative firm that
for a specific period of time it will have monopolistic position in the market, which will enable
the firm to repay the undertaken investment. In some cases when a patent cannot be acquired or
if acquired cannot offer proper protection, then other methods should be used for a firm to justify
its investment (Schumpeter, 1943, p. 88). Nowadays, some MNCs use patents as a legal measure
to protect their innovations, while others decide to employ some other "restrictive practice". The
question is why some of them refuse to protect their innovations through patents? One of the
main reasons why firms decide to use other methods than patents, is still linked to the lack of
confidence. Many of them still believe that by revealing valuable information, there always
exists a certain risk for illegal disclosure of that information.

Besides the patents, Schumpeter also speaks about other ways to protect an innovation and to
secure monopolistic position, which we will see that, even today, are commonly used in practice.
Securing monopolistic position can be achieved through building entry barriers. As we know,
even today, many MNCs use this strategy to secure their positions in the market. High capital
requirement to enter a certain industry is one of the strongest barriers to prevent new firms from
entering the industry. The experience that a first-mover firm enjoys is another important aspect
that should be considered by new firms willing to enter the industry. A firm which operates in an
industry that demands high capital to enter and which, at the same time, owns the needed
experience has an opportunity to gain time and space for further technological developments
(Schumpeter, 1943, p. 89). At the same time, such competition discourages new firm from
entering the industry (Schumpeter, 1943, p. 89).

In the section of monopolistic practices, Schumpeter also speaks about price rigidity in the
context of protecting innovations. He defines price rigidity as a phenomenon which is
characterized by less price sensitivity with regard to changes in demand and supply, than it
would be in perfect competition (Schumpeter, 1943, p. 92). Some innovations enable the firm to
offer its final products at lower prices than before, while other innovations induce higher prices
for the firm's final products. The former are innovations that cause reduction of the production

26
costs, thereby enabling the firm to produce its products at lower costs per unit than before. The
unit cost reduction is almost always a result of some technological innovation; innovation in the
technological production process of the firm. The latter are usually improvements of the firm's
existing products. Each improvement involves additional costs that are reflected in the product's
final price. In this context we can say that, for a firm it is of crucial importance to be able to
adapt the prices in accordance with the type of the innovation introduced. Even if the firm,
intentionally or unintentionally, fails to adapt the prices, according to Schumpeter, in the long
run the prices will not fail to adapt themselves to the technological progress (Schumpeter, 1943,
p. 93). This is very important point, because it emphasizes that even if a firm is able to impose
"unfair" price for its products(to keep the price rigid) using its market power, in a long run the
price will correct itself. Such price rigidity is mainly a short-term phenomenon (Schumpeter,
1943, p. 93).

What is really important to say here is that, Schumpeter does not promote rigid prices as a
possible method to achieve monopolistic position, on the contrary, he understands the strategy in
question as a way "...to avoid seasonal, random and cyclical fluctuations in prices and to move
only in response to the more fundamental changes in the conditions that underlie those
fluctuations. Since these more fundamental changes take time in declaring themselves, this
involves moving slowly by discrete steps-keeping to a price until new relatively durable contours
have emerged into view." (Schumpeter, 1943, p. 93).

I give myself the right to conclude this section with one Schumpeter's sentence which, I think,
best highlights his perception of perfect competition: "...perfect competition is not only
impossible but inferior, and has no title to being set up as a model of ideal efficiency."
(Schumpeter, 1943, p. 106).

27
 1.3. Penrose's perspective on profit and firm's growth

Edith E. T. Penrose, like Schumpeter before her, claimed that the main source of profit, which is
crucial for a firm's long term corporate growth and prosperity, are innovations. In her book "The
theory of the growth of the firm" published in 1959, Penrose argued that the innovation comes as
a result of a constant learning process within the firm of how to develop new applications of an
existing internal knowledge base (Cantwell, 2000/2001, p. 13). Penrose, like Schumpeter before
her and other economists after her (like Nelson and Winter, 1982), perceived the firm as a
constant seeker for higher profits through value-adding activities, and not as a purely profit-
maximizer creating profits by using its strong market position (market power).She clearly made a
difference between profits arising from market power, which are in their nature short-termed,
and profits arising from innovations, which are more stable and persistent. We can see that she
differentiated between firm's profitability and corporate growth as a consequence of
technological progress and firm's profitability and growth resulting from monopolistic practices
in the following sentence: "Examples of growth over long periods which can be attributed
exclusively to such protection [referring to market power] are rare, although elements of such
protection are to be found in the position of nearly every large firm." (Penrose, 1959, p. 113).

Technological diversification was another important aspect which Penrose addressed as essential
for firm's expansion. She emphasized that such diversification is to be based on the firm's
underlying technological complement and relatedness of activities (Cantwell, 2000/2001, p. 14).
An important condition for a firm to be able to technologically diversify is its existing
technological base. If the firm has a strong technological base, then it can more easily become
more technologically diverse. Some other authors later, like Cohen and Levinthal (1989), termed
this condition as an "absorptive capacity" of the firm. Penrose pictured the firm as a primary
source of innovation, because of its continuous internal learning process and its absorptive
capacity. "I have placed the emphasis on the significance of the resources with which a firm
works and on the development of the experience and knowledge of a firm's personnel because
these are the factors that will to a large extent determine the response of the firm to changes in
the external world and also determine what it 'sees' in the external world." (Penrose, 1959, pp.

28
79-80). This statement links Penrose's perspective on what is crucial for technological progress
and a firm's growth with regards to Cantwell's theory of technological accumulation, which will
be discussed in greater detail in the fourth chapter of this thesis. Some empirical findings will be
elaborated later in this work to show that, a firm is able to successfully innovate mainly in those
sectors in which its technological strengths were historically concentrated, thereby additionally
confirming the hypothesis that the technological progress results from the cumulative nature of
the firm's internal process of learning in production (Cantwell and Fai, 1999, p. 331).

In the context of the firm's growth, Penrose spoke about the importance of the ability of the
firm's personnel to learn and develop experience. She emphasized that the most valuable
resource of a firm is the human resource and its potential to be an active part of the internal
learning process in creating firm-specific advantages. The firm's personnel and its continuous
learning in production help the firm to accumulate knowledge and experience and to create firm-
specific technological competence. Having technological competence, the firm is able to respond
in an appropriate way to the fast changing market conditions and consumers' requirements. In
this sense, Penrose perceived the firm as the principle source of technological development and
innovation, and not the market, as Adam Smith's famous dictum claimed (that the division of
labor is determined by the extent of the market (Cantwell and Fai, 1999, p. 332)). Adam Smith in
his original theory of economic growth considered only capital accumulation to be responsible
for economic growth (Cantwell and Fai, 1999, pp. 335-336). Not only Adam Smith, but also
other classical economists as David Ricardo and Karl Marx, believed that capital accumulation is
the most important process in the economy. In their perspective, capital accumulation is the main
driving force towards technology creation, and not the process of learning in production.
However, this perception of economic growth can be more easily understood if we consider the
fact that, in Smith's time the profits from trade were the principle foundation of capital
accumulation. This accumulated capital was then used for organizing new production processes
(Cantwell and Fai, 1999, p. 336). Besides the classical theory of economic growth, which is most
importantly represented by Adam Smith, there are many evolutionary economists, like Penrose,
who did not share the same opinion about the economic growth and progress as the classical
theorists. Clark (1985), Kodama (1992), Utterback (1994), and Christensen (1997), claimed that
the technological progress of a firm is an evolutionary outcome of constant activities to improve

29
the internal production process of the firm. The technological progress is the principle condition
for a firm's growth. This evolutionary perception of the firm's technological development and
progress is actually an indicator that Schumpeter's "creative destruction" is more applicable to
products or markets than it is to technologies (Cantwell and Fai, 1999, p. 334).

In accordance with this evolutionary view, the firm is the one that organizes and initiates
economic development and economic progress through its firm-specific technological
competences (Cantwell and Fai, 1999, p. 333). Logically, the firm is not and cannot act as some
separated part from the market in which it operates. Furthermore, it is inconstant interaction with
other firms, institutions and with its customers. Satisfying the customers' needs by improving the
final products through improvement of the production process remains to be the principle
objective of each firm. However, the main point here is that the firm should be perceived as a
conceptually separate institution from the market, which has specific influence on the economic
activities (Cantwell and Fai, 1999, p. 333). From the above discussed, I can draw the conclusion
that Penrose's approach to analyze the firm's technological progress through innovations was
implying the technological accumulation theory (like Cantwell's approach to analyze MNCs and
international technological competition) and not Schumpeter's theory of "creative destruction",
which, according to the common interpretation used by many authors, explains the technological
progress as a discontinuous process, claiming that the process of creative destruction represents
"incessantly destroying the old one, incessantly creating a new one" (Schumpeter, 1943, p. 83).

However, one important drawback of Penrose's theory is her failure to clarify the difference
between the firm's national from international expansion, which for the analysis here is crucial.
My focus in this work is on MNCs (as opposed to national ones) that gain advantages mainly
from the narrow technological specialization of countries and firms, so the separation of national
and international expansion is rather important.

30
2. Technological innovation

"I never think of the future. It comes soon enough."

Albert Einstein

As outlined in the introduction, change is as fundamental as existing. Innovation is a new idea

(simple, or complex) that is intended to cause change in many economic areas – in organization,
structure, production, technology, quantification, knowledge, ethics and culture. Its main
supposition is improvement. Innovations tend to improvement (not indifference or regression),
therefore we can define innovation as idea + change + improvement.

Changes through innovations are not only determinant of economic progress and prosperity, but
are also considered to be the foundation of many basic sciences (or general purpose sciences, as
they are termed later in this work), such as mathematics, biology, physics, and many others.

Many processes in the economy are analogous to physics. In this sense, we can compare the
functioning principles of demand in the economy to the process of energy creation in physics. In
accordance to Newtonian physical axioms, changes in nature are related to the following
“primitives”: time, space, constants, force, energy, and inertia. Concepts (ideas) have analogical
primitives to the physical. The notion (entity) of innovation is a combination of idea + change,
therefore something sourcing from the subject (“individuum”) to the environment (collectivity,
plurality). In Newtonian language innovation is the relation (causative) of force and acceleration,
or in Leibniz-Newtonian language it is projection from differentiation to integration.
Alternatively, it is the mapping of the individual will to the plural (clustered) forms. In the
Escher-ian world it would be a continuum of primitive(𝑎𝑏𝑠𝑡𝑟𝑎𝑐𝑡 𝑓𝑜𝑟𝑚𝑠) → to harmonized(𝑐𝑜𝑚𝑝𝑙𝑒𝑥𝑖𝑡𝑦).
Finally, innovation can be an output of systematical work or serendipity.

In this work, I will stick only to innovations in the context of economy. In the economic world,
the main driving force of innovations is profit. Each innovation aims to increase profit either
through cost reduction or increase in demand. Achieving this purpose depends on the following

31
conditions (proportionalities): market power, enterprise size, technology availability
(technological development), appropriability (protection, adaptability) and demand.

The types of changes that innovations induce can be defined as follows: For convenience we
denote here: 𝐶 as "changes" and 𝑓 as 'is function of”.

o Functional changes, where

𝐶 = 𝑓(𝑠𝑡𝑟𝑎𝑡𝑒𝑔𝑦, 𝑔𝑜𝑎𝑙𝑠, 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛𝑠, 𝑐𝑎𝑢𝑠𝑒 − 𝑐𝑜𝑛𝑠𝑒𝑞𝑢𝑒𝑛𝑐𝑒)
o Relational changes, where
𝐶 = 𝑓(𝑐𝑙𝑎𝑟𝑖𝑡𝑦 + 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑓𝑙𝑜𝑤, 𝑐𝑜𝑛𝑛𝑒𝑐𝑡𝑖𝑣𝑖𝑡𝑦, 𝑠𝑒𝑞𝑢𝑒𝑛𝑐𝑒𝑠, 𝑜𝑝𝑡𝑖𝑚𝑎𝑙𝑖𝑡𝑦, 𝑐𝑜𝑛𝑓𝑖𝑔𝑢𝑟𝑎𝑡𝑖𝑜𝑛𝑠)
o Combination changes, where𝐶 = 𝑓(𝑝𝑒𝑜𝑝𝑙𝑒 + 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒𝑠 + 𝑒𝑛𝑣𝑖𝑟𝑜𝑛𝑚𝑒𝑛𝑡)
o Structural changes, where𝐶 = 𝑓(𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡, 𝑐𝑜𝑛𝑡𝑟𝑜𝑙, 𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛𝑠)
o Limit changes, where𝐶 = 𝑓(𝑓𝑖𝑛𝑎𝑛𝑐𝑒𝑠, ℎ𝑢𝑚𝑎𝑛 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒𝑠, 𝑐𝑜𝑛𝑠𝑜𝑟𝑡𝑖𝑎, 𝑚𝑎𝑟𝑘𝑒𝑡 −
𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛, 𝑐𝑖𝑟𝑐𝑢𝑚𝑠𝑡𝑎𝑛𝑐𝑒𝑠, 𝑒𝑡ℎ𝑖𝑐𝑠)
o Performance changes, where𝐶 = 𝑓(𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 + 𝑠𝑎𝑡𝑖𝑠𝑓𝑎𝑐𝑡𝑖𝑜𝑛)
o Quantitative changes, where
𝐶 = 𝑓(𝑛𝑢𝑚𝑏𝑒𝑟𝑠, 𝑑𝑖𝑚𝑒𝑛𝑠𝑖𝑜𝑛𝑠, 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠, 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑎𝑡𝑖𝑜𝑛, 𝑠𝑒𝑞𝑢𝑒𝑛𝑐𝑒𝑠, 𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑠)
o Logical changes, where
𝐶 = 𝑓(𝑙𝑜𝑔𝑖𝑐𝑎𝑙 𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛𝑠 𝑎𝑛𝑑 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠, 𝑎𝑏𝑠𝑡𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑠, 𝑡𝑜𝑝𝑜𝑙𝑜𝑔𝑖𝑐𝑎𝑙 𝑠𝑝𝑎𝑐𝑒𝑠/𝑖𝑛𝑣𝑎𝑟𝑖𝑎𝑛𝑡𝑠)
o Environmental changes, where 𝐶 = 𝑓(𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑦, 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠, 𝑐𝑜𝑚𝑝𝑙𝑒𝑥𝑖𝑡𝑖𝑒𝑠)
o Ethical changes, where
𝐶 = 𝑓 (𝑐𝑜𝑛𝑠𝑒𝑞𝑢𝑒𝑛𝑐𝑒𝑠, 𝑔𝑜𝑜𝑑 𝑣𝑠. 𝑏𝑎𝑑, 𝑙𝑒𝑔𝑎𝑙 𝑖𝑠𝑠𝑢𝑒𝑠, 𝑝𝑜𝑙𝑖𝑡𝑖𝑐𝑠, 𝑏𝑒𝑙𝑖𝑒𝑓𝑠, ℎ𝑖𝑠𝑡𝑜𝑟𝑖𝑒𝑠 𝑎𝑛𝑑 𝑐𝑢𝑙𝑡𝑢𝑟𝑒)

Innovations might reflect:

o Small vs. fundamental changes

o Continuous vs. discontinuous changes
o Input information vs. output information
o Sequence of: facts, numbers, metaphors, models, preferences, utilities
o Complexity vs. simplicity
o Linearity vs. nonlinearity
o Nearer vs. farther future

32
Albers and Gassmann (2005) categorize five innovation dimensions, namely: context, intensity,
subjective, process and normative (Albers and Gassmann, 2005, p. 26). In accordance with their
content ("What is new?"), we distinguish between process innovations and product innovations
(Albers and Gassmann, 2005, p. 26). Process innovation could be defined as an improvement
which increases the efficiency of the production process. Process innovations might reduce the
unit costs, might increase the quality of outputs, might reduce the production time or might make
the production process safer (Albers and Gassmann, 2005, p. 26). While process innovations are
pursuing to find new combinations of existing production factors, thereby making the production
process more efficient, product innovations are pursuing to exploit the market. With a product
innovation, the firm aims to offer its customers fulfillment of completely new purposes or
fulfillment of existing purposes in a completely new way (Albers and Gassmann, 2005, p. 26).
Thus, product innovation aims to increase the effectiveness.
In accordance with the intensity of an innovation ("How new is it?"), we make a difference
between radical and incremental innovations. Radical innovations induce fundamental changes,
while incremental innovations create small changes or improvements.

We make another distinction according to the subjective dimension of innovations ("For whom it
is new?"), between subjective and objective innovations. Subjective innovations are considered
to be new only to a certain group of customers or to the firm that creates the innovation, while
objective innovations are new, so to say, to the whole world.

The process dimension of innovations refers to the whole innovation process, from initiation to
the utilization of an innovation.

The fifth dimension, the normative one, deals with questions concerning the success of an
innovation.

My focus in this work is to find the relationship between technological innovations and MNCs.
More precisely, to find out why technological innovations (rather than other types of innovation)
are fundamental for a firm's growth, its long-term existence and its success.

33
Technological innovation covers everything within the production process itself, which over time
raises the productivity of inputs (Cantwell, 1989, p. 8). According to Caves (1982), technological
innovation is "knowledge about how to produce a cheaper or better product at given input prices
or how to produce a given product at lower cost than competing firms".
In other words, technological innovation is a process innovation, which tends to make the
production process of a firm more efficient over time. By increasing the efficiency of the
production process through process innovations, the firm lowers the production costs or it
improves the quality of the inputs used. By lowering the unit costs, the firm will be able to
induce price reduction more easily than its competitors, thereby increasing the demand for its
products. By improving the quality of the inputs used, the firm will produce more value-added
products, which can be marketed at higher prices than the products of its major rivals. Thereby,
the firm can induce higher prices for its final products and can increase its profit margins.

Technological innovation is a process that takes a longer period of time, as we can see from the
definition above. It is a process that over time raises the productivity of inputs. Thus, it can be
concluded that technological innovation is a result of gradual accumulation and constant,
incremental improvements of the firm's production process (Cantwell, 1989, pp. 8-9). In this
sense, technological innovation is a result of continuous systematic work and not an output of
serendipity.

If we look for an explanation of the strong connection between technological innovation and
MNCs, there is no better way than to explain it in Cantwell's language, namely the growth of
MNCs is a result of a continuous "process of cumulative technological change within the firm, in
which innovation and the growth of international production are mutually supportive"
(Cantwell, 1989, p. 7).

34
3. The importance of internationalization and the concept of multi-nationality
for large MNCs

The internationalization of large manufacturing firms finds its beginnings in the period after
WWII, when US firms started to intensively invest in Europe. During the 1970s and the 1980s,
when European firms recovered from the devastated economy in which they were left after the
war period, they followed the example of the US firms and began to invest in the US.
The latter emergence of Information and Communication Technology (ICT) enabled enormous
number of firms to internationalize their operations. Firms began to establish internationally
integrated networks and to globalize their production and R&D operations. The newly
established international networks differed from the former ones in their form and purpose. The
principle difference between the previously and the newly established international networks was
that the new networks were more integrated and dependent on each other than the old ones were.
With the expansion of ICT and the establishment of global MNC networks in the early 1990s,
the era of globalization began.

In the current trend of technological globalization, the importance of the knowledge flow
between firms and countries increased enormously (Cantwell and Janne, 1999, p. 121; Cantwell
and Santangelo, 1998, p. 132). Both firms and countries became more dependent on the global
knowledge flow for technological development and technological diversification. In order to gain
advantages from the global technological knowledge and experience, many firms
internationalized their research and development (R&D), thereby employing less hierarchical
and less centralized form of organizations. By establishing R&D and production units in
different centers of excellence worldwide and by building global organizational networks, the
most successful and technologically advanced firms became MNCs. Although, MNCs were
primarily motivated to internationalize their R&D by the advantages that the market proximity
offered, nowadays the R&D units abroad have gained a more important role, namely to generate
new technology from the specific knowledge flow of the country in which they are located
(Cantwell and Mudambi, 2005, p. 1109). The MNC's subsidiaries abroad that acquired a more
creative role in the process of technological development have become a strongly integrated part

35
of the MNC's international network, compared to the subsidiaries that stayed focused only on
market exploiting activities. In accordance with the role of the subsidiaries within the integrated
MNC's network, Cantwell and Mudambi (2005) distinguish between "competence-exploiting
subsidiaries", whose principle role is product adaptation to the local needs and regulations and to
the local factors of production, and "competence-creating subsidiaries" with a main function to
create technologies. They emphasized that the competence-exploiting subsidiaries may evolve in
competence-creating ones. The subsidiaries' evolution depends upon many factors, such as the
location in which the subsidiary is stated, but sometimes the "subsidiary evolution may to some
extent gain a logic of its own" (Cantwell and Mudambi, 2005, p. 1110).

Other authors have worked on the topic of MNCs' subsidiaries evolution as well, like Birkinshaw
and Hood (1998) and Frost et al. (2002). Birkinshaw and Hood (1998) defined the environmental
factors, the choice of the subsidiary itself and the assignment that the subsidiary receives from
the firm's headquarters as the three most important factors in the process of subsidiary's
evolution. Frost et al. (2002) addressed the dynamism of the environment in which the subsidiary
is located, the level of the subsidiary's autonomy, the support that the subsidiary receives from
the firm's headquarters and the level of integration between the subsidiary and the other parts of
the MNC's structure in competence-creating activities as the most decisive factors in the
determination either the subsidiary will evolve in competence-creating or not.

