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Safe nests in global nets: Internationalization and appropriability of R&D in wireless telecom

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Abstract

This paper documents the case of the wireless telecom industry to bring new empirical evidence to the debate on the internationalization of research and development (R&D) activities. US patent statistics on the four industry leaders – Ericsson, Motorola, Nokia and Qualcomm – illustrate the growing trend of the internationalization of R&D over the 1990s, yet we show that the most critical R&D projects related to the development of wireless standards remain homebound. The paper then leverages qualitative data collected through interviews with informed managers to provide a fresh interpretation for the homeboundedness of critical industrial R&D: the stickiness of core R&D projects to domestic locations is related not only to organizational inertia and the unripe maturation of subsidiaries, as suggested by prior literature, but particularly to the headquarters centralization of intellectual property (IP) management, which offers a high level of appropriability of R&D results. The unequal distribution of appropriability across corporate R&D networks is at the base of the formation of safe nests, domestic R&D centers that are sheltered from the forces of globalization because they offer a desirable setting for the exploitation of technologies deriving from a stronger coordination of inventive activities with the management of IP.

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Notes

  1. Appropriability is here defined as the ability to take exclusive possession and extract value from the application of technologies and other intangible assets (Gans & Stern, 2003; Teece, 1986).

  2. IEEE Transactions on Engineering Management, 1996, Vol. 43, no. 1.

  3. For a recent review of R&D globalization in various industries, see Macher and Mowery (2008).

  4. Since 1993, a series of OECD reports started inferring the policy implication of a global interconnection of technology development activities and the need for countries to create the necessary conditions to attract this form of investment.

  5. A well-known problem for standard-setting committees is that participants could “act strategically,” timing the disclosure of essential IP in order to create lock-in situations for the partners. Both partners of the standardization committee and third parties, which hold supposedly essential IPRs, might fail or voluntarily conceal the potential infringement of the standards of technologies that they have already patented, or which they are currently developing and are going to be covered by patents. This type of behavior attempts to maximize future licensing revenues, but threatens the future success of the standard. For a variety of reasons not discussed here (see Bekkers, 2001), in the case of ETSI wireless standards, late disclosure or concealment of a potentially essential patent was severely policed, and during the 1990s did not constitute a problem for the commercial application of standards. We therefore think that it should not constitute a troublesome bias for the empirical analysis discussed in this section.

  6. The Delphion Patent Family database is used for this procedure. A patent family is commonly defined as the bundle of patent documents protecting the same invention in different countries. For the sake of clarity, throughout the rest of the paper, “non-internationally protected” patents assigned to US companies are excluded. By definition these patents have only USPTO documents within their patent family. We found that, in the essential category, all USPTO patents assigned to US companies have at least one European equivalent in the patent family, which is not surprising, given the commercial relevance of these patents on the European market. This means, de facto, that the “international protection” correction just discussed applies exclusively to the control group, described in the next subsection. Also, the fact that a Swedish firm, that is, Ericsson, has the highest number of US patents should not be surprising. According to a survey on MNEs’ patenting behavior, the USA has long been the first foreign country in which companies seek patent protection (Bertin & Wyatt, 1988).

  7. Interviews were not recorded, but notes from the interviews were sent back to the interviewees for comments and amendments. Interviews lasted between 1 and 2 h; one was conducted over the phone, and the others in person. It was possible to interview the top managers of these companies thanks to the mediation of the faculty and researchers taking part in a joint project at the University of California, Berkeley, and ETLA, the Research Institute of the Finnish Economy.

  8. Managers confirmed both the validity of the empirical approach (in particular the strength of the distinction between essential and non-essential IP) and the limitations of the inventive location analysis. The managers stated that the inventors’ addresses on the USPTO documents are good proxies for the countries where the R&D investments leading to those specific inventions were performed. In fact, they stated that confidence in the accuracy of the inventors’ addresses is necessary in particular for USPTO patents, given that the US system grants protection to “the first to invent” and not “the first to file.” In litigation, it is often the case that assignees have to trace back laboratory reports to show the original work of inventors. A mismatch between the declared and actual location of invention can be lethal for the validity of a patent.

  9. Possible variations of names for the same companies were also considered. Dialog constantly checks patents for misspellings and incorrect information.