The intensity of R&D activities varies among the two types of subsidiaries. According to
Cantwell and Mudambi (2005), subsidiaries with competence-creating role tend to have higher
degree of R&D activities than the subsidiaries with simply competence-exploiting assignments.
They also found out that the subsidiaries located in a center of excellence, with a higher degree
of autonomy and with support of the parent company have a higher chance to become
competence-creating subsidiaries than the subsidiaries that do not fulfill these requirements
(Cantwell and Mudambi, 2005, p. 1112). All of the factors that influence the evolution of
subsidiaries are presented in the following table, together with the intensity of R&D activities in
each of the two types of subsidiaries.

36
Table 1. Evolution of subsidiaries and varying determinants of localized R&D

Process of subsidiary evolution

Stage 0 Stage 1 Stage 2
Competence- Competence- Local R&D
exploiting creating mandate driven mainly by
More favorable mandate needs of
Locational, technological
subsidiary-level creativity
and MNC group- Competence- Competence- Local R&D
level conditions exploiting exploiting continues to be
Less favorable mandate mandate driven mainly by
needs of
technological
adaptation

Source: own representation based on Cantwell and Mudambi, 2005, p. 1112

As we can see from the Table 1, all MNC's subsidiaries abroad began their evolutionary journey
in stage 0 as competence-exploiting subsidiaries with a purely market-orientation focus. As the
MNCs' international networks were expanding and becoming more integrated, some of the
competence-exploiting subsidiaries, which had a favorable combination of locational, subsidiary-
level and MNC-group level conditions, evolved in competence-creating subsidiaries in Stage 1,
with local R&D driven by technological creativity in Stage 2. Subsidiaries that had a less
favorable combination of these three factors did not acquire a competence-creating mandate and
their local R&D remained mainly driven by the needs of technological adaptation.

Another important contribution of Cantwell and Mudambi's (2005) work is the examination of
the effect that an acquisition may have on the evolution of a firm's subsidiaries and their R&D
intensity. This topic will be elaborated in the sixth chapter of this work, in which I am going to
discuss M&As as a possible strategy for greater technological diversification.

As we saw from the evolution of the MNCs' subsidiaries, almost each MNC subsidiary abroad
began to work with a competence-exploiting mandate, thereby completely focusing only on

37
market-oriented activities. Historically, a firm's decision to become a MNC depended mainly on
the advantages that the market proximity offered. Market proximity enabled the firm to respond
appropriately to the local demand by adapting its products to the local tastes and regulations. It
also enabled the firm to take advantage of the locally available factors of production and to adapt
its products in accordance with the availability of the local resources and production conditions
(Cantwell and Mudambi, 2005, p. 1109).

The trend among MNCs towards establishing closely integrated global networks is well
discussed in the literature of business strategy (Porter 1986; Hedlund, 1986; Doz, 1986;
Dunning, 1988a; Bartlett and Ghoshal, 1989) according to which, it is expected that in the future
the networks' integration will be even more unified (Cantwell and Sanna-Randaccio, 1993, p.
275). Doz (1986) has spoken about the advantages that a MNC can gain from such a closely
integrated global network. Such advantages mainly arise from the possibility for a MNC to
improve its performance. Dunning (1988a) emphasized the possibility for creating technological
capabilities, as the most important advantage that a MNC can obtain within such a globally
integrated network. Cantwell and Sanna-Randaccio (1993) claimed that the main benefit that a
MNC can gain from such a network derives from the possibility of each MNC's affiliates abroad
to specialize in the local supply and demand. By adapting to the locally available resources, such
as factors of production, labor force, communication and interaction with local organizations,
and to the local consumers' tastes and needs, the firm would be able to benefit from the refined
locational division of labor within the MNC (Cantwell and Sanna-Randaccio, 1993, p. 275). The
experience that certain affiliates abroad can gain from its local specialization can create positive
spillovers in some other parts of the MNC's integrated network.
Overall, global integration stimulates knowledge and technology diffusion and vice versa.

The advantages that a MNC can obtain from its internationally integrated network are in positive
correlation with the MNC's degree of multi-nationality, as measured by the value of international
production for which the MNC's affiliates abroad are responsible, relative to the value of
domestic production for which the parent firm is responsible in its home-country (Cantwell and
Sanna-Randaccio, 1993, p. 276). Multi-nationality is defined as a geographical dispersion of

38
MNC's production and not necessarily of its markets (Cantwell and Sanna-Randaccio, 1993, p.
282).

Because of the numerous positive effects that a firm may obtain when becoming a MNC, the
multi-nationality is perceived here as a source of competitive advantages for the firm.
To be able to claim that the multi-nationality is a source of advantage for the firm, first we
should see how it affects the firm's profit and growth. The idea about the existence of a
connection between the multi-nationality and the firm's growth originates from Penrose's (1959)
and Downie's (1958) theory of growth of the firm. Radice (1971) and Devine (1976) have later
worked the same topic, summarizing the findings of Downie and Penrose. Two functions relate
the firm's growth (𝐺𝑓 ) to its profit rate (𝑟𝑓 ), namely the first one which is depicted by Downie
(1958) and Marris (1964) and which claims that the firm's growth is constrained by the
availability of financial resources (termed as institutional constraints on growth), and the second
one which claims that the firm's rate of profit depends upon the growth rate, the growth in
demand, the growth of its technological opportunities in the industry, the size, the technological
capabilities, the market power and upon factors associated with the degree of multi-nationality of
the firm (Cantwell and Sanna-Randaccio, 1993, pp. 277-278). The first function depicts the
financial resources available to the firm as a main determinant of the firm's growth, such that the
growth is positively influenced by the firm's profitability (Cantwell and Sanna-Randaccio, 1993,
p. 277). The second, cost-of growth function, suggests that the firm's growth induces costs which
vary in accordance with the firm's willing to gain market share from its competitors, whereby the
firm's rate of profit is an inverse function of its growth (Cantwell and Sanna-Randaccio, 1993, p.
277).
The growth of the firm is constrained by two types of financial resources, internal and external.
Internal resources are related to the firm's shareholders and their willingness to reinvest in the
firm and external resources are related to the possibility for the firm to gain resources from the
capital market. The ability of the firm to borrow from the capital market in order to grow
depends on its profit rates. The amount of the reinvested capital of the firm's shareholders
depends on the firm's profit rates as well. Namely, the shareholders require certain portion of the
firm's profit to be paid in dividends. The higher the firm's profit rates, the higher is the possibility

39
that the shareholders will agree the excess profit to be reinvested in the firm, because only if the
firm is able to pay the dividends to its shareholders, they may consider the idea of reinvesting.
Overall, we can conclude that the firm's growth depends positively on the profitability.

A firm's growth can be external, internal or both at the same time. According to Ansoff's (1957)
product-market strategies for future growth, the firm has four possibilities to grow externally,
namely by market penetration, by market development, by product development or by
diversification. When employing the market penetration strategy, the firm reduces the product
price and increases the support in promoting and distributing its products. Thereby, the firm
should be aware of the possibility that such an action may force the competition to react and
there is a high risk for this strategy to become contra-productive (Cantwell and Sanna-
Randaccio, 1993, p. 278). If the firm decides to implement the market development strategy, it
tries to develop a new market with its existing products. Apropos the product development
strategy, the firm extends its product range by introducing new products to the existing markets.
The strategy of diversification is certainly the riskiest one, where the firm increases its market
shares by introducing new products to new markets.

When discussing the internal growth of the firm, we are referring to what Penrose (1959) defined
as an expansion of the firm's management team. Almost each external growth of the firm is
followed by internal growth and vice versa. Expanding the firm's management team induces
costs which increase proportionately to the increase in newly hired managers. As Penrose (1959)
suggested, these costs can be reduced if the learning capabilities of the new managers and the
experience and skills of the old ones are at the highest level. The effectiveness of the new
managers depends on their learning abilities (or absorptive capacity, as termed previously). Such
an effectiveness will be secured only if they are capable of acquiring knowledge and experience
from their older colleagues, when working together (Cantwell and Sanna-Randaccio, 1993, p.
278). Therefore, the utility of the firm's managers can be expressed as a function of the firm's
growth (the third function below). The higher the utility of the managers, the faster is the firm's
growth. In sum, the firm's internal and external growth depends on its profitability. Therefore,
the higher the firm's profitability, the faster is its growth.

40
The three functions discussed above can be formally written as follows (Cantwell and Sanna-
Randaccio, 1993, pp. 277-278):

𝑑𝐺𝑓
𝐺𝑓 = 𝑓1 𝑟𝑓 , 𝐼 , 𝑑𝑟𝑓 > 0

𝑑𝑟𝑓
𝑟𝑓 = 𝑓2 𝐺𝑓 , 𝐺𝐷 , 𝐺𝑇𝑂 , 𝑆𝑓 , 𝑇𝐶𝑓 , 𝑀𝑃𝑓 , 𝑀𝑓 , 𝑑𝐺𝑓 < 0 𝑓𝑜𝑟 𝐺𝑓 > 𝐺′𝑓

𝑑𝑈𝑀𝑓
𝑈𝑀𝑓 = 𝑓3 𝐺𝑓 , 𝑑𝐺𝑓 > 0

where,
𝐼 represents the institutional constraints on growth
𝐺𝐷 represents the growth in the firm's demand in its industry
𝐺𝑇𝑂 represents the growth of the firm's technological opportunities in its industry
𝑆𝑓 represents the firm's size
𝑇𝐶𝑓 represents the firm's technological capabilities
𝑀𝑃𝑓 represents the firm's market power
𝑀𝑓 represents the factors associated with the degree of the firm's multi-nationality
𝑈𝑀𝑓 represents the utility of the firm's managers

The graphical presentation of the first two functions follows in Figure 5. Firm's managers can
choose to set the firm's growth rate at the point where the two functions intersect or at any other
point on the costs-of-growth function above the intersection point (Cantwell and Sanna-
Randaccio, 1993, p. 279).

41
 Figure 5. The relationship between the firm's growth (𝑮𝒇 ) and its rate of profit (𝒓𝒇 )

𝑟𝑓

𝐺𝑓 = 𝑓1 (𝑟𝑓 , 𝐼)

Financial and institutional constraints on growth function

𝑟𝑓 = 𝑓2 (𝐺𝑓 , … , 𝑀𝑓 )

Costs of growth function

𝐺𝑓

Source: own representation based on Cantwell and Sanna-Randaccio, 1993, p. 279

Cantwell and Sanna-Randaccio (1993) analytically examined the effect of multi-nationality on a

large industrial firm's growth. When analyzing the effect of multi-nationality on a firm's growth,
we should be aware of the effect that the firm-specific competitive advantages have on the firm's
profit and growth. Important to highlight here is that, the competitive advantages of a firm are
defined relative to the competitive advantages of its major competitors in the industry (Cantwell
and Sanna-Randaccio, 1993, p. 281). The competitive advantages of each firm are different and
firm-specific, but as Penrose (1959) said, all of them derive from the firm's internal learning
process and its accumulated experience and knowledge. The most important competitive
advantage of a firm, which certainly affects the firm's profit and growth, is the firm-specific
technological capability. The firm's technological capabilities affect the firm's external and
internal costs of growth and shape its technological competitiveness. The higher the
technological capability of a firm, the lower are the production costs per unit and the higher is
the demand curve of the firm (Cantwell and Sanna-Randaccio, 1993, pp. 280-281). Due to the
high demand, a firm is able to realize higher profits and to grow faster externally. Therefore, the
firm-specific technological capability affects the firm's profitability in a positive way.

42
The more technologically capable and experienced the firm is, the faster is its internal growth.
Because the growth of a firm can be described as a function of its rate of profit, as outlined
before, we can conclude that the technological capability of a firm has a positive effect on the
firm's profit rates and consequently, on the firm's internal and external growth.
The position that a firm has in its markets forms another type of competitive advantage which
affect the external growth of the firm (Cantwell and Sanna-Randaccio, 1993, p. 281). The degree
of market power that the firm enjoys shapes the flexibility of the firm to set prices and to
organize product promotions. Namely, the firm can easily employ market penetration strategy if
it has greater market power. By exercising market penetration strategy, the firm can acquire high
profits, which will positively influence its growth rates. If the firm has strong technological
capabilities and high market power compared to its competitors, it has a profit-growth frontier
that lies above the average position for the industry (Cantwell and Sanna-Randacio, 1993, p.
281).

As outlined previously in this section, the multi-nationality is perceived as a source of

competitive advantage for the firm, because, as discussed by Doz (1986) and Dunning (1988), it
lowers the firm's costs of growth and increases the profits. The greater the degree of international
integration of the production facilities within the MNC, the lower are the firm's costs of growth
(Cantwell and Sanna-Randacio, 1993, p. 282). By being able to take advantage of the economies
of location, economies of scale and scopes, the firm can lower its production costs and can easily
impose price reduction. By doing so, the firm increases its international demand and grows
externally by increasing its market shares internationally. While economies of location and scale
economies in production affect the firm's external costs of growth, economies of scope affect
both external and internal costs of growth. Economies of location lower the production costs,
because the firm is able to use locally available resources and skilled labor force. The firm can
also develop products in accordance with the local customers' needs and can easily support sale
promotions locally. Economies of scale also lower the production costs and facilitate the firm's
external growth. Economies of scope which arise from the integrated structure of an MNC, lower
both external and internal costs of growth (Cantwell and Sanna-Randaccio, 1993, p. 283).What
affects the external costs of growth is that each affiliate within the integrated MNC's structure
located abroad is not only specialized in a specific production of a certain product, but its

43
acquired knowledge and experience can be also used to improve the production process of some
other production affiliate within the MNC's network. Such positive spillovers lower the affiliate's
production costs and improve its efficiency. The specialization process within each affiliate
facilitates the learning process and the accumulation of experience not only in the specific
affiliate, but at the corporate level as well. The acquired knowledge and skills in a specific
affiliate can be used as a resource input in other parts of the integrated MNC' network. In this
sense, the creation of specialized knowledge accelerates the internal growth of the firm.

Generally, we can conclude that the great degree of integration within the MNC's structure
positively affects the firm's growth and its profitability. However, this claim does not hold for
every industry. The effects that the economies of location, economies of scale and scope have on
the firm depends on the industry in which the firm operates (Doz, 1986). Therefore, the impact
that the multi-nationality has on a specific firm largely depends on its industry. Important to
notice here is that the degree of a firm's multi-nationality is not expressed in absolute terms, but
in relative, compared to the degree of multi-nationality of other firms in the same industry
(Cantwell and Sanna-Randaccio, 1993, p. 284). It is the relative degree of multi-nationality that
moves the firm's profit-growth frontier higher, not the absolute one (Cantwell and Sanna-
Randaccio, 1993, pp. 283-284). To conclude, the creation of firm-specific advantages is
determined by the firm's relative degree of multi-nationality, compared to its major competitors
in the industry, and these advantages vary across different industries (Cantwell and Sanna-
Randaccio, 1993, p. 285).

If we look at the multi-nationality concept historically, we can draw a conclusion that firms did
not decide to become multi-national because of the possibility to create firm-specific competitive
advantages, but because of market proximity. The costs were the main determinant of whether
the firm would evolve into a MNC or stay within its national borders. Therefore, in sectors in
which the transportation costs and import taxes were high, the firms more often evolved into
MNCs (Cantwell and Sanna-Randaccio, 1993, p. 284). However, the situation changed during
the late 1960s and the early 1970s, when international production emerged. Internationalization
of production became firms' main tool to spread their organizational network and to became
multinational. During this period firms became more focused on creating firm-specific

44
advantages by closely integrating production facilities from different geographical locations
within the MNC's structure. The benefits of the close international integration are already
discussed earlier in this section and it is emphasized that these advantages vary across different
industrial sectors. The degree of multi-nationality is low in industries in which firms serve
government-controlled agencies, in which firms are under strong national regulations or under
strong local servicing requirements, and in which firms are offering national differentiated
products (Cantwell and Sanna-Randaccio, 1993, p. 285). In industries with high trade barriers,
the degree of firms' multi-nationality is high, because firms are trying to overcome any obstacle
which prevents the establishment of internationally integrated networks.
From the discussion about the effect of multi-nationality on firm's growth, an overall conclusion
can be drawn that the firm's high demand, the creation of firm-specific competitive advantages
within the internationally integrated MNC's structure and the firm's strong position in its markets
positively influence the firm's growth (Cantwell and Sanna-Randaccio, 1993, p. 292).

When discussing the multi-nationality another important question that emerges is whether multi-
nationality (and globalization) destroys nationality or embraces it. Internationalization and
national specialization are complementary parts of a common process, not conflicting trends
(Cantwell and Santangelo, 1998, p.138). Globalization tends to increase countries' national
differentiation and firms' technological specialization (Cantwell and Janne, 1999, p.121), which
is the raison d'être of MNCs. By establishing internationally integrated networks, MNCs benefit
from the technological differences arising from different countries. Tapping into the specific
knowledge concentrated in a certain country or location helps the firm to improve its own
technological capabilities and to increase its own technological competitiveness. For greater
understanding of how the firm can gain technological competitiveness through globalization, we
should look at the firm's overall research activities, as measured by its US patent activities
(Cantwell and Harding, 1998, p. 100). The greater the firm's patent activities, the greater are the
benefits that the firm has gained from globalization. In this sense, internationalization and
globalization enable a MNC to diversify its technological base and to take advantage from
complementary technologies, which are created elsewhere. Thus, by broadening the
technological capabilities, a MNC extends its technological base, thereby including in its exiting
technological base new related technologies which support the firm's core technologies. In

45
addition, population diversification stimulates product and methodology modifications, more
complexities and therefore demand expansion.

Nowadays firms are more oriented towards joint technological development and inter-firm
cooperation in learning (Cantwell and Santangelo, 1998, p. 135). MNCs use their international
R&D networks to create firm-specific competitive advantages in specific technological areas
(Cantwell and Harding, 1998, p. 100). Countries and firms narrowed their technological
specialization in industrial areas in which they were historically strong, which established them
as centers of excellence. When a country gains the reputation of being a center of excellence, it
becomes an attractive location for foreign MNCs to site their R&D and production facilities. As
we will see later in this work, that is what happened in countries like Germany for example. By
narrowing the specialization in technologies in which German firms were historically strong,
Germany has become a major center of excellence in Europe in many industrial areas, such as
chemicals, pharmaceuticals and motor vehicles. The example of Germany and German firms is
the best example which shows that the internationalization and national specialization of firms
are not mutually exclusive trends.

Many concerns were expressed when during the 1990s German firms intensively increased their
outward foreign direct investment (FDI) and reduced their involvement in domestic R&D. At the
same time, the inward investment in Germany by foreign investors decreased, which many
experts and analytics understood as a signal that the attractiveness of Germany as a host-country
for foreign R&D investment declined. Although the German R&D's expenditure in 1994
remained relatively high in relation to their GDP from the same year (2.34% of the GDP in year
1994), there was certain decline in the expenditure from year 1989 of some 0.56% of the GDP
(Cantwell and Harding, 1998, p. 99). The fact that the German firms located their R&D abroad
concerned many experts who interpreted this trend as an indicator that domestic research has
weakened and German firms don't have confidence in it anymore. Even though German firms
relied on domestic research during most of the post-war years, large firms from other European
countries, such as the UK and France, internationalized their R&D much faster than the German
firms.

46
Cantwell and Harding (1998), using the US patent data from the period between 1969 and 1995
for 784 world's largest firms (from which 56 were German firms and 325 had research located in
Germany), statistically proved that although German firms increasingly internationalized their
R&D during the 1990s, Germany still remained an attractive location for foreign R&D
(especially in industries such as motor vehicles, electronics and chemicals) and that German
firms stayed technologically strong in areas of their traditional technological strengths
(chemicals, pharmaceuticals, motor vehicles, metals and electrical equipment) (Cantwell and
Harding, 1998, p. 100). The results from the research showed that German firms increasingly
internationalized their R&D in the period between 1983 and 1995, showing highest interest for
the US as a foreign location (see Table 1 in the appendix) (Cantwell and Harding, 1998, p. 102).
However, the largest increase in internationalization of German R&D is in the period between
1991 and 1995. German firms have internationalized their R&D in sectors in which they were
technologically strongest, such as in chemicals, pharmaceuticals, motor vehicles and electrical
equipment (see Table 2 in the appendix) (Cantwell and Harding, 1998, p. 104). The highest
increase in internationalization of R&D in these sectors is noted in the period between 1987 and
1995. If we agree with the fact that MNCs choose foreign location to site their R&D according to
the possibility of exploiting competitive advantages in the country's technologically strongest
industrial areas, then it would be logical to expect that foreign-owned MNCs would be most
interested in German's chemical, pharmaceutical, motor vehicle and electronic industries. The
statistical findings of Cantwell and Harding (1998) showed exactly the same, that foreign firms
showed highest interest for German's chemical, pharmaceutical and metal industries, industries
in which Germany has traditionally been strong (see Table 3 in the appendix) (Cantwell and
Harding, 1998, p. 105). However, a decline in the internationalization of R&D in motor vehicles
industry is noted, especially in the period between 1991 and 1995. This decline may be explained
as a result of a subsequent consolidation of R&D, sales and marketing activities in the industry,
because, as Belitz (1997) explained, internationalization of R&D follows the internationalization
of sales and marketing activities with a lag (Cantwell and Harding, 1998, p. 105). Thus, the
increased sales and marketing activities in the industry during the 1970s resulted with an increase
in internationalization of R&D activities in the period between 1983 and 1986 (from 26.50% in
1978-1982 to 31.70% in 1983-1986) (Cantwell and Harding, 1998, p. 105).

47
4. The theory of technological accumulation

In this chapter I focus my discussion on the theory of technological accumulation, which was
first articulated by Pavitt (1987), but it was also embodied in the ideas of Rosenberg (1976 and
1982), Usher (1929), Atkinson and Stiglitz (1969), Nelson and Winter (1977), and Stiglitz
(1987), and in great detail elaborated by Cantwell (1989) in his book “Technological innovation
and multinational corporations”. The term “technological accumulation” was first used by
Pavitt (1987) to explain the cumulative nature of technological development within a firm
(Cantwell, 1989, p. 7). The theory of technological accumulation describes the success of MNCs
through the process of generation of ownership advantages. These ownership advantages are
generated through the accumulation of technology and innovation. Bell and Pavitt (1993) define
technological accumulation as an accumulation of a firm‟s technological capabilities (Bell and
Pavitt, 1993, p. 159). Under firm‟s technological capabilities they categorize the firm-specific
skills, knowledge and experience, and the institutions that enable the firm to generate and
manage technological innovations (Bell and Pavitt, 1993, p. 159 and p. 163). The basic concept
of technological accumulation and the key terms are presented in Figure 6.

48
Figure 6. Technological accumulation: basic concepts and terms

Accumulation of
Technological
technological
accumulation
capability
(learning)

Technological Technical Production Industrial

capability change capacity output

The resources needed to 1. Introduction of Components of given

generate and manage technology embodied production systems:
technical change: in new products
and/or new plants  Fixed capital
1. Knowledge, skills and through "major"  Operating labor skills
experience investment projects and know-how
 Product
2. Institutional structures 2. Incremental specifications/designs
and linkages: adaptation and  Input specifications
improvement of 
 in firms Organization and
existing production procedure of
 between firms capacity
 outside firms production

Source: own representation based on Bell and Pavitt, 1993, p. 164

In the essence of this theory stands its perception of technological development and progress as
an outcome of the firm-specific competence creation. The competence creation comes as a result
of a constant and cumulative learning process in the production system of a firm. Only such
technological development can guarantee further economic growth and progress. This
understanding of the technological development and economic growth may be opposed to what
the Schumpeterian model of innovation and technological development stands for.

49
The theory of technological accumulation indicates that the technological specialization of firms
and countries is determined by their historical technological strengths. According to Pavitt
(1987), the innovative activity in a given country or among firms originating from the same
country reflects the past technological accumulation. Because of such technological
accumulation, industries in which firms from a certain country were traditionally (historically)
strong, have later became the core sources for technological leadership of the country. The
leadership of US firms in woodworking and oil-industry, the leadership of British firms in metal
working and pharmaceutical industry, and the superiority of German firms in electronics, motor
vehicles, chemicals and pharmaceuticals, are results of the path-dependent course of
technological accumulation (Cantwell and Fai, 1999, pp. 336-337). These countries have become
very attractive locations for foreign-owned R&D, mostly because of the advantageous positions
they hold in these areas. Today, they are known as world's centers of technological excellence.

A similar topic is elaborated in the paper entitled as "The location of MNCs' technological
activities in Europe: agglomerative tendencies and other territorial externalities", (2000), from
Cantwell and Piscitello, where they statistically proved that the existing knowledge base in a
certain country has a crucial role in the decision of foreign MNCs of where to locate their R&D
activities (Cantwell and Piscitello, 2000, p. 1). By using patents granted in the US to the world's
largest industrial firms for inventions achieved in their European-located R&D units (Cantwell
and Piscitello, 2000, p. 1), the examination showed that the most attractive European countries
for foreign MNCs to locate their R&D activities are: Germany (29% in 1991-1995), UK (21%)
and France (16%) (Cantwell and Piscitello, 2000, p. 4). Italy is the fourth most attractive
European location with only 6% during the same period (Cantwell and Piscitello, 2000, p. 4).
Among other things, the paper showed that the industries in which a country is technologically
strong are less dependent on foreign R&D. The contribution of foreign R&D to European
research as a whole is below average (the average is 24%) in industries such as chemicals
(15.6% as against 24%), motor vehicles (12.3%), aircraft and aerospace (13%) and metals
(13.3%), and only slightly above average in pharmaceutical industry (27.4%) (Cantwell and
Piscitello, 2000, p. 5 and p. 24). This is due to the fact that European firms are technologically
strong in these industries and less dependent on foreign R&D. Furthermore, these are the
industries in which the European countries historically concentrated their technological efforts.

50
On the contrary, in industries in which European firms are technologically weak, the contribution
of foreign R&D is high. Consequently, the contribution of foreign R&D in Europe as a whole is
above average in electrical equipment (30.5%), office equipment (67.4%), professional
instruments (45.6%), and coal and petroleum products (39.3%) (Cantwell and Piscitello, 2000, p.
5 and p. 24). In these industries, European firms are technologically weaker than the US and the
Japanese firms (Cantwell and Piscitello, 2000, p. 5). Similar results are found across individual
European countries. The foreign contribution to German R&D is low in motor vehicles,
chemicals and pharmaceuticals, again in the industries in which German firms are
technologically the strongest. In the UK, the foreign investment penetration is low in food
industry and coal and petroleum products, in which domestic firms are strong. In Italy, the
foreign contribution is very low in office equipment and oil industry, and in France, in coal and
petroleum products and electrical equipment (Cantwell and Piscitello, 2000, p. 5 and p. 24). For
a closer look at these numbers, please look Tables 4 and 5 in the appendix.

The attractiveness of the European countries as locations for establishing foreign R&D is also
partially elaborated in the paper "Technological globalization and innovative centers: the role of
corporate technological leadership and locational hierarchy" (1999), written by Cantwell and
Janne. For each industry, a hierarchical position is determined in accordance with the level of
technological competence in the industry (Cantwell and Janne, 1999, p. 124). RTA index values
greater than one suggest that technological competence in a particular industry is high and thus,
that industry is hierarchically higher in rank (Cantwell and Janne, 1999, p. 124). "The RTA index
is defined as a group's share of all US patenting in a technological field, relative to its share of
all US patenting in all fields-all large firms patenting in the US, irrespective of their country of
ownership or of where technological development is located" (Cantwell and Janne, 1999, p.
123). Considering the chemical and pharmaceutical industry in the period from 1969 until 1995,
the three countries with the highest RTA indexes are Switzerland (2.59), Belgium-Lux (2.32),
and Germany (1.81). Other European countries with RTA indexes greater than one in chemical
and pharmaceutical industry are Norway (1.63), Italy (1.52), UK (1.40), Denmark (1.15), France
(1.08) and Ireland (1.01). Considering the metal products and mechanical engineering, the three
countries with the highest RTA indexes are Sweden (4.11), Austria (3.80) and Finland (3.34).
Other countries with RTA indexes greater than one in metal products and mechanical

51
engineering are Greece (2.65), Norway (2.52), Spain (1.95), Denmark (1.95), Germany (1.71)
and Switzerland (1.57). In the industrial group of electrical equipment and computing the
Netherlands (2.00) and Ireland (1.52) are the only two countries with index values greater than
one (Cantwell and Janne, 1999, pp. 124-125).

The above discussed empirical findings represent further proof of the reliability and the practical
implications of the theory of technological accumulation. As we can see from the results,
technological development is a continuous process, which is determined by the cumulative
nature of the learning process. The gradual learning process within the firm shapes the creation
of technological competence and technological specialization of the firm. Firm's technological
competence tends to be persistent and quite stable over long periods of time. Because of that
persistence, technologies, in which a firm (or a country) had historically a strong technological
position, are today the leading technologies of the firm (or of the country). The creation of
technological competence and technological progress is predominantly an internal process,
taking place within the firm. In this sense, the technology is not, as the neoclassical theory of
economic growth states, some exogenous factor of production that could be traded on the market,
but it is a result of the constant learning process within the firm (Cantwell and Fai, 1999, p. 337).
Overall, we can easily conclude that the technology accumulation theory does not explain the
innovation as "an individual act of technology creation" (Cantwell, 1989, p. 9), but as an
outcome of continuous and persistent learning processes within the firm.

When describing technological development and progress of a firm as an outcome of an internal

and continuous learning process, another question which appears to be inevitable is the question
about the determinants of such technological development and progress. According to
Schumpeter's theory of economic development, the changes through technological innovations
are the principle determinant of technological development and progress. However, one crucial
difference between the Schumpeterian model of economic development and the model of
economic development based on the technological accumulation theory is the source of
innovations. Cantwell and Fai (1999) proposed a new model of innovation, which differs from
Schumpeter's "linear model" of innovation and from Schmookler's "demand-pull" model
(Cantwell and Fai, 1999, p. 338). This new approach of understanding the source of innovations

52
is graphically presented in Figure 7. As we can see from the figure, the learning in production is
the principle source of innovations for a firm. However, there are also other factors that have an
important influence on the innovation process of the firm. The most influential among them are
surely the markets, the existing science base or existing technology, and the corporate R&D. The
existing science base and the markets are external factors to the firm, while the corporate R&D
and the distribution networks are integrated within the firm's structure and are classified as
internal factors. Each firm follows a different path-dependent course during the internal learning
process, which helps it to develop specific technological competences, different from the
competences of other firms in the industry.

Figure 7. Learning as the principle source of innovation

Schumpeter's "science-push" or "linear" model Schmookler's "demand-pull" model

Science
base Markets

Corporate
R&D Distribution
networks

Learning in
production

Source: own representation based on Cantwell and Fai, 1999, p. 338

In this new model, the corporate R&D is not the main initiator of technological innovation, but it
only contributes to the innovative process of the firm by providing "public" knowledge, which
can be useful for the firm's specific problem-solving activities (Cantwell and Fai, 1999, p. 339).
Since the main activities of almost each corporate R&D department are primarily organized to
find solutions to the existing problems in the firm's production processes, it would be incorrect to

53
think of corporate R&D as a principle innovation driver (even though it may have an important
role in the initiation process) (Cantwell and Fai, 1999, p. 339). R&D also reflects what is
technologically achieved outside the firm, in the existing science base, through the "public"
knowledge and not only what is achieved within the firm due to the firm's internal learning
process.

The model presented in Figure 7 gives a completely different light on the dilemma of whether
the science base (or the existing technology) or the market is the principle driver of innovation.
In this sense, the new model differs from the old "science-push" (or "technology-push") and
"market-pull" models, where the main driver of innovation is either science or the market. When
perceiving the firm as a principle driver of innovation, the focus shifts from external factors,
such as public knowledge and markets, to internal factors that influence the learning process of a
firm.

Cantwell and Fai (1999) in the paper entitled as "Firms as the source of innovation and growth:
the evolution of technological competence" went one step further and not only showed that the
firm's technological competence comes as a result of the cumulative nature of the firm's internal
learning process, but they also statistically proved that the specific technological competence of a
firm tends to persist over long periods of time (Cantwell and Fai, 1999, p. 331 and p. 341).
Markets and especially products change quite dramatically especially over longer periods of
time, because of the fast-changing customers' needs and requirements. Firms' technological
competences are much more stable. They change very slowly to the fast-changing market
conditions. The cause of such a long persistence may be the institutional continuity, which is
characteristic of many large firms (Cantwell and Fai, 1999, p. 361). Even though the persistence
of the firm's technological competence is strong and stable, the firm tends to engage constantly
in technological diversification in order to take advantage of new knowledge and new
technologies. The firm could also engage in technological diversification in order to be able to
appropriately answer new customers' needs and requirements, thereby taking advantage of new
markets. The most attractive technological areas for a firm to diversify its technological base are
the ones of great present (and possibly of great future) importance.

54
5. The evolutionary development of technological competition since the 1950s

Analyzing the evolution of international technological competition after WWII to the present
days would be incomplete without considering the process of internationalization of large
manufacturing firms that took place after the war period.

The story of internationalization begins in the 1950s, after WWII, with the intensive investments
of US firms in Europe. The increased direct investment in Europe stimulated the technological
competition between American and European firms. US firms intensified their investments in
Europe with the formation of the EEC in 1958. In the following almost twenty years, until the
end of the 1970s, the investment was generally one-sided. Large and technologically advanced
US firms were investing in Europe, thereby ensuring themselves a position as innovative leaders
in Europe. Many European analytics (like Servan-Schreiber, 1967) were concerned about the
developing situation of unbalanced positions between the US and the European firms in terms of
technological competence. Because of the existing "technological gap", the analytics feared from
the possibility that the most important European industries would be overtaken by US firms
(Cantwell, 1989, p. 1). These concerns were in a way understandable, if we agree that by
overtaking the most important European industries, competition would be destroyed, which
could further damage the already devastated European economy in that period.

However, in the 1970s, when European firms recovered and started to expand in the US, the
concerns of the US analytics were the same. During 1970s the European economy completely
recovered from the war period and European firms got the strength to respond appropriately to
the so called "American challenge", thereby building their own international networks and
expanding production internationally. In 1970s and 1980s intra-industry production (for exact
definition of intra-industry production see p. 56) between US and European firms started to grow
rapidly.

As we will see in the following sections, the international competition from the 1950s, 1960s and
the first half of the 1970s was quite different from the competition that took place since the mid-
1970s. While the first wave of technological activities of the large European firms was more in a
direction of improving the European export rates, the second wave of activities went in a

55
direction of establishing international production networks. By establishing international
production networks, the most successful and technologically advanced firms expanded their
organizational structures internationally and evolved into MNCs. The period of expansion of
MNCs is a result of a long process of technological development through technological learning
in production within the firms, where innovation and expansion of international production are
mutually supportive factors (Cantwell, 1989, p. 7). Technological innovations lay the foundation
of international production and trade.

When in the1980s, Japanese firms established themselves as an important player in international

technological competition, US and the European firms shifted the attention towards the activities
of their new competitors. Today, we are witnessing the same situation with Chinese firms.

With the emergence of Information and Communication Technology (ICT) in the 1990s, the
international competition changed dramatically. Building international networks became much
easier. Among other things, the transfer of knowledge, which is a very important condition for a
successful innovation process, has become much easier as well. Before the expansion of ICT, the
knowledge transfer had been a big issue for MNCs with R&D locations in different parts of the
world.

During the evolutionary development of international technological competition, the most

successful firms became MNCs (Cantwell, 1989, p. 3). As we will see later in this work, firms
originating from countries with advantageous technological capabilities and long-lasting
innovative traditions were able to adapt more easily to the new market conditions and to survive.
Furthermore, the ability of European firms to respond to the "American challenge" depended
upon their previous technological achievements. European firms have shown greatest results in
catching up with the US firms in industrial sectors in which they were historically
technologically very strong.

In the 1970s and especially in the 1980s intra-industry production between US and European
firms increased faster in those industrial areas in which firms from both countries involved had
mutual technological strengths. Close linkages between firms were established in an attempt to
encourage innovation. By organizing international networks, the leading MNCs tended to locate
their production facilities and R&D units in countries that were centers of excellence. As we will

56
see later in this chapter, US firms showed the highest interest in Germany (West Germany at that
time) as the most attractive industrial location to site their production and R&D, compared to
other European locations. (West) German MNCs showed the highest interest in US as a location
where they can establish their production and R&D units than in the rest of the world. These
facts further prove that technological development is a cumulative process, such that
technological strengths of countries tend to be persistent over long periods of time (Cantwell,
1989, p. 50). Therefore, countries that had long innovative traditions and technological strengths
in certain industrial areas were able to retain the position of technological leaders to the present
days. The same holds for firms, namely technologically advanced firms transformed themselves
into successful MNCs which currently hold the positions as the world's technological leaders in
their industries.

5.1. Analyzing the evolution of international technological competition with Vernon's

Product Cycle Model

In this section I will try to explain why neither the Schumpeterian model of innovation nor
Vernon's PCM I and II are adequate models to analyze the international technological
competition that took place since the early 1970s. Based on the Schumpeterian approach of
economic development and growth, in 1966 Vernon developed the Product Cycle Model (PCM).
The model offered a useful explanation of the US direct investment in Europe during the 1950s
and the 1960s (Cantwell, 1989, p. 54), when only firms from one country, namely from the US,
were involved in competing innovations. Later on, when firms from more than one county
engaged in competing innovations, the PCM failed to offer satisfactory explanations (Cantwell,
1989, pp. 51-52). As internationalization of manufacturing firms started to grow, Vernon
developed the second version of the PCM in 1974, which was extended to incorporate
oligopolistic considerations as well (Cantwell, 1989, p. 54). Accordingly, the economic critique
distinguishes now between PCM Mark I (1966) and PCM Mark II (1974).

When analyzing international technological competition, the most commonly used model is the
Schumpeterian model of innovation and economic growth, which emphasizes discontinuity and

57
"creative destruction" in the process of technological development. Vernon's PCM practically
applies the Schumpeterian model of economic development and growth in the area of
international trade and investment (Cantwell, 1989, p. 51).

The PCM embodies the classical theory of trade, according to which innovations are the
underlying basis of international trade and investment. In its dynamic framework, the model
perceives the growth of production as a result of innovation, which consequently increases the
rate of international trade. Innovations (in form of introduction of new products), production and
international trade are viewed as factors which are positively dependent from each other. An
increase in the production as a result of an increased number of innovations, will eventually
result in an increase in international trade rates. In this sense, international production is viewed
as a tool to encourage rapid rates of domestic economic growth (Cantwell, 1989, p. 52).
However, some elements of the neo-classical theory of international trade and investment can be
found in the PCM as well. The comparative cost factor, as the main determinant for production
location, and the understanding of technological innovation as an exogenous and not as an
endogenous and firm-specific, are sufficient indicators that the PCM incorporates elements of the
neo-classical trade theory too.

Similar to the Schumpeterian model, the PCM focuses on the discontinuities that become
apparent after the introduction of entirely new products and analyzes the effects that such an
introduction has on international trade (Cantwell, 1989, p. 51). In an attempt to minimize the
costs of production, the PCM focuses on finding the optimal location for a firm to establish its
production facilities, namely the location that secures the optimal production costs for the firm.
The principle focus of the model is on the product itself. The maturation of the product is the
main determinant of the firm's international strategy.

The question, whether the classical Schumpeterian model is still an adequate tool to analyze the
evolution of technological competition since the 1950s or not, seems to be an inevitable one. The
Schumpeterian model was a reliable model to examine the technological development of
industries in the nineteenth century (Cantwell, 1989, p. 60), when entrepreneurs introduced
radical innovations, thereby creating both new firms and industries. The success of those initial
innovators, known as "first-movers", was secured as long as they were capable of retaining their
ownership advantages. Therefore, the Schumpeterian model suggests that follower-firms from

58
any industry would be able to successfully catch-up with the initial innovators as long as the
technological dominance of the first movers is not so strong. This is very much the same in the
PCM I, in which firms were capable of surviving only if they retained their ownership
advantages (Cantwell, 1989, p. 60). In PCM II the focus shifted from retaining the ownership
advantages towards building entry barriers that would prevent new firms from entering the
industry. Furthermore, the Schumpeterian model suggests that technological competition is a
random process (Cantwell, 1989, p. 49) and as we will see in the following sections, this may be
quite the opposite. According to the theory of technological accumulation, the course of
technological competition may be highly predictable.

The following two critiques are addressed to the Schumpeterian model of innovation and
subsequently to the PCM I and PCM II, both of which are based on the Schumpeterian model.
The critique also compares Schumpeter's theory of innovation and Cantwell's theory of
technological accumulation and emphasizes why Cantwell's theory seems to have much more
practical application.

o The Schumpeterian model of economic development and growth through innovations is

discontinuous, which is well explained by his term of "creative destruction", which
involves "...incessantly destroying the old one, incessantly creating a new one"
(Schumpeter, 1943, p. 83), referring to the process of "industrial mutation" of the steel
industry that "incessantly revolutionizes the economic structure from within"
(Schumpeter, 1943, p. 83). When comparing Cantwell's understanding of innovation and
Schumpeter's model of innovation we can notice one big difference. According to
Cantwell's understanding, innovation is an outcome of a cumulative (Cantwell, 1989, p.
50) and continuous learning process, which I personally find to be true. However,
Cantwell in one of his later works entitled as "Innovation, profits and growth:
Schumpeter and Penrose" published in 2000/2001, when speaking about the
Schumpeterian theory of profit, gives a completely new perspective on Schumpeter's
process of "creative destruction" by saying that the creative destruction "is often
misunderstood, as the disruption referred to relates to the circular flow (of money) and
established market structures, but the creative process itself is likely to be cumulative and
incremental" (Cantwell, 2000/2001, p. 6). Discontinuities are common if we consider the

59
 overall rate of innovation, as measured by the total number of patents granted. Overall
innovation rates may vary dramatically throughout the years. Consequently, in the 1950s
and 1960s we had major waves of innovations. In the 1970s and 1980s the innovation
rates had fallen, but the sectoral pattern of innovations tended to stay much more
persistent across the firms from most of the countries (Cantwell, 1989, p. 50). Therefore,
we should make a clear difference between discontinuities in the overall rate of
innovation, which are logical and usual, and discontinuities in the sectoral pattern of
innovation, which practically never occur (Cantwell, 1989, p. 50). To be able to analyze
the effect that the major wave of innovations from the 1950s and 1960s had on the
subsequent path of technological competition across sectors (Cantwell, 1989, pp. 50-51),
we need a new model which applies the accumulation theory and which perceives the
innovation process as a cumulative one.

o According to Cantwell's view of innovation as a continuous and cumulative process, and

according to his perspective on continuity in the industrial pattern of innovation
(Cantwell, 1989, p. 16), it seems that the technological competition that took place since
the 1950s is not a random process (as neo-Schumpeterian economists may suggest), but a
predictable one. Because of the continuity in the innovation process, whether the firms
from the so called "follower nations" will be able to catch up with the "first-movers" or
not, depends upon their potential for innovation, and not upon the scope for imitation as
Schumpeter suggests (Cantwell, 1989, p. 50).

Following the general critique of the Schumpeterian model of innovation, I would like to
emphasize some points that refer particularly to Vernon's PCM Mark I (1966) and PCM Mark II
(1974). The following points are specifically a critique on both versions of the PCM:

o As mentioned before, one of the essential drawbacks of the PCMs is their understanding
of innovation as a discontinuous process. The creation of new products is a continuous
process and not a result of a series of discrete actions (Cantwell, 1989, p. 53).

o Another limitation of the models is their absolute focus on the product (and accordingly,
on product innovation) (Cantwell, 1989, p. 53). Therefore, the PCMs face major

60
 limitations, which make them unreliable models to analyze the current situation in which
firms from different countries interact with each other and influence one another
(Cantwell, 1989, p. 56). However, PCM I offered quite valuable explanations about
international trade and investment in the 1950s and 1960s, when only firms from the US
held the position of technological leaders. In the mid-1970s, when European and
Japanese firms also established themselves as technological leaders in many industrial
areas and the international technological competition became more balanced, the model
failed to offer exact clarification of the situation.
In the PCMs the firm is not regarded as the main source of innovation, but as a passive
agent which only reacts to the changing market conditions. The product development
through the three evolutionary stages (named as new product, mature product and
standardized product) is the principle determinant of the international strategy of a firm.

o According to the employed innovation theory in the PCMs, the innovation process is
viewed simply as a market-determined process, that relies entirely upon demand and
relative cost factors (Cantwell, 1989, p. 53). According to the PCM I, innovations are
determined only by consumer demand. In this sense, the main driver of innovation is the
existing unsatisfied consumers' needs. The model dynamic is secured simply by the
evolution of the demand (Cantwell, 1989, p. 55). Furthermore, the decision for relocating
production depends mainly on the cost factor. If the marginal costs of production +
transport costs < cost of production in the importing country, then the firm decides to stay
at home and to avoid investment and vice versa (Vernon, 1966, p. 197).
Communicational issues and external economies are other powerful factors which
determine the production location (Vernon, 1966, p. 194). According to Vernon (1966),
the major reason for a firm to relocate its production is any threat to the established
position of the firm (Vernon, 1966, p. 200), which is again a market-determined driver.

o The firm is perceived simply as a reactive agent to the changing market conditions and
not as an active agent influencing the market (Cantwell, 1989, p. 54). Cantwell and Fai
(1999) in their paper entitled as "Firms as the source of innovation and growth: the
evolution of technological competence" described the firm as a principle source of

61
 innovation and growth. In this sense, the innovation is firm-specific and depends upon
the continuous, incremental changes (innovations) in the production process of the firm.
Neither the market nor the science base are the main drivers for innovation. They are
important factors for innovation, but not decisive ones, as the PCMs suggest.

o During the 1950s and 1960s, when US firms introduced mainly radical innovations, PCM
I was quite an appropriate model to explain the situation on the market. In the 1970s,
when major economic changes took place at the level of international trade between
manufacturing firms and the focus shifted from radical to incremental innovations, the
model lost its explanatory capacity. Such incremental innovations were not a result from
a series of separate actions, but furthermore were an outcome of a continuous process of
technological development within the firm. Vernon's models failed to perceive the firm as
the principle source of innovation. They stayed focused primarily on the market.
Perceiving the technology as an exogenous factor and not as an endogenous factor and
firm specific, was another major drawback of the PCMs.

o Even though Vernon became aware of the fact that the PCM I was losing its explanatory
capacity, in the second version of the model, released in 1974, he was not able to abolish
the major deficiencies of the first version (Cantwell, 1989, pp. 58-59). The crucial
difference between the PCM I and PCM II was that the PCM II was extended to consider
the newly created industries with oligopolistic structures, which resulted from the
growing number of MNCs on a global level (Tolentino, 1993). However, the old way of
understanding the technological innovation didn't change in the PCM II. The main focus
stayed on the product and its maturation as a shaper of the international strategy of a firm.

5.2. Analyzing the evolution of international technological competition with Cantwell's

model based on the theory of technological accumulation

As we saw from the previous section, the PCM I and PCM II are relatively unreliable models for
analyzing the evolutionary development of international technological competition between

62
MNCs. Therefore, I will try to achieve this purpose by using Cantwell's model, which is based
on the above discussed theory of technological accumulation, and is presented in his book
"Technological innovation and multinational corporations", published in 1989.

In the fourth chapter of this work I already discussed some of the main principles of the theory of
technological accumulation. Now, the discussion will be more precise in explaining the three
main propositions of the theory in order to make an appropriate link between this theory and
Cantwell's model, which relies on it.

According to Cantwell (1989, pp. 16-18), the accumulation theory consists of the following
principle propositions:

o the first one is that technological change is cumulative, such that the created
technological competence due to technological change tends to be persistent over periods
of 10 to 20 years (Cantwell, 1989, p. 16). Because of the cumulative nature of
technological development, the improvements in the production process of a firm are the
results of incremental, rather than radical innovations. Even the radical innovations,
which create radically new technologies or production processes, are developed on the
basis of previous technological achievements
o the second proposition claims that the technological change develops incrementally, such
that the firm may slowly shift its point of interest towards some related industrial sectors.
This proposition states that the industrial composition of innovation may change over
long periods of time (Cantwell, 1989, p. 17).
o the third proposition of the theory points out that each firm follows different path-
dependent course of technological development, thereby creating firm-specific
technological competence (Cantwell, 1989, p. 18). The same statement holds for states or
locations.

Using the first proposition, which claims that technological change is cumulative, we can explain
the recovery of European firms after the American "economic invasion" of Europe in the 1950s
and 1960s, and their ability to respond appropriately to the so called "American challenge". Their
recovery depended very much on their traditional technological strengths in certain technological
areas. More precisely, European firms were able to catch up with the US firms in those industries

63
in which the technological efforts of the European firms were historically concentrated
(Cantwell, 1989, p. 62). The firms' competitive technological strengths shaped their future
international strategies (Cantwell, 1989, p. 62).

Table 2 lists the countries in which firms have obtained the highest number of patents in the
periods of 1890-1892, 1910-1912, and 1963-1983. We can clearly see from the table that the
European countries in which firms received the highest number of patents in the period from
1890 to 1892 (UK and West Germany) have also retained in the following two periods the
highest number of patents granted. Countries like France, Switzerland, Sweden, Italy and the
Netherlands had high increases in the number of patents granted in the third period (1963-1983),
compared with the two previous periods. Japan is the only exception here. The Japanese example
contradicts the theory of technological accumulation, since the number of patents granted to
Japanese firms was extremely low in the first two periods and drastically increased in the period
from 1963 to 1983. The case of the Japanese economy and how Japanese firms responded to the
American and European "challenge" will be briefly discussed in the section 5.2.3 from chapter 5.
These statistical numbers are further proof of the cumulative nature of technological change,
where technological innovation is perceived as a further development of already existing
technological achievements.

Table 2. The total number of US patents granted to residents of the major countries of origin

Country of 1890-1892 % 1910-1912 % 1963-1983 %

origin
USA 66 766 91.6 95 022 88.6 929 133 69.1
Non-USA, 6 084 8.4 12 285 11.4 416 113 30.9
total
UK 2 145 2.9 2 970 2.8 55 028 4.1
West 1 378 1.9 3 961 3.7 101 864 7.6
Germany
Canada 975 1.3 1 673 1.6 22 160 1.6
France 548 0.8 1 031 1.0 38 956 2.9

64
Austria 198 0.3 439 0.4 4 560 0.3
(-Hungary)
Australia 147 0.2 284 0.3 4 072 0.3
Switzerland 139 0.2 310 0.3 23 733 1.8
Sweden 101 0.1 318 0.3 14 621 1.1
Belgium- 54 0.1 149 0.1 5 125 0.4
Luxembourg
Ireland 44 0.1 37 0.0 309 0.0
Italy 31 0.0 175 0.2 13 299 1.0
Denmark 22 0.0 94 0.1 2 760 0.2
Netherlands 19 0.0 56 0.1 12 317 0.9
Spain 17 0.0 35 0.0 1 316 0.1
Japan 6 0.0 34 0.0 94 046 7.0

Source: Cantwell, 1989, p. 23

(Original source: US Index of Patents, various sources; OTAF, unpublished data)

Estimating the regression of the distribution of revealed technological advantage (RTA index) in
1977-1983 on the distribution in 1963-1969 for 27 industries (see in the appendix the list of the
27 industries included in the examination), Cantwell (1989) showed that those countries in which
firms were able to rapidly restructure their industries since the 1960s and in which technological
development relied upon innovations have retained leading technological positions over a long
period of time (Cantwell, 1989, p. 37 and p. 42). To get a more detailed look into the data
description used in the estimation and the employed statistical methodology, you can see Chapter
2: Historical trends in international patterns of technological innovation in Cantwell's book
"Technological innovation and multinational corporations" (1989). For my work only the
interpretation of the results is relevant and therefore I am not focusing on explaining the
employed methodology. The results of the regression have shown that since the 1960s German
firms have retained the leading positions in chemicals, motor vehicles, textiles and rubber
products. Since then they were able to improve their positions in industries such as mechanical

65
engineering and construction and mining equipment. In radio and TV receivers and in
professional and scientific instruments they were not able to retain positions of technological
leadership (Cantwell, 1989, p. 42).

Since the 1960s UK firms have improved their technological strengths in chemicals,
pharmaceuticals, food products, agricultural machinery and non-metallic mineral products.
Industrial sectors in which UK firms have fallen behind their European competitors are
mechanical engineering, motor vehicles, radio and TV receivers, non-ferrous metals and coal and
petroleum products (Cantwell, 1989, p. 42).

Japanese firms are the only exception here; since the 1960s they have maintained advanced
technological positions in electrical equipment in general, rubber products, non-ferrous metals
and professional and scientific instruments. Certain improvements of their technological
positions are found in motor vehicles and industrial engines, while they lost their positions in
chemicals and shipbuilding, the industries in which they were historically strong (Cantwell,
1989, p. 42).

The results of the estimation are further evidence of the reliability of the theory of technological
accumulation, which explains the persistence and the stability of firms' technological
competences since the 1960s. Overall, we can conclude that the future technological
development of firms and countries is highly dependent on the past technological achievements.
If we follow the continuous course of the technological development of firms, we can see that
those firms that had innovative tradition and advanced technological positions, have become the
most successful MNCs today.

5.2.1. Cantwell's model: Conceptual framework

After a detailed discussion of the main characteristics of the theory of technological

accumulation, I can now focus on trying to explain why the alternative model proposed by
Cantwell (1989), which is based on this theory, is well founded to examine the technological
competition between modern industrialized firms and countries.

66
When examining the technological competition between MNCs from the major industrialized
countries from 1950s up to the present day, it would be useful to divide this long period of time
into two shorter periods; the first one, which took place after WWII up to the 1970s, and the
second one, which started since the mid-1970s. This separation is necessary, if we consider the
fact that during the 1950s and the 1960s European firms were catching up with their US
competitors only in terms of exports, and since the mid-1970s they started to internationalize
their production and the "catch up" was more in a direction of international production of
manufactured goods.

In accordance with these two evolutionarily different phases of international competition,

Cantwell (1989) splits the examination of international technological competition into two
separate stages: 1. Technological Competition between US and European firms from 1955
to1975, and 2. Technological Competition between US, European and Japanese firms since the
mid-1970s until the late 1980s.

During the 1990s the situation in the marketplace at the international level changed quite a lot in
terms of technological competition between large MNCs, partially because of the successful
recovery of the Chinese economy. After successful implementation of the economic reform from
1979, the Chinese economy has become one of the most progressive economies worldwide.
Today, China is one of the major economic powers in the world. Since the second half of the
1990s many American and European MNCs have shown interest in China not only in respect of
exploiting the enormous Chinese market potential, but also to take advantage of the
technological excellence existing in China. Many technologically-oriented MNCs chose China as
a location for their R&D activities. This trend shows that, aside from the purely market-driven
reasons to choose China as a foreign country to invest in, MNCs decided to locate their R&D
laboratories in China in order to take advantage of the local technological development and
knowledge flow. According to OECD report from 2003, China has achieved remarkable results
in advancing its science base and improving its technological development since the 1990s. It
has become the third most R&D-intensive country in the world, at least in purchasing power
parity (PPP) (OECD, 2003; von Zedtwitz, 2004, p. 439). In 2001, the statistical data
demonstrated that China‟s total R&D spending was estimated at about 60 billion USD, which
puts China in third place after USA and Japan, whose R&D expenditures for the same year were

67
282 billion USD and 104 billion USD respectively (OECD, 2003; von Zedtwitz, 2004, p.
439).According to the number of researchers in the same year, China took second place in the
world with 743, 000 researchers, after USA with 1.3 million researchers (OECD, 2003; von
Zedtwitz, 2004, p. 439). After China comes Japan with 648, 000 researchers and Russia with
505, 000 researchers (OECD, 2003; von Zedtwitz, 2004, p. 439). The number of foreign-owned
R&D laboratories in China have increased dramatically since 2000. In 2000 the number of R&D
laboratories established in China by foreign MNCs was 34, in 2001 this number increased to 82
laboratories and in 2002 this number reached the level of 92 laboratories (von Zedtwitz, 2004, p.
440). A more recent study from Boutellier, Gassmann and von Zedtwitz (2008) showed that the
number of foreign R&D units in China continued to increase further in 2003 and 2004, reaching
the level of 750 units in2005. According to the number of foreign R&D units in 2005, China
reached second place in the world after USA (Boutellier, Gassmann and von Zedtwitz, 2008, p.
62). This trend is expected to continue in the future, taking into consideration that China
continually improves its economic, education and innovation systems (Boutellier, Gassmann and
von Zedtwitz, 2008, p. 62). The following table shows the number of foreign R&D centers in
China.

Table 3. Number of foreign R&D centers in China

Number Focus Year Source

18 Beijing 2000 China Economic Weakly (2000)
40 Shanghai December Xinhua News Agency (2001)
2001
80 Shanghai February 2003 Xinhua News Agency (2003)
34 China Early 2000 Xue& Wang (2001)
82 China August 2002 China's Statistical Office (STS, 2003)
100 China 2002 Greatwall (2002)
120 China June 2002 People's Daily (2002)
148 China 2002 Asia Pulse (2002)
223 ICT companies in China 2002 Walsh (2003)
400 China October 2002 People's Daily (2002)
Source: von Zedtwitz, 2004, p. 440

68
Many successful European, American and Japanese MNCs have established R&D centers in
China. Among the European MNCs with R&D units in China are Nokia, Ericsson, Bayer,
Hoffmann-La Roche, Volkswagen, Schindler, Unilever, Tetrapak, Electrolux, Nestle, Siemens,
Philips, Alcatel and Novo Nordisk (Boutellier, Gassmann and von Zedtwitz, 2008, p. 65).
American MNCs such as Microsoft, Motorola, Lucent, DuPont, Proctor & Gamble, IBM, Intel,
Sun, Hewlett-Packard, GM, Kodak and GE have R&D units in China as well (Boutellier,
Gassmann and von Zedtwitz, 2008, p. 65). Although Japanese MNCs generally tend to keep their
R&D units at home, as we will see later in this chapter, the fact that many of them have R&D
centers located in China, shows that the Japanese managers are well aware of the importance to
take advantage of the international knowledge flow and the international technological
experience. Japanese MNCs like Hitachi, Toshiba, Yamaha, Ajinomoto, Canon, Toyota, Sharp,
Sony, Matsushita Electric, Fujitsu and Honda have established R&D units in China (Boutellier,
Gassmann and von Zedtwitz, 2008, p. 65). Not only MNCs from the most developed countries in
the world, but also MNCs from other less developed countries have R&D centers in China, such
as Acer, Infosys, BenQ, Tata, Nortel, Merry Electronics, LG and Samsung (Boutellier,
Gassmann and von Zedtwitz, 2008, p. 65).

Since I do not consider the impact of China and Chinese MNCs on international technological
competition in this work, it might be interesting for future research to broaden the examination
and include Chinese MNCs in the analysis as well. Some might disagree with this suggestion,
since many experts consider China only as a location where MNCs establish R&D units purely
driven by market-development, and not as a center of excellence. It is quite true that during the
1980s and the first half of the 1990s the main decision criteria for MNCs to invest in China were
the low labor costs. However, recent statistical data shows that since the second half of the 1990s
the situation has changed quite a lot. More and more MNCs decide to locate their R&D in China
in order to take advantage of the Chinese experience in some industrial sectors, such as
electronics for example. Although China is mainly a location where MNCs decide to site their
development centers, many MNCs consider Beijing lately as an attractive location for their
research activities. Beijing has more than 100 universities, the Chinese academy of science is
located there, and the Zhongguancun district (high-tech zone with many R&D laboratories) is in
Beijing as well (Boutellier, Gassmann and von Zedtwitz, 2008, p. 68). All this increases the
attractiveness of Beijing as a location for research-intensive activities.

69
In order to analyze the first stage of technological competition between the US and European
firms, Cantwell (1989) focused on two regions, USA and Western Europe, as the most important
industrialized regions where the main economic activities were concentrated. For the purposes of
the analysis, he examined three possible groups of industries: 1. industries in which the leading
US firms are strong while the European firms are weak and more narrowly specialized, 2.
industries in which US firms are weak and European firms are strong, and 3. industries in which
both, US and European firms are strong and in competition (Cantwell, 1989, p. 62). By dividing
the industries in three separate groups, three possible outcomes can be identified (Cantwell,
1989, pp. 63-64): 1. in the first group of industries, the US firms have retained their strong
technological position on the European market, 2. in the second group, the strong European firms
were able to retain their advantageous positions in Europe, and 3. in the third group, strong
European firms were able to catch up with their American competitors. Establishment of
international networks and production is the most common practice among the industries from
the third group. (Cantwell, 1989, pp. 63-64).

He identified seven stages of development that characterize each of the above described
industries. These stages are the following (Cantwell, 1989, pp. 65-67):

1. stage: "the Schumpeterian technological leadership phase"

2. stage: "US export growth phase"
3. stage: "US firms’ international production growth phase"
4. stage:"the early European recovery stage"
5. stage:"the European firms’ international production growth phase"
6. stage: "intra-industry production phase"
7. stage: "the balanced innovation phase"

Underlying assumption

The growth of each industry is equal for every country included in the examination. Therefore,
we are facing constant market shares of indigenous firms and imports. (Cantwell, 1989, p. 65).

70
Notation

𝑖 = 1,2,3 are the three possible groups of industries

𝑈 is the US market
𝑈𝑖 𝑓𝑜𝑟 𝑖 = 1,2,3 is the total US market for industry i
𝑈𝑖, 𝑗 𝑓𝑜𝑟 𝑖 = 1,2,3 is the part of the US market served by domestic firms
𝑈𝑖, 𝑚 𝑓𝑜𝑟 𝑖 = 1,2,3 is the part of the US market served by imports

𝐸 is the European market

𝐸𝑖 𝑓𝑜𝑟 𝑖 = 1,2,3 is the total European market for industry i
𝐸𝑖, 𝑗 𝑓𝑜𝑟 𝑖 = 1,2,3 is the part of the European market served by domestic firms
𝐸𝑖, 𝑚 𝑓𝑜𝑟 𝑖 = 1,2,3 is the part of the European market served by imports

(Cantwell, 1989, p. 64).

Relations that hold

𝑈𝑖 = 𝑈𝑖, 𝑗 + 𝑈𝑖, 𝑚 𝑓𝑜𝑟 𝑖 = 1,2,3

𝐸𝑖 = 𝐸𝑖, 𝑗 + 𝐸𝑖, 𝑚 𝑓𝑜𝑟 𝑖 = 1,2,3

𝑈𝑖 = 𝑈𝑖, 𝑗 = 𝑈𝑖, 𝑚 = 𝐸 𝑖 = 𝐸 𝑖, 𝑗 = 𝐸 𝑖, 𝑚

(Cantwell, 1989, pp. 64-65).

These relations hold because of the underlying assumption that the market shares of domestic
and foreign firms are equal, and the proportion of production and the proportion of innovation in
firms of each state are positively related and equal. The dots represent the proportional rates of
growth:

71
 1 𝑑 𝑈𝑖
𝑈𝑖 =
𝑈𝑖 𝑑𝑡

(Cantwell, 1989, p. 65).

Under the described conditions, it is further assumed that the innovative activity of each firm
depends upon its ownership advantages. The lower the firm's total costs per unit compared to its
competitors, the higher are the ownership advantages of the firm. By increasing the firm's
ownership advantages, the market share of the firm increases as well.

Results
(Cantwell, 1989, pp. 65-67):

1. Stage: "The Schumpeterian technological leadership stage"

(Cantwell, 1989, p. 65):

In the first stage of development, in 𝑖 = 1, US firms had stronger ownership advantages than
European firms. Therefore, they had RTA values higher than one.
In 𝑖 = 2, US firms had lower ownership advantages than the European firms, thus their RTA
values were smaller than one.
In 𝑖 = 3, the ownership advantages of the US and European firms were pretty much the same, so
the RTA values of firms from the both countries were around one.
The first stage is called the "Schumpeterian technological leadership stage", because during this
stage, US firms enjoyed the so called first-mover advantages. Because of the increased number
of innovative activities in the US, US firms were able to retain their strong ownership advantages
and high market shares in the US, thereby making the American market not dependent on
imports. Therefore, the part of the US market served by domestic firms (𝑈𝑖, 𝑗) was larger than
the total US market for industry 𝑖 (𝑈𝑖). The total US market for industry 𝑖 (𝑈𝑖) was also larger
than the total European market for industry 𝑖 (𝐸 𝑖).

72
 2. Stage: "US exports growth phase"
(Cantwell, 1989, p. 65):

Because of the strong ownership advantages and technological strength, in the second stage, US
firms began to expand in Europe through exports. Therefore, this stage is named as "US exports
growth phase". During this phase of development, the section of the European market served by
imports (𝐸 𝑖, 𝑚) was larger than the European total sales in industry 𝑖 (𝐸 𝑖). The number of local
sales of European firms in industry 𝑖 (𝐸 𝑖, 𝑗) was lower than the sales due to imports in the same
industry (𝐸 𝑖, 𝑚).

3. Stage: "US firms international production growth phase"

(Cantwell, 1989, p. 66):

As the name suggests, in this stage, the US firms started to expand in Europe not only though
exports, but also through establishing networks of international production. US firms established
subsidiaries in Europe. Sales are denoted as 𝐸𝑖, 𝑠. The whole European market (𝐸𝑖) in this stage
was served by European firms (𝐸𝑖, 𝑗), imports (𝐸𝑖, 𝑚) and by the US firms' subsidiaries in
Europe (𝐸𝑖, 𝑠). The European total market for industry 𝑖 (𝐸 𝑖) was larger than the US total market
for industry 𝑖 (𝑈𝑖). The sales of the US firms' subsidiaries in Europe (𝐸 𝑖, 𝑠) were higher than the
total sales in the European market (𝐸 𝑖).

4. Stage: "The early European recovery stage"

(Cantwell, 1989, p. 66):

Although the first signs of recovery of European firms were apparent in the third stage, it was in
the fourth stage when European firms were able to engage in real competition with the US firms
in 𝑖 = 1. They began to gain advantages from licensing technology from the US firms. In this
stage, many European firms in 𝑖 = 1 were eliminated from the competition by technologically
stronger US firms or bought by them.
Local sales of European firms due to licensing American technology are denoted as 𝐸𝑖, 𝑙, while
sale of US firms in the US market due to licensing European technology are denoted as 𝑈𝑖, 𝑙.

73
In this stage the total European market (𝐸𝑖) was served by domestic firms (𝐸𝑖, 𝑗), imports
(𝐸𝑖, 𝑚), US firms' subsidiaries in Europe (𝐸𝑖, 𝑠) and by European firms licensing technology
from US firms (𝐸𝑖, 𝑙).
In 𝑖 = 1, the number of US firms' subsidiaries in Europe continued to grow. In 𝑖 = 3 and
especially in 𝑖 = 2, US firms that were technologically weaker than their European competitors
started to license technology from them. In this stage, the highest growth of imports in the US
was recorded in industry 2, which made the US market in this industry more dependent on
imports. In the same group of industries (𝑖 = 2) in Europe, the number of European exports to
the US started to increase.
In 𝑖 = 3 technologically strong European firms started to export in the US, while strong US
firms increased the number of subsidiaries in Europe.

5. Stage: "The European firms’ international production growth phase"

(Cantwell, 1989, pp. 66-67):

In this stage industry 1 started to stabilize, because weak European firms were driven out from
the industry and only strong European firms stayed in competition with strong US firms. During
this stage, firms grew at the same proportional rates and market shares became stable again
(Cantwell, 1989, pp. 66-67). Such stabilization was achieved, because the sum of the European
sales ascribable to imports and the sales ascribable to the US firms' European subsidiaries in
industry 1 (𝐸1,𝑚 + 𝐸1,𝑠 ) rose considerably relative to the sales from indigenous firms in the
same industry (𝐸1,𝑗 ).
The situation in 𝑖 = 2 was quite different, namely the sales of foreign-owned subsidiaries in
𝑖 = 2 were zero (𝐸2,𝑠 = 0), because US firms' European subsidiaries in this industry were
overtaken by strong European firms. Therefore, the proportion of the European market served by
domestic firms (𝐸2,𝑗 ) was larger than the proportion served by imports (𝐸2,𝑚 ) and larger than the
proportion served by firms which licensed technology from US firms (𝐸2,𝑙 ). Furthermore, the
proportion of the European market served by imports (𝐸2,𝑚 ) was larger than the proportion
served by those European firms which licensed US technology (𝐸2,𝑙 ). In industry 2, the number

74
of established European subsidiaries in the US (𝑈2,𝑠 ) was bigger than the total US market for this
industry (𝑈2 ).
In 𝑖 = 3, technologically advanced European firms established their own subsidiaries in the US
(𝑈3,𝑠 > 𝑈3 ) and the licensing agreements between European and US firms were greater than
zero in Europe, as well as in the US (𝑈3,𝑙 > 0 𝑎𝑛𝑑 𝐸3,𝑙 > 0).

6. Stage: "Intra-industry production phase"

(Cantwell, 1989, p. 67):

In industry 3, weaker European or American firms were overtaken by more technologically

advanced European or American subsidiaries in each country. This was the developmental phase
when in 𝑖 = 3 intra-industry production started to grow and the strongest European and
American firms started to establish international networks (𝐸3,𝑠 > 𝐸3 𝑎𝑛𝑑 𝑈3,𝑠 > 𝑈3 ).
In industry 2, technologically stronger European firms' subsidiaries in the US acquired
technologically weaker US firms, while the comparatively weaker European firms started to
license technology to those US firms that were not overtaken by the strong European subsidiaries
in the US. However, in 𝑖 = 2 the proportion of the US market served by those American firms
that licensed technology from the European firms (𝑈2,𝑙 ) was greater than the proportion of the
market served by domestic firms (𝑈2,𝑗 ).

7. Stage: "The balanced innovation phase"

(Cantwell, 1989, p. 67):

In this stage, all three groups of industries (𝑖 = 1,2,3) became stable again. Firms were growing
at the same proportional rate, while market shares were constant again.
In industry 1 and 2, the strongest European and American firms had established international
networks, so their world market shares increased.
In industry 3, inter-industry production between European and American firms continued to
grow.
The situation in the final stage was the following:

75
The total US market (𝑈𝑖), for all three industries, was served by domestic firms (𝑈𝑖, 𝑗), imports
((𝑈𝑖, 𝑚), European subsidiaries established in the US (𝑈𝑖, 𝑠) and by US firms which licensed
technology from technologically stronger European firms (𝑈𝑖, 𝑙), while the sales of the European
subsidiaries (𝑈1,𝑠 ) and the sales of those firms that licensed European technology (𝑈1,𝑙 ) in
industry 1 were zero (Cantwell, 1989, p. 67):

𝑈𝑖 = 𝑈𝑖,𝑗 + 𝑈𝑖,𝑚 + 𝑈𝑖,𝑠 + 𝑈𝑖,𝑙 𝑈1,𝑠 = 𝑈1,𝑙 = 0

In the European market the situation was the same; the total European market (𝑈𝑖), for all three
industries, was served by domestic firms (𝐸𝑖, 𝑗), imports (𝐸𝑖, 𝑚), US firms' subsidiaries in
Europe (𝐸𝑖, 𝑠) and by domestic firms licensing US technology (𝐸𝑖, 𝑙), while the sales of the
subsidiaries (𝐸2,𝑠 ) and the sales of the domestic firms licensing foreign technology (𝐸2,𝑙 ) in
industry 2 were zero (Cantwell, 1989, p. 67):

𝐸𝑖 = 𝐸𝑖,𝑗 + 𝐸𝑖,𝑚 + 𝐸𝑖,𝑠 + 𝐸𝑖,𝑙 𝐸2,𝑠 = 𝐸2,𝑙 = 0

Cantwell's model vs. PCM

PCM best outlines the situation in the second (𝑖 = 2) of the three previously described industries
(Cantwell, 1989, p. 67). However, there are two main points that should be précised. Firstly, the
PCM considers only breakthrough innovations, which are radical and discontinuous, and does
not pay attention to incremental innovations which are continuous and adaptive. Thus, PCM
begins and ends in a static rather than a dynamic equilibrium (Cantwell, 1989, pp. 67-68). Under
such constellation, PCM loses its dynamism and it is often defined as a special case of the static
theory of international trade and investment (special case of the neoclassical approach), in which
technology is perceived as a production factor, same as capital or labor (Cantwell, 1989, p. 53).
Secondly, PCM may describe the success of the European firms in the 1960s and 1970s as a
consequence of an imitation and not as a result of their high potential for innovation. European
firms were able to increase their export rates and international production because of their
accumulated technological capabilities in industrial areas of their historical technological

76
strengths and not because they imitated their US rivals. Furthermore, in the PCM the industry is
expected to shift from Europe and USA to same new developing countries and not to settle down
(Cantwell, 1989, p. 68). In the last evolutionary stage, namely "the balanced innovation phase",
the industry settled down and didn't shift to industrializing countries. Important to note here is
that, when I speak about shifting the industry to developing countries I don't refer to shift
assembly type of activities, but to shift research activities. In this sense, the research activities
stayed within the developed countries, while assembly activities shifted to developing countries
mainly because of the cost factor.
Finally, only the first three stages of the evolutionary development of international technological
competition can be described with the PCM. Starting from the fourth stage, when innovation
becomes an ongoing phenomenon, the PCM loses it explanatory capacity.

The model proposed by Cantwell (1989) has been inspired by the continuous trend towards
internationalization and globalization. MNCs tend to internationalize their production and to
establish global integrated networks, thereby gaining technological competitive advantages from
the international knowledge flow. By establishing production and research in foreign centers of
excellence, a MNC aims to improve its technological development by tapping into the specific
knowledge and the specific technological experience of the foreign country. This trend towards
internationalization and globalization of a firm's operations has become a way of strengthening
technological accumulation and competitiveness at the firm level (Cantwell, 1989, p. 69).
However, gaining technological competitiveness through internationalization and globalization
varies across industrial sectors.

5.2.2. The first evolutionary phase of international technological competition

The first four developmental stages of Cantwell's model describe part of the evolution of
international technological competition that took place in the time period from 1955 up to 1975.
During the first evolutionary stage, the main competitive activities were only between European

77
and American firms. The principle focus in this phase of international competition is on the
European recovery in terms of exports.

Although many economists were concerned about the technological progress and economic
growth of European firms after the expansion of US firms in Europe, some other authors, like
Dunning (1971, 1970a and 1970b) for example, perceived the growth of American firms in
Europe as a stimulus for the European firms to start to act, rather than as being disadvantageous
for European competition. In this sense, one of the reasons for improving the European export
rates in that period was the competitive pressure that US firms created, after they started to
expand their affiliates in Europe. The US investment in Europe helped European countries in
improving their position not only as a location where American firms can sell their exports, but
also as a region where they can site the production of research intensive goods (Cantwell, 1989,
p. 73).

Not only Dunning, but also other authors came to the conclusion that the expansion of US firms
in Europe and the sharp competition they created afterwards have improved the innovation and
export rates of the European firms. Lake, in his papers, "Transnational activity and market entry
in the semiconductor industry" (1976) and "Foreign competition and the UK pharmaceutical
industry" (1976), found out that the rapid growth of American firms in the semiconductor and
pharmaceutical industry in the UK helped domestic firms to improve their own technological
capabilities in both industries. Stimulated by the US expansion in the UK, domestic firms began
to open their own R&D laboratories, which helped improve their innovation rates and create
competitive advantages. Only by improving the innovation rates, could UK firms stay
competitive and survive.

From the period of 1955 up to 1975, the export rates of Europe as a whole had increased. During
this period, European firms focused on catching-up with the US firms in terms of exports, rather
than in terms of international production. This was the primary response of the European firms to
the "American challenge". According to the statistical data from Table 4, we can see that in all
European countries considered in the examination, the number of exports has increased. The
export rates have especially increased across the six countries from the EEC. All European

78
countries, with exception of the UK, performed better than the US for both periods (1955-1965
and 1965-1975).

Table 4. The growth in exports of European countries and the USA, 1955-1975

Country 1955-1965 1965-1975 1955-1975

USA 177.1 407.7 722.0
EEC six: 284.5 510.1 1451.2
West Germany 315.9 514.5 1625.3
France 228.8 522.2 1194.8
Italy 359.9 490.5 1765.3
Netherlands 276.4 538.7 1489.0
Belgium and 248.5 472.1 1173.2
Luxembourg
UK 171.4 329.6 564.9
Denmark 328.8 389.4 1280.3
Other Europe 208.7 447.4 933.7
Europe 251.2 488.3 1226.6
Total 228.1 468.2 1068.0

Source: Cantwell, 1989, p. 77

(Original source: United Nations, Commodity Trade Statistics, 1955, 1965 and 1975)

After the second developmental stage named as "US export growth phase", the recovery of the
European firms began and in the following period Europe was able to improve its export rates (as
we saw from the statistical data in Table 4). As a response to the European recovery in terms of
exports, US firms began to establish subsidiaries in Europe, making Europe an attractive location
not only for exports, but also for establishing production. The output of the US firms'
subsidiaries located in Europe became an important factor in the third developmental stage of the
international competition, namely in the "US firms’ international production growth phase". In
the third phase, international production of the US firms started to replace the exports from the

79
US (Cantwell, 1989, p. 78). Because of the increased interest of US firms for Europe as an
attractive production location, the output of the US subsidiaries in Europe was continually rising,
compared with the number of US exports in Europe. Consequently, the 𝐸𝑖, 𝑠/𝐸𝑖, 𝑚 (Sales of the
US subsidiaries located in Europe/Sales of imports in Europe) ratio was continually rising
(Cantwell, 1989, pp. 77-78). However, it would be incorrect to think that starting from the third
developmental stage, the output of the US subsidiaries in Europe completely replaced the exports
from the US. Although the sales/export ratio increased, the US exports and the sales of their
subsidiaries in Europe became complementary with each other, rather than substitutes to one
another (Cantwell, 1989, pp. 78-79). In this section, we will see how the international production
of the US firms affected the European recovery.

From Table 5 we can see that Italy, Belgium, Netherlands and Luxembourg have the highest
increase in the sales/export ratio. UK has the lowest increase. The 𝐸𝑖, 𝑠/𝐸𝑖, 𝑚 ratio increased in
almost all industrial sectors, with the exception of the electrical equipment sector. In the
electrical equipment sector, we can see that the ratio has slightly fallen. This is because European
firms are technologically weaker than the US firms in this particular sector. Sales/export ratio
increased above-average in chemicals and allied as well as in rubber products, sectors in which
Europe was historically very strong (Cantwell, 1989, p. 78). Above-average increase of the ratio
are demonstrated in the paper and allied as well as in primary and fabricated metals sectors.
Overall, we can conclude that the expansion of innovative American firms in Europe, first in
terms of exports and later in terms of international production, helped the European firms to
restructure and to improve the industrial sectors in which they were historically strong. European
firms were, in a way, forced to rebuild the sectors of their traditional technological strengths in
order to stay in competition, which after the entry of the US firms in Europe became very
aggressive. In this sense, the entry and the expansion of the US firms in Europe was highly
beneficial for the production and the exports of European firms (Cantwell, 1989, p. 91) and for
the European economy as a whole.

80
Table 5. The sales of US manufacturing affiliates in Europe and exports from the USA to
Europe, 1957-1975 ($m)

Europe EEC six West Germany

1957 1966 1975 1957 1966 1975 1957 1966 1975
Chemicals A). 822 3,417 19,798 275 1,733 12,478 46 464 3,063
and allied B). 353 927 2,666 223 596 1,816 43 121 352
C). 2.33 3.69 7.43 1.23 2.91 6.87 1.07 3.83 8.70
Primary and A). 435 1,619 7,985 145 648 4,458 45 207 2,057
fabricated B). 462 497 1,220 214 296 633 70 87 189
metals C). 0.94 3.26 6.55 0.68 2.19 7.04 0.64 2.38 10.88
Mechanical A). 1,009 4,099 21,235 502 2,431 13,007 228 903 4,571
engineering B). 567 1,571 5,451 306 822 2,923 59 238 825
C). 1.78 2.61 3.90 1.64 2.96 4.45 3.86 3.79 5.54
Electrical A). 678 2,170 11,891 299 1,214 8,463 73 n. a 3,133
equipment B). 114 644 2,179 55 338 1,202 8 100 421
C). 5.95 3.37 5.46 5.44 3.59 7.04 9.13 n. a 7.44
Transportation A). 1,700 5,012 16.339 764 2,747 9,822+ n. a n. a 5,917
equipment B). 244 647 2,493 130 350 1,152+ 14 138 419
C). 6.97 7.75 6.55 5.88 7.85 8.53+ n. a n. a 14.12
Rubber A). 262 662 2,190 77 276 1,321 n. a n. a 204
products B). 97 128 178 60 86 118 19 29 25
C). 2.70 5.17 12.30 1.28 3.21 11.19 n. a n. a 8.16
Paper and A). 34 384 3,221 13 241 1,671# 6 61 420
allied B). 91 257 916 44 157 482# 15 55 195
C). 0.37 1.49 3.52 0.30 1.54 3.74# 0.40 1.11 2.15
All products A). 4,940 17,363 82,650 2,074 9,290 52,221 890 3,920 19,365
B). 1,928 4,671 15,103 1,032 2,645 8,326 228 768 2,426
C). 2.56 3.72 5.47 2.01 3.51 6.27 3.90 5.10 7.98

A). Sales of affiliates

81
B). US exports
C). 𝑆𝑎𝑙𝑒𝑠/𝑒𝑥𝑝𝑜𝑟𝑡 𝑟𝑎𝑡𝑖𝑜 (𝐸𝑖, 𝑠/𝐸𝑖, 𝑚)
n. a not available
+ Excluding Netherlands transportation equipment
# Excluding Netherlands paper and allied
* Excluding paper and allied
^ Excluding rubber products and transportation equipment

Source: Cantwell, 1989, pp. 80-81

(Original source: United Nations, Commodity Trade Statistics, 1975, 1966 and 1975;
US Department of Commerce, Survey of Current Business, 1960 (supplement), August 1974 and
February 1977)

Table 5. (continued)

France Benelux Italy UK

1957 1966 1975 1957 1966 1975 1957 1966 1975 1957 1966 1975
114 475 2,907 60 478 4,771 55 316 1,736 517 1,365 4,738
48 98 278 86 306 953 46 71 233 44 171 374
2.38 4.85 10.46 0.70 1.56 5.01 1.20 4.45 7.45 11.75 7.98 12.67
60 154 680 19 116 1,135 21 172 584 230 781 2,630
53 74 125 45 56 215 46 79 103 128 119 352
1.13 2.08 5.44 0.42 2.07 5.28 0.46 2.18 5.67 1.80 6.56 7.47
192 810 3,686 36 386 3,090 46 333 1,660 480 1,479 6,623
113 248 813 72 210 883 62 125 401 92 316 1,106
1.70 3.27 4.53 0.50 1.84 3.50 0.74 2.66 4.14 5.22 4.68 5.99
79 n. a 2,194 67 n. a 1,978 80 303 1,159 270 n. a 1,737
13 113 279 16 68 285 18 58 217 9 129 428
6.08 n. a 7.86 4.19 n. a 8.94 4.44 5.22 5.34 30.00 n. a 4.06
174 n. a 2,528 138 n. a 732+ n. a 63 645 789 n. a 4,970
39 63 245 67 130 307+ 10 20 179 19 58 352

82
4.46 n. a 10.32 21.06 n. a 2.38+ n. a 3.15 3.60 41.53 n. a 14.12
n. a 104 426 28 n. a 596 n. a 29 95 139 268 574
19 23 31 12 23 51 10 11 11 19 12 26
n. a 4.52 13.74 2.33 n. a 11.69 n. a 2.64 8.64 7.32 22.33 22.08
n. a 60 475 4 67 446# n. a 54 330 21 89 449
12 31 112 11 31 61# 6 39 115 41 65 193
n. a 1.94 4.24 0.36 2.16 7.31# n. a 1.38 2.87 0.51 1.37 2.33
619 2,497 12,895 353 1,603 13.752 202*^ 1,269 6,209 2,446 6,511 21,721
266 650 1,883 309 824 3,118 172*^ 403 1,259 352 870 2,831
2.33 3.84 6.85 1.14 1.95 4.41 1.17*^ 3.15 4.93 6.95 7.48 7.67

5.2.3. The second evolutionary phase of international technological competition

The second phase of the evolution of international competition started in the mid-1970s. Since
1975, European firms entered in a stage of international expansion of their production. Their
focus shifted from exports (manufactured in their home countries) to internationalization of their
production processes and establishing global organizational networks. The phase of expansion of
international production began in the fifth developmental stage of Cantwell's model, when not
only American, but also European firms internationalized their production.

The sixth developmental stage was a result of the growth of international production. Because
each country and each firm were narrowly specialized in different technological areas, intra-
industry production began to grow among industrial sectors in which the firms of both countries
involved had certain technological strengths (Cantwell, 1989, p. 137). "Intra-industry production
occurs where firms from two different countries but from the same industry each establish
production facilities in the other county" (Cantwell, 1989, p. 138). The reason for the increasing
interest of firms to establish production facilities in foreign countries which are centers of
innovation, is because it enables the firm to take advantage of the technological development
there, which is different but mostly complementary to their own technology base developed at

83
home (Cantwell, 1989, pp. 137-138). Intra-industry production is expected to increase further
between countries whose firms are technologically advanced in the industry in question
(Cantwell, 1989, p. 68). The increasing intra-industry production is actually a consequence of
what the third proposition of the theory of technological accumulation claims, namely that each
firm follows different path-dependent courses of technological development, thereby creating
firm-specific technological competence.

This proposition can be supported by statistically proving that, in the era of expansion of intra-
industry production, West German MNCs were especially attracted to the US as an industrial
location for siting their production and that the US MNCs were mostly favoring West Germany
as an attractive location for their production. USA and West Germany were and still are, the
major technological leaders in the world and the most important centers of excellence. Table 6
shows that MNCs from West Germany were especially attracted to the US in food products,
other transport equipment, rubber products and coal and petroleum products, while US MNCs
were attracted to West Germany mostly in motor vehicles, other transport equipment, textiles
and rubber products (Cantwell, 1989, pp. 155-156). GIPUS (German International Production in
the US) is the index that shows the share of German MNCs in international production located
particularly in the US, relative to the share of total international production of non-US firms in
the world. USIPG (US International Production in West Germany) shows the share of the US
affiliates located in West Germany, relative to the US share of total international production of
non-West German firms in the world (Cantwell, 1989, pp. 155-156). GIPUS and USIPG are
calculated for 1982. You can find the exact calculation of the indices and detailed description of
the data in the seventh chapter of Cantwell's book "Technological innovation and multinational
corporations" (1989). For the purpose of my work, only the interpretation of the results
presented in Table 6 is important and not the underlying calculations. Therefore, I decided not to
go further into details with the calculations. My main aim is to show that the theory of
technological accumulation, on which I have based my work, is statistically proven and can be
used to analyze the evolution of international technological competition between MNCs.

84
Table 6. The index of the relative attractiveness of the USA for the international production of
West German firms, and of West Germany for the international production of US firms

GIPUS USIPG
Food products 2.349 0.238
Chemicals 0.921 0.668
Metals 0.755 0.526
Mechanical engineering 0.551 0.785
Electrical equipment 0.416 0.814
Motor vehicles 0.883 1.674
Other transportation equipment 1.805 1.231
Textiles 0.466 1.828
Rubber products 2.121 1.200
Non-metallic mineral products 0.536 0.632
Coal and petroleum products 13.734 0.486
Other manufacturing 0.353 0.631

Source: Cantwell, 1989, p. 155

During the period of expansion of intra-industry production, the collaboration and co-operation
between foreign and domestic firms took a quite different path and intensity than before. Co-
operations between foreign and local firms emerged, mainly because it enabled foreign firms to
adapt more easily and quickly to the local conditions and regulations. In the 1970s, when the
focus shifted from geographical dispersion of intra-firm networks to inter-firm linkages, M&As
started to appear. M&As were one of the possible forms to establish these linkages. M&A as a
corporate technological strategy to transform portfolios of technological competences (Cantwell,
2005, p. 178) and to reshape corporate technological boundaries (Cantwell, 2005, p. 174) will be
discussed in the following chapter of this work.

In the final developmental stage of Cantwell's model, "the balanced innovation phase", as its
name suggests, no technological leadership exists anymore and all three industries (𝑖 = 1, 2, 3)

85
start to follow a course of equal growth rates across groups of firms and stable market shares
(Cantwell, 1989, p. 67). In the seventh stage, the firms from all countries involved in
international technological competition have pretty much an equal level of technological
development and their market shares are quite the same.

Internationalization of production became a trend not only among firms originating from the
most industrialized countries in the world, like the USA, Germany, the UK, Italy, France, but
also among Japanese firms (Cantwell, 1989, p. 96). Since the 1970s, Japanese firms started to
become heavily involved in international competition as well. During the 1970s and 1980s they
moved from domestic exports to international production. Consequently, US firms started to lose
world market shares dramatically. However, they continued to expand internationally and once
firms from other countries internationalized their production, they led them towards a closer
integration of the firms‟ networks.

The “catching-up” of Japanese firms is an interesting topic to look at closer. After they
succeeded to catch up with their European and US competitors during the 1970s and the 1980s
and after establishing themselves as technological leaders in many industrial areas, in the 1990s,
the Japanese economy started to face numerous difficulties and major drawbacks. The reasons
for such an abrupt turn in the Japanese economy will be analyzed later in this section, in
accordance with the paper from Cantwell and Zhang (2006) entitled as “Why is R&D
Internationalization in Japanese Firms so Low? A Path-Dependent Explanation”.

The degree of internationalization of production and its relative importance varied among firms
from different countries. Some countries were more dependent on exports, while others relied
more on international production. If we compare the results from Tables 7 and 8, we can see that
the USA and the UK are more dependent on international production than the other countries
listed. As we can see from Table 7, the USA accounts for 42.43% and the UK for 18.32% of
international production in the world, while the shares of the other countries are much lower,
West Germany 10.64%, Italy 1.56%, France 5.38% and Japan 4.87%. West Germany, Italy,
France and Japan are more dependent on exports than they are on international production. From
Table 8 we can see that West Germany accounts for 12.20% of international production plus

86
exports, Italy accounts for 4.15%, France for 6.45% and Japan for 9.36%. To see the exact
calculations behind the numbers presented in Tables 7-14, and to see how the data for the
calculations is collected, you can read Chapter 5 from Cantwell's book "Technological
innovation and multinational corporations" (1989), Dunning and Cantwell (1987) "The IRM
directory of statistics of international investment and production", Dunning and Pearce (1985)
"The world's largest industrial enterprises, 1962-1983", Cantwell (1984) "The revaluation of the
UK's outward foreign direct investment stock" and Cantwell (1986) "Recent trends in foreign
direct investment in Africa".

If we look at Tables 7-10, we can see which industries are more dependent on international
production and which on exports. According to the data shown in these tables, we can conclude
that the industries of food products (15.72% compared to 14.89%), chemicals (14.17% compared
to 11.61%), electrical equipment (11.56% compared to10.73%), motor vehicles (10.17%
compared to 9.76%), rubber products (2.49% compared to 2.03%), non-metallic mineral
products (2.73% compared to 2.06%) and coal and petroleum products (22.31% compared to
11.97%) are more dependent on international production, while the industries such as metals
(9.33% compared to 6.78%), mechanical engineering (10.60% compared to 7.07%), other
transport equipment (2.96% compared to 1.07%), textiles (5.71% compared to 1.74%) and other
manufacturing (8.37% compared to 4.20%) are more dependent on exports (Cantwell, 1989, pp.
101-103).
Tables 7-10 give a clear picture of how important the international production and exports are for
the firms from different countries in the world.

Table 7. The geographical distribution of international production in manufacturing by source

country, 1982

Source country Value of production ($m) Share of production (%)

USA 357,244 42.43
West Germany 89,586 10.64
UK 154,230 18.32
Italy 13,141 1.56

87
France 45,333 5.38
Japan 41,047 4.87
World total 842,027 100.00

Source: Cantwell, 1989, p. 98

Table 8. The geographical distribution of international production and indigenous firm exports
in manufacturing combined, by source country, 1982

Source country Value of production plus Share of production plus

exports ($m) exports (%)
USA 521,269 27.60
West Germany 230,466 12.20
UK 212,816 11.23
Italy 78,434 4.15
France 121,709 6.45
Japan 176,687 9.36
World total 1,888,357 100.00

Source: Cantwell, 1989, p. 100

Table 9. The industrial distribution of international production in manufacturing, 1982

Industry Value of production ($m) Share of production (%)

Food products 132,373 15.72
Chemicals 119.281 14.17
Metals 57,056 6.78
Mechanical engineering 59,532 7.07
Electrical equipment 97,299 11.56
Motor vehicles 85,665 10.17

88
Other transport equipment 9,039 1.07
Textiles 14,625 1.74
Rubber products 20,958 2.49
Non-metallic mineral products 22,958 2.73
Coal and petroleum products 187,889 22.31
Other manufacturing 35,352 4.20
Total world manufacturing 842,027 100.00

Source: Cantwell, 1989, p. 102

Table 10. The industrial distribution of international production and indigenous firm exports in
manufacturing combined, 1982

Industry Value of production plus Share of production plus

exports ($m) exports (%)
Food products 281,149 14.89
Chemicals 219,271 11.61
Metals 176,148 9.33
Mechanical engineering 200,197 10.60
Electrical equipment 202,591 10.73
Motor vehicles 184,296 9.76
Other transport equipment 55,820 2.96
Textiles 107,817 5.71
Rubber products 38,244 2.03
Non-metallic mineral products 38,839 2.06
Coal and petroleum products 225,971 11.97
Other manufacturing 158,025 8.37
Total world manufacturing 1,888,357 100.00

Source: Cantwell, 1989, p. 103

89
As mentioned before, after the European recovery first in terms of exports and later in terms of
international production in the mid-1970s, US firms began to dramatically lose their shares not
only in total international production in manufacturing, but also in total international economic
activity (international production plus exports) (Cantwell, 1989, pp. 102-105). Tables 11-14
show national firms' shares of international production by manufacturing sector in 1974 and in
1982 and national firms' shares of total international economic activity of manufactured goods in
1974 and in 1982. If we compare the data from Table 11 and 12, we can see that the US firms'
shares of total international production in manufacturing have fallen from 55.3% in 1974 to
42.4% in 1982. At the same time, the firms' shares of total international production in the rest of
the countries (West Germany, the UK, Italy, France and Japan) have increased. West German
firms have increased their shares of total international production from 6.8% in 1974 to 10.6% in
1982. UK firms have increased their shares from 12.4% in 1974 to 18.3% in 1982. Italian firms
have increased the shares from 1.1% in 1974 to 1.6% in 1982. French firms have increased their
shares as well, from 3.9% in 1974 to 5.4% in 1982. Japanese firms had also an increase in their
shares, from 2.1% in 1974 to 4.9% in 1982.

If we look at the firms' shares of international production by manufacturing sector in both

periods, 1974 and 1982, we can see that US firms lost their shares most heavily in chemicals
(from 52.8% in 1974 to 37.2% in 1982), electrical equipment (from 65.6% in 1974 to 49.3% in
1982), motor vehicles (from 66.7% in 1974 to 40.5% in 1982), in non-metallic mineral products
(from 47.6% in 1974 to 28.6% in 1982) and in coal and petroleum products (from 66.2% in 1974
to 53.0% in 1982) (Cantwell, 1989, pp. 103-105). The US MNCs lost their shares of international
production in chemicals mostly to German and British MNCs. In the sector of chemicals, as we
already know, British and especially German firms were historically very strong. In the sector of
electrical equipment, the US MNCs lost their shares of international production to Japanese
firms. In motor vehicles, they lost their shares to the European and the Japanese MNCs. In coal
and petroleum products they lost their shares to British MNCs. The only two sectors in which the
American MNCs increased their shares of international production were other transport
equipment (from 14.4% in 1974 to 25.6% in 1982) and in other manufacturing (from 63.0% in
1974 to 70.7% in 1982).

90
The data of the national firms' shares of international production plus domestic exports of
manufactured goods for 1974 and 1982 are presented in Tables 13 and 14. US firms' shares of
total international production and exports have fallen from 35.1% in 1974 to 27.6% in 1982. The
firms' shares of all other countries have increased during this period. West German MNCs
increased their shares of total international economic activity from 10.4% in 1974 to 12.2% in
1982. British firms increased their shares as well, from 8.7% in 1974 to 11.3% in 1982. Italian
MNCs had an increase of 1.1%, namely from 3.1% in 1974 to 4.2% in 1982. France MNCs also
increased their shares from 5.6% in 1974 to 6.4% in 1982. Japanese MNCs had an increase of
2.6%, from 6.8% in 1974 to 9.4% in 1982.

Table 11. National firms' shares of international production by manufacturing sector, 1974 (%)

USA West UK Italy France Japan

Germany
Food products 32.8 1.1 21.8 0.5 1.2 1.2
Chemicals 52.8 22.1 9.2 3.3 7.8 3.8
Metals 40.4 8.7 23.2 0.2 5.4 1.0
Mechanical 51.1 8.6 10.9 0.3 2.5 1.2
engineering
Electrical 65.6 13.2 10.8 1.0 3.8 4.6
equipment
Motor 66.7 11.7 9.3 2.5 6.3 2.6
vehicles
Other 14.4 23.8 36.5 0.3 3.3 0.3
transport
equipment
Textiles 40.5 10.3 40.1 0.4 2.4 5.3
Rubber 55.9 5.6 9.8 12.3 11.3 4.2
products
Non-metallic 47.6 5.3 19.9 0.1 11.1 4.2
mineral

91
products
Coal and 66.2 0.3 5.9 0.2 2.9 0.1
petroleum
products
Other 63.0 7.3 4.7 0.1 0.5 7.3
manufacturing
Total 55.3 6.8 12.4 1.1 3.9 2.1

Source: Cantwell, 1989, p. 104

Table 12. National firms' shares of international production by manufacturing sector, 1982 (%)

USA West UK Italy France Japan

Germany
Food products 31.0 2.5 34.7 0.3 1.8 2.4
Chemicals 37.2 27.4 13.4 2.4 4.6 5.8
Metals 34.5 10.3 15.8 0.5 5.5 3.3
Mechanical 38.1 13.9 12.5 0.5 2.4 2.9
engineering
Electrical 49.3 13.1 12.5 1.3 6.8 11.0
equipment
Motor 40.5 18.1 8.3 4.7 9.4 8.1
vehicles
Other 25.6 11.1 13.3 0.4 3.5 0.8
transport
equipment
Textiles 29.8 15.0 42.7 0.7 4.0 8.0
Rubber 43.5 7.8 21.9 10.5 9.7 5.9
products
Non-metallic 28.6 9.7 22.3 0.1 21.3 6.2

92
mineral
products
Coal and 53.0 0.5 19.6 0.9 5.4 0.3
petroleum
products
Other 70.7 8.8 7.3 0.1 1.0 14.9
manufacturing
Total 42.4 10.6 18.3 1.6 5.4 4.9

Source: Cantwell, 1989, p. 105

Table 13. National firms' shares of international production plus domestic exports of
manufactured goods, 1974 (%)

USA West UK Italy France Japan

Germany
Food products 24.4 1.8 10.7 1.6 4.7 1.1
Chemicals 30.0 21.0 9.0 4.6 7.6 5.9
Metals 17.6 13.5 8.7 2.9 7.2 13.2
Mechanical 39.1 15.3 8.1 2.9 3.9 6.1
engineering
Electrical 41.3 14.9 7.2 2.6 5.4 9.9
equipment
Motor 48.2 16.8 7.7 4.5 8.0 11.3
vehicles
Other 27.2 9.2 9.9 1.5 5.3 23.5
transport
equipment
Textiles 1.24 11.7 13.9 8.8 7.1 8.9
Rubber 39.2 10.6 7.0 9.7 8.3 6.8

93
products
Non-metallic 33.6 11.0 15.8 5.6 10.4 6.4
mineral
products
Coal and 63.2 1.2 6.0 1.1 3.5 0.2
petroleum
products
Other 28.8 12.0 7.4 2.1 3.1 8.6
manufacturing
Total 35.1 10.4 8.7 3.1 5.6 6.8

Source: Cantwell, 1989, p. 106

Table 14. National firms' shares of international production plus domestic exports of
manufactured goods, 1982 (%)

USA West UK Italy France Japan

Germany
Food products 24.0 3.6 18.3 1.9 5.3 1.6
Chemicals 27.0 23.2 11.9 3.5 7.0 5.6
Metals 15.3 12.7 8.5 4.5 7.4 13.0
Mechanical 28.1 17.2 8.4 5.4 5.1 10.0
engineering
Electrical 35.5 12.5 8.7 2.9 6.7 19.4
equipment
Motor 25.8 21.3 5.5 4.0 8.4 20.2
vehicles
Other 28.8 13.7 8.7 2.3 8.2 13.7
transport
equipment

94
Textiles 8.7 10.6 9.4 11.8 5.4 7.1
Rubber 29.5 11.4 15.0 9.3 7.6 9.0
products
Non-metallic 20.3 11.5 15.6 6.5 16.3 8.3
mineral
products
Coal and 46.5 1.1 17.2 2.3 6.0 0.4
petroleum
products
Other 27.0 11.0 6.4 5.3 3.8 11.1
manufacturing
Total 27.6 12.2 11.3 4.2 6.4 9.4

Source: Cantwell, 1989, p. 107

From the statistical data presented in the tables above we can summarize that, in general
European firms were able to better respond to the "American challenge" in those industrial
sectors in which they were historically technologically very strong. This is one further proof of
the reliability of the technological accumulation theory and its cumulative and continuous nature.
The expansion and the growth of American MNCs in Europe was an incentive for the European
firms to restructure their old and less effective organizational systems and to improve their
production processes. By improving the inner organizations and especially the production
processes, they improved their outputs eventually. The innovative capacity of a firm, as an
essential factor in the overall improvement process, depends upon the accumulated technological
strengths of the firms and on the learning capacity of its personnel. As Penrose claimed, the
human resource is the most valuable resource of a firm and it is the initiator of the innovative
process. The strong competition that was primarily initiated by the American MNCs, was at the
end beneficial for every agent in the economic system and for the economy as a whole. In this
sense, a conclusion can be drawn that, the Schumpeterian understanding of economic
development and growth through technological innovation in imperfectly competitive economic
environment accurately reflects what actually happened in the world economy since the 1950s.

95
Primarily because of the technological superiority, US firms were able to successfully expand
their business operations in Europe. Improving the technological competences in order to gain
technological advantages is what helped the European firms to recover after WWII and to stay in
competition with the US firms. Japanese firms were able to catch up with the American and
European firms only because of their strong innovative capacity.

As I mentioned at the beginning of this chapter, the example of the Japanese economic recovery
is quite an interesting case to be discussed. After the fast-technological progress and the
successful catch-up with firms from the Western countries during the 1970s and 1980s, Japan
became one of the major technological leaders in the world in many industrial areas such as
motor vehicles, instruments, office equipment and electrical equipment (Cantwell and Zhang,
2006, p. 250). In the 1970s the Japanese GNP per capita has greater than that of the UK and in
the 1980s it exceeded that of the US (Minami, 1994). In the 1990s the economic situation in
Japan suddenly changed. Japan's growth rate fell down to only 1%, from 9.3% in 1956-1973 and
4.1% in 1975-1991 (Katz, 1998). Many authors (such as Dore, 1998; Katz, 1998; Vogel, 2001;
Schaede and Grimes, 2003) tried to find the reasons for such drawback of the Japanese economy
and many of them came to the same conclusion, that the Japanese keiretsu networks that worked
very well in the 1970s and 1980s, restrained the Japanese firms from internationalizing their
R&D in the 1990s. They were practically stuck in these close networks and unable to take
advantage of the technological development in other centers of excellence worldwide.

The paper entitled as "Why is R&D internationalization in Japanese firms so low? A path-
dependent explanation" from Cantwell and Zhang (2006) deals, among other things, also with
the question, why Japanese firms decided to keep their R&D at home and not to internationalize
it, following the example of the firms from other industrialized countries. The authors worked
with data from the US patent database to show the technological activity of Japanese firms in
time period from 1969 to 1995. To see the exact description of the data used in the analysis and
the methodology employed, you can see pp. 252-254 in the paper "Why is R&D
internationalization in Japanese firms so low? A path-dependent explanation" from Cantwell
and Zhang (2006). I will not focus on the data and methodology description, but on the final
results of the research, which I believe to be most relevant for the discussion in my work.

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Table 15 shows that in time period from 1991 to1995 Japan had the lowest share of R&D located
in foreign countries (only 1.08%), compared with the shares of other industrialized countries like
the USA (8.63%), Germany (20.72%), the UK (43.01%) and France (33.18%). Even though it
was common practice for firms from the major industrialized countries, like the USA and
Germany, to keep their R&D at home mainly because of the very strong technological base in
their home countries, Japanese R&D internationalization is the lowest, even compared with these
countries (Cantwell and Zhang, 2006, p. 254). As we can see from the data in Table 15, Japan
had higher shares of abroad located R&D in 1969-1972 (2.63%), 1973-1977 (1.88%), 1978-1982
(1.22%), 1983-1986 (1.26%) than it had in 1987-1990 (0.93%) and 1991-1995 (1.08%). This
decrease in the percentage of the total shares of US patents attributable to R&D conducted
abroad (outside Japan) was due to the very strong technological base existing in Japan (Cantwell
and Zhang, 2006, p. 255). Japanese firms had a strong technological base in their home country
which was needed for their technological development, so they had no need to relocate their
R&D abroad in order to tap into a foreign knowledge base. If we compare the last two rows of
Table 15, we can see that the numbers of Japanese patents from foreign locations are much
lower, compared with the total number of patents granted to Japanese firms (patents from home
plus foreign locations).

Table 15. Shares of the US patents of the world's largest firms attributable to research in foreign
locations, organized by nationality of patent firm, 1969-1995 (%)

Country 1969- 1973- 1978- 1983- 1987- 1991-

1972 1977 1982 1986 1990 1995
USA 4.91 5.88 6.41 7.54 7.91 8.63
Germany 12.77 11.05 12.07 14.47 17.05 20.72
UK 32.27 33.41 32.95 37.76 39.95 43.01
Italy 13.39 16.03 13.85 12.59 11.14 16.47
France 8.16 7.74 7.17 9.19 18.17 33.18
Japan 2.63 1.88 1.22 1.26 0.93 1.08
Netherlands 63.07 57.32 55.60 61.78 59.52 62.79

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Belgium 50.00 54.32 56.27 71.21 59.04 67.25
Switzerland 44.36 43.63 43.78 41.59 42.99 52.47
Sweden 17.82 19.90 26.20 28.94 30.60 42.42
Canada 41.19 39.30 39.49 35.82 40.12 43.96
Total 10.03 10.67 10.55 11.02 11.24 11.24
Japan 210 343 284 392 442 771
(patents from foreign locations)
Japan 7998 18278 23249 31169 47793 71212
(total patents from both home and
foreign locations)

Source: Cantwell and Zhang, 2006, p. 255

(Original source: US patent database developed by John Cantwell, with cooperation of the US
Patent and Trademark Office)

As mentioned before, the main reason why Japanese firms had such low internationalization
rates were the close domestic inter-firm networks, known as keiretsu systems. Although they
were very effective systems for the Japanese economy after WWII, in the 1990s when the trend
of internationalization of technological activities and the era of globalization began, they
constrained the Japanese firms from following these trends. After WWII the Japanese economy
was devastated and Japanese firms were obliged to find an effective solution to recover their
destroyed economy. The organizational structure known as keiretsu system enabled the Japanese
firms to not depend on foreign firms and even countries, but solely on domestic suppliers and
financiers. Firms that are classified as keiretsu-firms can be part either of horizontal-type of
keiretsu integration, known as H-type, or of vertical keiretsu, known as V-type. The most
successful Japanese firms are parts either of H-type or of V-type of close integration. Mitsubishi,
Mitsui, Sumitomo, Fuyo, Sanwa and DKB are parts of horizontally integrated network, while
Toyota, Nissan, Matsushita, Hitachi, Toshiba and Sony are parts of vertical keiretsu (Cantwell
and Zhang, 2006, p. 256).
Table16 shows that the Japanese firms that are part of a certain keiretsu network, internationalize
their R&D less often than Japanese firms that are not part of such a network.

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If we compare the total shares of US patents attributable to research outside Japan for keiretsu
and non-keiretsu firms, we can see that the keiretsu firms have much lower percentage of only
1.14, while non-keiretsu firms have higher percentage of 2.81. If we look at each of the four
sectors separately, we can see that the keiretsu-firms have a lower degree of R&D
internationalization in all four sectors. The different levels of R&D internationalization between
keiretsu and non-keiretsu firms is most notable in chemicals and motor vehicles. This difference
is not so big in electrical and office equipment and in professional and scientific instruments.

Table 16. Share of US patents of the largest Japanese-owned firms attributable to research
outside Japan, keiretsu vs. non-keiretsu firms, 1969-1995 (%)

Sector Keiretsu firms Non-keiretsu firms

Chemicals 1.62 14.69
Electrical and office equipment 1.53 1.55
Motor vehicles 0.76 5.17
Professional and scientific 1.06 1.24
instruments
Total 1.14 2.81

Source: Cantwell and Zhang, 2006, p. 256

(Original source: US patent database developed by John Cantwell, with cooperation of the US
Patent and Trademark Office, and Industrial Groupings in Japan, 1994/1995, Dodwell Marketing
Consultants, Tokyo (for the keiretsu classification of firms))

Another very interesting fact that can be observed from Table16 is that in sectors, such as
electrical and office equipment and motor vehicles, in which Japanese firms are technologically
quite strong, the degree of R&D internationalization is pretty low. For other industrialized
countries, such as Germany, Switzerland and the Netherlands, the situation is completely the
opposite. Firms originating from these countries have a higher degree of internationalization of
their R&D in sectors in which they are technologically strong. Namely, except in Japan, in
almost all other industrialized countries, the degree of R&D internationalization is high in

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industrial sectors in which domestic firms are technologically strong (Cantwell and Zhang, 2006,
p. 259).
If we classify the Japanese firms by technological activity rather than industry, we can see that
they are more focused on sourcing technology abroad in industrial fields in which they are
technologically weaker than the firms from other countries (Cantwell and Zhang, 2006, p. 259).
Therefore, Japanese firms source technology internationally in areas such as pharmaceuticals
(where the share of the US patents of the largest Japanese-owned firms attributable to research
outside Japan was 2.48% in 1991-1995), mining equipment (was 14.29% in 1991-1995),
bleaching and dyeing processes (11.63% in 1991-1995), image and sound equipment (2.18% in
1991-1995) and aircraft (7.69% in 1991-1995) (Cantwell and Zhang, 2006, pp. 258-259). For a
more detailed look into these numbers, please see Table 6 in the appendix.

Important to notice here is that, the keiretsu systems consisting of close inter-firm networks were
in the past a source of strength for Japanese firms and for the Japanese economy as a whole
(Cantwell and Zhang, 2006, pp. 262-265). These networks helped Japanese firms to successfully
recover from the after-war period and to catch-up with firms from Western countries in the
1960s and 1970s.
During the 1980s the global technological competition had changed and science-based
knowledge became a predominant source of competitive advantage for MNCs. Therefore, MNCs
began to source technology internationally, in other technologically advanced locations abroad.
They started to build internationally integrated networks for technological development, which
with the emergence of information and communication technology (ICT) became much easier to
establish and manage. When ICT came into sight, the complete picture of international
technological competition changed quite a lot. Because the international organizational networks
became easier to maintain, MNCs organized their international organizations in a more
decentralized way than before. They shifted the focus from centralized home-country based
research to decentralized international research. Being able to tap into international knowledge
bases and to transfer knowledge from some location abroad to the home-based research
department, helped MNCs to improve their technological strengths at home.
Because of the close keiretsu networks, Japanese firms were unable to take advantage of the
international knowledge flow during the 1980s, because they didn't internationalized their R&D.

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Their decision to further maintain centralized and home-based research caused many difficulties
for the Japanese economy later on. Even though Japanese managers realized the importance of
international R&D, it was not easy for them to leave the keiretsu system. According to the
evolutionary perspective of observing the international technological competition and according
to the path-dependent approach of technological development, during the process of
technological development a firm interacts with the institutional environment in which it is
located and it would be extremely difficult for such a firm to abandon the established interaction
and cooperation networks if some new situation emerges (Cantwell and Zhang, 2006, p. 262).
This explanation can be used to describe why Japanese firms decided to stay within their
established keiretsu networks and not to internationalize their R&D.

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Excursion: I permit myself to finish this chapter with an excursion which, I think, shows the
analogy between the theory of technological accumulation and the human biology in order to
show that the process of technological accumulation is a natural process which enables natural
evolution of firms (from national to multi-national), same as human evolution.
The cumulative processes are like father and son. The father has accumulated knowledge and
experience with sophisticated performances. The son has "primitive" performances because of
the still low accumulation of knowledge and experience. In the future, the father achieves the
maximum accumulation of knowledge and his performances are becoming circular. As the son
grows, he learns new things and he has the opportunity to achieve the same or even better
performances than his father. If we view the father as a first-mover firm and the son as a firm-
follower, we can say that the son (the firm follower) can achieve the same or better performance
than his father (the first-mover firm) only through the continuous learning process (through
innovations). Both the father and the son can achieve the best performances if they co-operate
and share their knowledge and experience, as is the case with some large corporations
collaborating together.
With this analogy, we can explain in a very simple way what happened historically between US
and European firms; innovative US firms had the role of father in the international technological
competition and the European firms had the role of the son.

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6. M&As as technological strategy for greater technological diversification

Since the 1970s, when intra-industry production started to expand rapidly, M&As as a possible
form of inter-firm co-operation emerged. Since 1995, M&As have become widely adopted
across many industrial sectors (Cantwell and Santangelo, 2005, p. 175).

In the current much more complex technological environment and fast changing and highly
demanding markets, the technological interrelatedness between firms from different
technological sectors and the communication between them appear to be of great importance.
Given the complex and highly demanding techno-socio-economic conditions (Cantwell and
Santangelo, 2005), firms are becoming unable to develop by themselves all the competences
required to stay in competition. This is the main reason why firms are becoming increasingly
dependent on their closely integrated global networks for diversifying their existing
technological base. Thus, technological diversification becomes an important strategic tool for
technological development.

The new techno-socio-economic environment necessitated new corporate strategies (Cantwell

and Santangelo, 2005, p. 176). Under such new conditions, technological development changed
its trajectory from an individual firm-specific development towards a more integrated
technological development. This is what Andersen (1998) described as a shift from intragroup
technological diversification towards intergroup diversification. In this new model of
technological development, general purpose technologies gained great importance (Cantwell and
Santangelo, 2005, p. 176). These technologies (such as the ICT) have gained so much
importance in MNCs because of the actual possibility to find applications in a wider range of
applied technologies. This type of technologies aims to facilitate the innovation potential of firms
through easing the process of finding new combinations within the firm's existing resource base.
More precisely, they serve as a facilitator of new technological combinations of interrelated
technological activities. Under such a constellation, basic research has become crucial for MNCs'
long-term success and existence.

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In this work, I decided to put the focus on M&As as a possible corporate strategy for
restructuring the corporate technological portfolio, because M&As seem to be the most effective
strategic form for achieving rapid transformation in the scale and composition of a firm's
capabilities (Cantwell and Santangelo, 2005, p. 178). In order to restructure their corporate
technological portfolio, firms should focus on more interrelated technologies, either by
narrowing or by broadening their technological capabilities (Cantwell and Santangelo, 2000).

Cantwell and Santangelo (2005) discussed M&As as a strategic tool for technological
diversification in their paper entitled as: "The boundaries of firms in the new economy: M&As as
a strategic tool toward corporate technological diversification". Opposite to the actual
transaction cost perspective of M&As existing in the literature, they proposed a completely new
explanation of it, namely they perceive M&As as a strategic tool for technological development
whereby technological diversification is the most important condition for strengthening
technological capabilities and increasing competitiveness. M&As could be also perceived as a
strategy for a firm to extend its technological boundaries and to move towards more
decentralized organizational forms. Because of the increased importance of basic research and its
high uncertainty and great costs, MNCs decide to employ strategies for technological
development which extend the boundaries of the individual firm. Moving beyond their individual
boundaries, firms extend the range of their technological capabilities by expanding their
knowledge base in a more efficient, faster and costs-saving way. In this sense, we can conclude
that MNCs decide to engage in M&As not purely because of marker-related motives, such as
increasing market power and corporate size, but more because of capability-related issues. Thus,
I underline the innovations-related motives for M&As. If we try to apply Penrose's (1959)
perspective of firm's growth in this M&As context, we can say that by implementing a M&A
strategy the firm can grow through finding new combinations within its existing resource base or
finding new applications for its existing resources.
Under such highly demanding environmental conditions and increasing co-operation between
firms, MNCs are progressively moving towards what is known as multi-technology corporation.
A multi-technology corporation is defined as a corporation whose technological base diversifies
into several areas of technical competence (Granstrand et al., 1997; Patel and Pavitt, 1997;
Cantwell and Santangelo, 2005).

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Using US patent data for the world's largest firms, Cantwell and Santangelo (2005) investigated
the corporate dynamism of post-M&A technological specialization (Cantwell and Santangelo,
2005, p. 195). Implementing econometric and statistical analysis they succeeded to prove that
M&As may improve the innovative capacity of a firm by creating a possibility for the firm to
take advantage of the opportunity to form new combinations of previously disparate
technological capabilities (Cantwell and Santangelo, 2005, p. 179). They also proved that post-
M&A technological restructuring leads to a cumulative and incremental re-composition of the
firm's corporate technological capabilities and its corporate technological portfolio (Cantwell and
Santangelo, 2005, p. 179). In the phase of post-M&A technological restructuring firms tend to
technologically diversify into more general purpose technologies, especially into ICTs (Cantwell
and Santangelo, 2005, p. 180). This explains the increased interest of MNCs for basic research
and basic sciences. Finally, in the science-based industries, they identified two different
industrial models of corporate technological development in the post-M&A phase (Cantwell and
Santangelo, 2005, p. 180). The first model is identified in science-based industries in which
general purpose technologies are developed, while all other science-based industries can be
classified into the second industrial model of technological development (Cantwell and
Santangelo, 2005, p. 195). Whether the direction of technological development in science-based
industries in the phase of post-M&A technological restructuring will follow the first or the
second industrial model depends on the relationship between ICT and the core fields of
development in each of these industries (Cantwell and Santangelo, 2005, p. 180).

Cantwell and Mudambi (2005) examined the effect that an acquisition might have on the
evolution of MNC's foreign-located subsidiaries and on the R&D intensity within these
subsidiaries. They researched the impact that the acquisition strategy may have on each of the
two types of subsidiaries, previously discussed in chapter 3 (competence-creating and
competence-exploiting subsidiaries). This is an important research question since a large quantity
of survey evidence suggests that MNCs' R&D that are located abroad result from acquisitions
(Hakanson, 1981, 1995; Cantwell and Mudambi, 2005, p. 1111 and p. 1114).
They classified the post-acquisition effect on subsidiaries‟ evolution as a MNC group-level
determinant (Cantwell and Mudambi, 2005, p. 1114). The process of post-acquisition
restructuring and integration decides the very existence of foreign-located subsidiaries, their

105
evolution and the R&D-intensity in them. The post-acquisition effect is generally different in
competence-creating and competence-exploiting subsidiaries. The underlying motives for
acquisition are the main determinant of the future of subsidiaries (Cantwell and Mudambi, 2005,
p. 1114). If the motives are mainly financial, the competence-exploiting subsidiaries of the
acquired group are in a much worst position than the competence-exploiting subsidiaries of the
acquiring group. In case of duplication of the newly acquired competence-exploiting
subsidiaries' activities with the activities of the competence-exploiting subsidiaries of the
acquiring group, there is a high possibility that such a duplication will be eliminated to the
detriment of the subsidiaries of the acquired group. In this case, the acquired competence-
exploiting subsidiaries will suffer from massive budget-cuts. Thus, their R&D-intensity will
decrease massively. Considering the fact that the number of competence-exploiting subsidiaries
is significantly higher than the number of competence-creating ones, the finding of Hitt et al.
(1991) that, during a post-acquisition restructuring the R&D intensity within the firm generally
decreases, seems to be quite true. The budget-cuts and the elimination of duplications to the
detriment of the acquired group's competence exploiting subsidiaries might be due to the lack of
influence of their managers in the new head office of the acquiring group (Cantwell and
Mudambi, 2005, p. 1123). This is similar to what Sambharya (1996) found about the managers
of the acquired group, namely that the acquired group's managers are often taken less seriously.
If the motives for the acquisition are not purely financial (for example asset-seeking objectives
and synergy of complementary productive resources (Cantwell and Mudambi, 2005, p. 1115 and
p. 1123)), then the competence-creating subsidiaries of the acquired group are in a better
position. When the acquiring firm has asset-acquiring objectives (Cantwell and Mudambi, 2005,
p. 1115), the contribution of the acquired group's competence-creating subsidiaries in R&D
terms is important to the acquiring group. In this case, these subsidiaries will retain the resources
needed for R&D. Therefore, their R&D intensity may increase or remain at the same level,
depending on the importance of their contribution from the standpoint of the acquiring firm.
By using statistical data and implementing econometric estimations, Cantwell and Mudambi
(2005) succeeded to prove their hypothesis that, in the post-acquisition integration process the
R&D intensity in competence-creating subsidiaries of the acquired group tends to increase, while
the R&D intensity in competence-exploiting subsidiaries tends to decrease (Cantwell and

106
Mudambi, 2005, p. 1115). This is an important finding in the field of M&As in general and in the
effect of M&As on the internationalization of R&D in particular.

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7. Conclusions and critical overview of the Cantwell's model (1989) and the
technological accumulation theory

The theory of technological accumulation is an example of an evolutionary theory (or a dynamic

theory), which examines the international technological competition between MNCs over time.
The theory of technological accumulation understands the technological development and
progress of the firm as a constant and cumulative process which takes place over a longer period
of time. In Cantwell's model (1989) for analyzing the international technological competition
between MNCs which was presented in this work, the accumulation theory is extended to
examine international production of MNCs as well.

Other theories of international trade and investment are more interested in questions concerning
the very existence of MNCs, not with their evolutionary progress. The accumulation theory treats
questions such as what is the reason that some MNCs grow faster than others and why in some
locations the conditions are more favorable to MNCs' growth than in others (Cantwell, 1989, p.
187).
The model introduced previously in this work analyzes the international production at a
mesoeconomic level. Precisely, the international production between MNCs is examined at an
industry level.
Besides the mesoeconomic level, the international production could be analyzed at
macroeconomic and microeconomic level. In accordance with the level at which the international
production is analyzed, the literature distinguishes between four main theories of international
production.

The first theory for analyzing international production is based on the firm's market power. It
explains the internationalization of production as a tool for the firm to lower international
competition, to increase its market power and to create conditions where the establishment of
collusive networks among firms will be easier. Important representatives of the market power
approach are Baran and Sweezy (1966), Newfarmer (1985) and Cowling and Sugden (1987).
The basic theoretical framework of this approach is presented by Hymer (1976) and it is

108
grounded on his understanding of the firm mainly as an agent for market power and collusion
(Cantwell, 1989, p. 189).

The second theory for analyzing international production is based on Coase's theory of the firm.
According to this approach, a firm decides to internationalize its production only to improve
efficiency by entering new markets with favorable conditions for the firm to fulfill the desired
task. Representatives of this theory are Rugman (1980), Buckley and Casson (1976 and 1985),
Casson (1987) Williamson (1975), Teece (1977) and Caves (1982) (Cantwell, 1989, p. 189).

The third group of theories includes macroeconomic approaches, thereby examining important
national and international trends and their influences on the firm. The earlier version of the PCM
(Mark I), introduced by Vernon (1966) and previously discussed in this work, is a typical
macroeconomic approach. Not only Vernon (1966) in his Mark II, but also Hirsch (1967),
Kojima (1978), Ozawa (1982), Dunning (1982), Cantwell and Tolentino (1987), Aliber (1970),
Rugman (1979) and Casson (1982) incorporated macroeconomic approaches in their works to
investigate international trade and investment (Cantwell, 1989, p. 189).

The fourth group of theories analyzes the international production in terms of competition in
international industries. The so called "competitive international industry approaches"
(Cantwell, 1989) compose this group of theoretical frameworks. The theory of technological
accumulation belongs to this group of theories. The latest version of the PCM (Mark II) is
classified in this group as well. Besides the technological accumulation theory (Cantwell, 1989)
and Vernon's (1974) latest version of the PCM (Mark II), under this group we can classify the
work of Graham (1975), Flowers (1976), Knickerbocker (1973), Jenkins (1987), Warren (1980)
(Cantwell, 1989, p. 189).

An alternative analytical framework for examining international production known as "eclectic

paradigm" and developed by Dunning (1977, 1981 and 1988b) exists in the literature as well. It
incorporates elements of all previously outlined groups of approaches, thereby is classified in a
separate, fifth group of theoretical frameworks.

109
The main difference between all five groups of approaches lies mainly in their understanding of
the driving force for internationalization of production (Cantwell, 1989, p. 206). As defined
above, the first group of theories based on the market power approach perceives the
internationalization of production only as a tool for a firm to increase its market power and its
market shares. The internationalization approach understands the internationalization of
production simply as a process to increase firm's efficiency. According to this approach, the
principle motivator either to expand or to tighten international production are the costs. If the
costs of operating in particular market are higher than the costs of coordinating the transactions
from abroad, then the firm will decide to tighten its international production. If it is the other way
around, the firm will decide to expand its international production. The main driving force for
internationalization of production according to the macroeconomic approach is the
developmental position of countries and their firms (Cantwell, 1989, p. 206). If the
developmental position of a particular country is favorable to the firm, thereby offering the firm
a possibility for further technological development and/or technological diversification, the firm
will decide to expand its production in that country and vice versa. According to the
technological accumulation approach, the principle driving force for internationalization of
production is the potential of a particular country or location for technological development
and/or technological diversification.

Competitive international industry approaches

One of the crucial differences of the competitive international industry approaches compared to
the other approaches is their understanding of the influence of international production on
international competition and firm's growth. The theory of technological accumulation belongs
to this group of approaches. According to the accumulation theory, the prior technological
achievements and the accumulated technological experience of a firm determine the process of
internationalization of production in such a way, that the higher the degree of technological
experience of a firm, the faster is the process of internationalization. In this sense, the
internationalization in production, similarly to technological development, is a cumulative
process. Furthermore, the internationalization of production influences the international
technological competition. The competitive international industry approaches hold the belief that

110
the growth of international production positively influences the international competition
between firms.

The degree of technological development of a firm and the degree of its accumulated
technological experience define the so called "ownership advantages" (Cantwell, 1989) of the
firm. The stronger the ownership advantages of a firm, the lower are the production costs per unit
and the higher is the firm's profitability (Cantwell, 1989, p. 207). Thus, the ownership
advantages affect the firm's unit costs, its profit margins and its market shares. The lower the unit
costs of a firm, the faster is its domestic and international growth. Overall, the ownership
advantages improve the position of the firm in the industry, relative to the position of other firms
in the same industry.

One of the two main characteristics of the accumulation theory, which distinguish it from the
other theories, is its consideration of the importance of the firm's ownership advantages in the
process of internationalization of production and their influence on international competition.
The ownership advantages are firm-specific, because each firm follows a different path of
technological development. They are essential for the firm's long-term existence and success,
thereby affecting many aspects of the firm. Most importantly, the ownership advantages affect
the process of internationalization of production and the international growth of the firm. The
stronger these advantages, the faster is the process of internationalization and the faster is the
international growth of the firm.

The firm's ownership advantages positively affect not only the international production of a firm,
but also the expansion of domestic production. However, for a firm with weak or without
ownership advantages, it is easier to survive in domestic market than in international, because of
the possibility to enjoy for example the support of domestic government and the support of its
loyal domestic customers (Cantwell, 1989, p. 208). A firm with weak or without ownership
advantages is unable to survive in the international market in the long-run. Thus, the need of
these types of advantages applies for both national and international firms, but it is essential for
MNCs.

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The firm's ownership advantages affect the competitiveness of a firm positively. There is a high
risk for a firm with weak ownership advantages to be driven out of domestic and international
competition in a very short time or to be overtaken by some other firm with strong ownership
advantages and a strong position in both markets. Another very important aspect of the
ownership advantages is that they affect the firm's innovation potential and the possibility for
technology creation within the firm. The stronger the ownership advantages, the higher is the
firm's innovation potential, the higher is the possibility for technology creation.

Once a MNC with strong ownership advantages has established its internationally integrated
networks, it can gain some additional advantages from the location in which it has sited the
production facilities, the research and development units. Usually, MNCs locate their R&D units
in international centers of excellence, which not only helps the MNC to gain additional
advantages from the local knowledge flow, but the MNC's research units located there help the
location to improve its technological experience and its international reputation. Besides the
consideration of the ownership advantages as an important factor for the firm's growth, another
characteristic of the theory of technological accumulation is its allowance for interaction between
the firm's ownership advantages and the location advantages (Cantwell, 1989, p. 212). When
locating R&D units in international centers of excellence, the MNC improves its own
competitiveness by gaining additional advantages from the local knowledge flow and
technological development, however, it also helps the location with its firm-specific
technological experience by increasing the competitiveness and attractiveness. Thus, these two
types of advantages are highly dependent on each other and can't be analyzed separately.

Major contribution of Cantwell's model (1989)

As already discussed, Cantwell's model for analyzing the evolution of international technological
competition between the major American, European and latter Japanese MNCs is based on the
technological accumulation theory. The first major contribution of this model is its finding that
the success of the response of European firms to the so called "American challenge" was largely
dependent on their underlying technological capabilities. Only those European firms with strong
technological capabilities were able to expand internationally and create multinational networks.

112
The European firms with weak technological capabilities were driven out of international
markets or overtaken by other, technologically stronger European or American firms.

As we saw from the previous chapters in this work, the expansion of American MNCs in Europe
in the 1950s and the 1960s helped European firms to recover from the after-war period, by
motivating them to restructure their organizations and to start to innovate in those industrial
sectors in which they were traditionally technologically strong. By analyzing the international
technological competition between the world's largest MNCs from the 1950s up to the late
1980s, Cantwell has practically shown what the accumulation theory theoretically states, namely
that the technological development of firms is a continuous and cumulative process which takes
place over a longer period of time.

The second very important contribution of Cantwell's model is that it shows that intra-industry
production tends to increase between countries in which firms are technologically advanced in
certain industrial sectors. Therefore, the results from the analysis have shown that intra-industry
production has grown, for example, between countries such as Germany and the USA and
between the USA and the UK in those industrial sectors in which firms from both countries in
question were technologically strong.

Major limitations of Cantwell's model (1989) and of the theory of technological accumulation

Cantwell's model (1989) suffers from several major limitations. First, it is assumed that all
industries are following the trend towards internationalization and globalization, which simply
does not hold for all industries. This is too simplified of an assumption. When extending the
model to examine other industries than the industries considered in this analysis, it should be
taken into consideration that many of them are not following this trend and are still successful
and capable of surviving.
Grocery retailing is a typical example of a business for which the rules of globalization do not
apply. This type of business is mostly dominated by local players (Corstjens and Lal, 2012).
Statistically, when expanding globally, grocery retailing businesses have failed as often as they
have succeeded (Corstjens and Lal, 2012). This is a business which mainly relies on local

113
customers' loyalty and local tastes for food. International R&D and global knowledge flow are
irrelevant in this case. Therefore, the underlying reasons for internationalizing a grocery retailing
business are more of a financial nature. There are other businesses as well for which the
technology creation and innovation are irrelevant and therefore, the accumulation theory cannot
be used to analyze them. In this sense, I allow myself to conclude that the theory of technological
accumulation, in general, and Cantwell's model, in particular, are applicable only to large
manufacturing firms.

Second, when extending the model to analyze international trade and production between MNCs
from other European countries as well, it must be emphasized that the industry classification
(𝑖 = 1,2,3) differs among different European countries. This classification depends upon the
technological strengths and ownership advantages of firms from a particular country and these
two parameters vary among firms from different European countries, as well as between firms
from Europe and the US. The same holds if we try to extend the analysis and include some
developing country in the examination as well. The process of technological accumulation
differs between developed and developing countries. Many developing countries do not improve
their performance and innovation rates through technological accumulation, but through
imitation or adaptation of the technologies created in the developed countries. Therefore, Bell
and Pavitt (1993) claim that activities such as technology creation and initial commercialization
of technological innovations are concentrated mainly in developed countries, while developing
countries are only involved in the process of international diffusion of technological innovations
(Bell and Pavitt, 1993, p. 160). Namely, firms from developing countries simply acquire and
adapt the technology created in developed countries (Bell and Pavitt, 1993, p. 160). However,
during the process of technology adaptation the firms are usually required to conduct some
changes and/or improvements of the acquired technology in order to use it appropriately and
effectively. These small changes conducted by individual firms can be classified as incremental
innovations which are usually subjective, namely are useful only for the specific-firm or for a
small group of firms using the same technology. Nevertheless, even those small changes
accelerate the process of technological development and are important for the technological
progress in the industry. In this sense, we can conclude that the so called "adopters" can have a
creative role in the overall process of technological change as well.

114
With respect to this critique, am I allowed to say that the theory of technological accumulation is
accurate only for developed countries?

The process of technological accumulation differs not only between countries, but also between
firms and industries. Bell and Pavitt (1993) identified five categories of firms, which follow
different paths of technological accumulation and technical change, in order to show that the
paths and patterns of technological accumulation differ between firms and industries. They found
the following five different firms: supplier-dominated firms, scale-intensive firms, information-
intensive firms, science-based firms and specialized supplier firms (Bell and Pavitt, 1993, pp.
178-182). Each of the five categories of firms follows a different path of technological
accumulation (Bell and Pavitt, 1993, p. 178).

The supplier-dominated firms are usually active in agriculture, housing, private services and
traditional manufacturing. Regarding the size, they are generally small firms and their customers
are price-sensitive. Their technological activities are primarily focused in reducing production
costs. In these firms the technological accumulation is mainly generated through improvements
and modifications in production methods and production factors, and sometimes the
improvements and the modifications might be related to product design (Bell and Pavitt, 1993, p.
178 and p. 180). The principal strategy of the supplier-dominated firms is to use the technologies
which are created elsewhere in order to reinforce their own competitive advantages (Bell and
Pavitt, 1993, p. 181).

The scale-intensive firms are mainly active in the production of bulk materials (steel, glass) and
consumer durables, in automotive industry and in civil engineering. Their size is large and their
customer base is mixed (price-sensitive and price-insensitive customers). These firms generate
technological accumulation by designing, building and operating complex production systems
and/or complex products (Bell and Pavitt, 1993, p. 178 and p. 180). Their strategies are focused
on incremental integration of new technologies in complex systems, improvements and diffusion
of best practices and exploitation of process technology advantages (Bell and Pavitt, 1993, p.
181).

115
Information-intensive firms are operating in the sectors of finance, retailing, travel and
publishing. Their size is large and their customer base is mixed. The information-intensive firms
have gained special importance after the emergence of ICT and the possibility to store, process
and transfer enormous number of information digitally. Technological accumulation in these
firms is generated by designing, building, operating and improving complex systems for storage,
processing and transferring information (Bell and Pavitt, 1993, p. 179 and p. 180). These firms'
strategies are directed to develop related products and to design and operate complex
information-processing systems (Bell and Pavitt, 1993, p. 181).

Science-based firms are mainly active in electrical-electronics and chemicals. They are large
firms with mixed customer base. In these firms, corporate R&D has a crucial role in the process
of technological accumulation. Therefore, they are heavily dependent on academic or basic
research. Science-based firms usually introduce radical and objective innovations, and open new
markets through widening the spectrum of potential applications for their innovations (Bell and
Pavitt, 1993, p. 179 and p. 180). Their strategies are mainly aimed at developing related
products, exploiting basic science, obtaining complementary assets as well as reconfiguring
divisional responsibilities (Bell and Pavitt, 1993, p. 181).

Specialized suppler firms are operating in the fields of capital goods, instruments and software.
They are usually small firms with performance-sensitive customers. They focus their
technological activities mainly on improving product performances in order to satisfy their
advanced customers. Technological accumulation in these firms takes place through design,
building and operational use of complex systems of production in the form of machinery,
components, software and instruments (Bell and Pavitt, 1993, p. 179 and p. 180). The main
strategic tasks of the specialized supplier firms are to observe and respond to the needs of their
advanced and demanding customers and to integrate new technologies in their products in order
to improve the products' performances (Bell and Pavitt, 1993, p. 181).

Third, it is too simplified to assume that in the first industry (𝑖 = 1), where US firms are
technologically stronger than the European firms) European MNCs never establish production
facilities in the US. It is also quite incorrect to conclude that in the second industry (𝑖 = 2),

116
where European firms are technologically stronger than the US firms), the international
production of the US firms completely disappear.

This critique is not directly related to the accumulation theory, but it is moreover about the
negative consequences that the global integration might have on certain countries. Because of the
different level of technological development between developed and developing countries,
MNCs will always choose the developed countries as locations where they can settle their R&D
operations. Therefore, the developing countries will always be in an unfavorable position
compared to the developed countries, because of their weak education systems, poor
infrastructures, unstable political situations, etc. As a result of the asymmetric investments, firms
from the developing countries might never get the chance to improve their positions and to
become technological leaders. Furthermore, there is a high possibility that they can never create
the advanced knowledge to initiate technological change and will always stay in a position in
which innovation creation will be inferior.

This further critique on the global integration is related to the enormous power (political, social,
financial) that big MNCs are enjoying nowadays. With such a power and such close integration,
they are becoming very hard to control. Moreover, they are able to dictate the political situation
in many countries in accordance with their needs. However, the governments are the ones who
are responsible to find a balance between the interests of the individuals and the interests of the
corporations. They are obligated to prioritize the individuals and their rights over the needs of the
corporations. Among other things, they are also responsible to protect the environment from
pollution and with legal policies to support the firms in innovations that will make the production
processes more environmentally friendly. If we consider the government as a corrector of a
possible market failure, then its policy intervention can be justified and to some extent
indispensable. Government policies should control the direction of technological change in a
way that would be beneficial for all participants in the market.

117
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http://www.ctheory.net/articles.aspx?id=648 [access 24.04.2017].

129
Appendix

Table 1. The share of US patents of the world's largest firms attributable to research in foreign
locations (outside the home country of the parent company), organized by the nationality of
parent firms, 1969-1995 (%)

1969-1972 1973-1977 1978-1982 1983-1986 1987-1990 1991-1995

USA 4.96 5.89 6.40 7.53 7.91 8.62

Germany 12.77 11.05 12.07 14.47 17.05 20.72

UK 43.08 41.24 40.47 47.09 50.42 55.79

Italy 13.39 16.03 13.85 12.59 11.14 16.47

France 8.16 7.74 7.17 9.19 18.17 33.17

Japan 2.63 1.88 1.22 1.26 0.92 1.08

Netherlands 50.40 47.37 47.65 53.99 53.96 55.69

Belgium 50.00 54.24 56.27 71.21 56.04 67.25

Switzerland 44.36 43.63 43.78 41.59 42.99 52.47

Sweden 17.82 19.90 26.20 28.94 30.60 42.42

Canada 41.19 39.30 39.49 35.82 40.12 43.96

Total 10.04 10.53 10.50 10.95 11.28 11.27

Total 10.51 11.74 12.31 13.97 15.71 16.48

(excl. Japan)

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Source: Cantwell and Harding, 1998, p. 101

*Note: The reason for the moderate increase in the overall internationalization of technological
activity during the period from 1969 to 1995 is due to "compositional shifts in the make-up of
total patenting across firms and the rising share in total corporate patenting of Japanese and
Korean firms, which as yet are on average little internationalized in their technological
development, and their greater contribution to the total has therefore acted to pull down the
global average foreign share" (Cantwell and Harding, 1998, p. 102).

Table 2. The share of US patents of the largest German firms attributable to research outside
Germany, organized by the industrial group of parent firms, 1969-1995 (%)

1969-1972 1973-1977 1978-1982 1983-1986 1987-1990 1991-1995

Chemicals 19.71 18.22 18.31 18.96 22.05 24.95

Pharmaceuticals 10.45 9.71 14.71 17.81 19.32 27.76

Metals 12.26 5.49 6.48 7.28 7.70 9.17

Electrical 3.51 4.47 7.34 15.74 18.74 28.02

equipment

Motor vehicles 3.91 3.73 3.39 12.26 16.53 8.03

Total 12.77 11.05 12.07 14.47 17.05 20.72

Source: Cantwell and Harding, 1998, p. 102

131
Table 3. US patents of the largest non-German firms attributable to research in Germany, as a
proportion of non-German firms patenting due to research in all foreign locations, organized by
the industrial group of parent firms, 1969-1995 (%)

1969-1972 1973-1977 1978-1982 1983-1986 1987-1990 1991-1995

Chemicals 9.29 13.77 16.57 18.97 15.55 14.48

Pharmaceuticals 5.11 9.86 9.31 9.09 7.91 7.09

Metals 15.95 22.48 25.00 27.57 29.69 24.13

Electrical 22.97 25.13 29.21 33.41 28.94 22.15

equipment

Motor vehicles 25.26 29.12 26.50 31.70 30.99 23.38

Total 13.63 16.50 18.30 21.11 19.30 15.39

Source: Cantwell and Harding, 1998, p. 105

Table 4. Patenting activity attributable to European-located foreign-owned research, across host

countries, 1969-1995 (%)

Total patents from foreign-owned facilitates

European host country 1969- 1973- 1978- 1983- 1987- 1991-

1972 1977 1982 1986 1990 1995

Germany 27.03 30.23 31.81 35.63 33.47 28.87

UK 29.34 26.78 25.03 22.63 21.00 21.15

Italy 4.34 4.94 4.37 4.50 5.97 6.46

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France 13.21 14.95 14.52 14.21 14.92 15.60

Rest of Europe 26.08 23.10 24.27 23.03 24.64 27.92

Total Europe 100.00 100.00 100.00 100.00 100.00 100.00

Source: Cantwell and Piscitello, 2000, p. 23

(Original source: US patent database developed by John Cantwell at the University of Reading,
with the assistance of the US Patent and Trademark Office)

Table 5. US patents from corporate research located in each host country due to foreign-owned
firms, by the industrial group of the parent company, 1969-1995 (%)

Sector Germany UK Italy France Europe World

Food, Drink 99.64 15.45 100.00 55.25 44.55 22.24

and Tobacco

Chemicals 6.49 29.55 31.97 33.31 15.57 14.21

Pharmaceuticals 13.91 50.34 100.00 19.34 27.37 16.16

Metals 9.87 29.62 63.87 11.20 13.25 10.32

Mechanical 25.84 47.16 100.00 52.00 26.93 12.47

engineering

Electrical 30.01 43.48 91.32 27.85 30.48 9.74

equipment

Office 86.34 76.71 21.87 56.76 67.36 10.34

equipment

133
Motor vehicles 8.35 13.18 7.67 21.83 12.28 5.68

Aircraft and 15.18 10.54 100.00 2.85 13.00 2.39

Aerospace

Coal and 80.47 19.43 12.07 10.31 39.25 15.08

Petroleum
products

Professional 29.90 97.79 100.00 100.00 45.62 3.37

instruments

Other 56.64 26.71 26.13 30.66 35.16 10.39

manufacturing

Total 16.87 33.73 36.60 25.86 23.97 10.81

Source: Cantwell and Piscitello, 2000, p. 23

(Original source: US patent database developed by John Cantwell at the University of Reading,
with the assistance of the US Patent and Trademark Office)

Table 6. Share of US patents of the largest Japanese-owned firms attributable to research outside
Japan, classified by technological activity, 1969-1995 (%)

Sector 1969- 1973- 1978- 1983- 1987- 1991-

1972 1977 1982 1986 1990 1995

Chemicals 1.67 1.29 1.74 1.87 0.84 1.02

Inorganic chemicals 5.45 0.57 0.00 1.33 0.00 0.00

Agricultural chemicals 0.00 0.00 0.00 2.82 1.04 1.10

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 Chemical processes 2.53 2.24 1.71 1.50 0.95 0.75

Bleaching and dyeing processes 0.00 0.00 0.00 0.00 0.00 11.63

Other organic chemicals 0.83 0.63 2.01 1.14 0.74 1.36

Pharmaceuticals 0.47 0.47 0.52 1.29 1.23 2.48

Mechanical engineering 4.24 1.71 1.00 0.95 0.83 0.82

Chemical and allied equipment 10.19 3.23 1.34 1.13 0.64 0.94

Metal working equipment 3.95 1.17 0.25 0.60 1.03 1.22

Assembly equipment 4.98 1.68 2.30 1.12 1.57 0.47

Mining equipment 0.00 10.00 14.29 0.00 0.00 14.29

Specialized industrial equipment 0.83 1.74 1.20 1.44 1.02 1.67

General industrial equipment 1.56 0.50 0.20 0.71 0.48 0.32

Electrical equipment 1.65 2.04 1.28 1.21 0.76 1.14

Telecommunications 1.43 2.37 1.80 1.72 0.65 1.45

Image and sound equipment 1.71 4.42 1.93 2.15 1.59 2.18

Electrical systems 2.01 1.04 0.87 0.89 0.57 0.77

General electrical equipment 1.80 1.95 1.13 0.40 0.33 0.58

Semiconductors 0.44 0.86 0.65 1.58 0.55 0.62

Office equipment 2.34 5.16 1.66 1.74 1.76 1.52

135
Motor vehicles 0.73 0.70 0.68 1.21 0.50 1.01

Aircraft 0.00 0.00 0.00 0.00 0.00 7.69

Professional and scientific instruments 2.07 1.60 1.17 1.31 0.81 0.58

Photographic instruments 0.81 2.15 0.75 1.36 0.31 0.06

Other instruments 2.74 1.30 1.41 1.30 1.01 0.81

Total 2.62 1.87 1.22 1.26 0.92 1.08

Source: Cantwell and Zhang, 2006, p. 258

(Original source: US patent database developed by John Cantwell, with cooperation of the US
patent and Trademark Office)

List of the 27 industries included in the examination (according to Cantwell, 1989, p. 26)

1. Food products
2. Chemicals
3. Synthetic resins
4. Agricultural chemicals
5. Cleaning agents
6. Paints
7. Pharmaceuticals
8. Ferrous metals
9. Non-ferrous metals
10. Fabricated metal products
11. Mechanical engineering
12. Agricultural machinery
13. Construction equipment
14. Industrial engines

136
 15. Electrical equipment
16. Transmission equipment
17. Lighting and wiring
18. Radio and TV receivers
19. Motor vehicles
20. Shipbuilding
21. Transportation equipment
22. Textiles and clothing
23. Rubber products
24. Non-metallic mineral products
25. Coal and petroleum products
26. Professional instruments
27. Other manufacturing

Source: Cantwell, 1989, p. 26

137
Curriculum Vitae

Personal Information

Name: Olgica Mocan

Date of Birth: 25.09.1989

Nationality: Macedonian and Bulgarian

Address: Hacquetova Ulica 6, 1000 Ljubljana, Slovenia

Email: olgica_89@hotmail.com

Telephone Number: 00386 70 164 603

Education

2014 - till present

University of Vienna

Master Studies, Business Administration

Core Subject Combinations: Financial Services and

Innovation and Technology Management

Master's Thesis Title: "Multinational corporations (MNCs)

through the prism of technological innovation"

2010 - 2014

University of Vienna

Bachelor Studies, Business Administration

Bachelor's Thesis Title: "Unemployment in

the Republic of Macedonia"

138
2009 - 2010

German course at the University Preparation Program of

the Vienna Universities (VWL)

2005 - 2008

Medical High School "Dr. Pance Karagozov",

Skopje, Macedonia

Additional Education

2000 - 2005

Music School "Ilija Nikolovski Luj",

Skopje, Macedonia

Instrument: Flute

Languages

Macedonian

German

English

Slovenian

Serbian

Croatian

Bulgarian

139
Interests

Literature

Music

Fine Art

History

Geopolitic

Hobbies

Fitness

Reading

Traveling

140