  10. Results discussed in the empirical section are confirmed using various control group sampling and selection of non-notified patents (medium and large portfolios). Results are available from the authors upon request.

  11. The citation rate of patents by Qualcomm is the highest, and stands out. Qualcomm essential patents received on average 77.27 citations, and its non-essential patents 16.58. Qualitative investigation with industry experts suggests that Qualcomm is developing technologies of a more generic and enabling nature and, as a result, plays the double role of competitor and technology provider (in particular for CDMA and third-generation networks). Generic technologies are likely to receive more citations than more application-specific patents, since their range of application is much broader.

  12. One alternative would be to consider international patents, those that have all their inventors located abroad, and home-country patents, those that have at least one inventor located in the home country. However, this categorization is harder to support conceptually. Empirical results reported in the following sections also hold using this alternative categorization. A second alternative would be to create a separate category for mixed patents. However, this would require dropping a dummy variable, which is of immediate interpretation, and to both introduce a categorical variable and adopt a different empirical model from Patel and Pavitt's (1991).

  13. Very similar shares, in the range of ±3%, were observed using the medium portfolio and large portfolio sampling defined at the beginning of the section. In addition, the trends of R&D internationalization resemble those obtained with the small portfolio.

  14. The lag between the development time of inventions underlying these patents and current events shaping R&D investment of these firms significantly limits the breadth of this study. Managers emphasized the importance of recent strategic changes that cannot yet be recorded in the analysis of the location of inventive activity. There was a general consensus that in a few years the situation might be significantly different, with a lot more inventive activity taking place in peripheral and foreign locations. This was acknowledged as a general trend in the industry, even if the interviewees suggested that the homebound nature of essential R&D of the type that we identified in this paper might not disappear.

  15. This is not surprising, given that on average essential patents tend to receive more citations than control group patents. Out of the total portfolio of 2-year forward citations to essential patents, 75.27% cite an HC patent, whereas out of the same portfolio of citations that cite control group patents, 57.05% cite HC patents. For both patent count and citations, the Pearson χ2 values confirm that it is possible to reject (with 0.01% significance level) the null hypotheses that the homeboundedness of inventive activity locations is similar for essential and control group patents.

  16. This variable design is consistent with the definition of homeboundedness at the country level (HC/IN patents). We analytically checked the location of each R&D lab with respect to the headquarters of the corresponding company. We found that the R&D labs that can be considered part of HQ premises are all located within a 100 km radius.

  17. In fact, if we had used the minimum distance, those patents with both inventors at the headquarters and inventors at distant labs would have been considered as homebound if using the DISTANCE variable.

  18. As we have already discussed, nearly all Qualcomm's R&D was homebound, and thus the non-significance of the coefficient is driven by the lack of a comparison group.

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Acknowledgements

We wish to thank Editor Anand Swaminathan, three anonymous reviewers, Stephen S. Cohen, Kira Fabrizio, Simone Ferriani, Eric J. Iversen, Olli Martikainen, Martin Kenney, David C. Mowery, Christopher Palmberg, Andrea Piccaluga, Philip Shapira, Riccardo Varaldo and Bennet Zelner for valuable comments. The managers of the companies interviewed provided us with generous feedback, and we are grateful that they were able to take time off their work. Finally, Simone Corsi, Roberto Di Minin, Nicola Orsini and Petri Rouvinen contributed with great insights into the data analysis. While we acknowledge these useful inputs, all remaining misconceptions are ours alone. This research was financially supported by the Berkeley Roundtable of the International Economy-ETLA Program (http://www.brie-etla.org), the Fondazione IRI (Rome) and the Dynamo project.

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  1. Institute of Management, Scuola Superiore Sant’Anna, Pisa, Italy

    Alberto Di Minin & Mattia Bianchi

  2. Berkeley Roundtable on the International Economy, University of California, Berkeley, USA

    Alberto Di Minin

  3. Department of Management and Organization, Stockholm School of Economics, Stockholm, Sweden

    Mattia Bianchi

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Accepted by Anand Swaminathan, Area Editor, 18 February 2011. This paper has been with the authors for three revisions.

APPENDIX

APPENDIX

Table A1

Table A1 List of standards commissioned by the ETSI
Full size table

Table A2

Table A2 Interviews conducted
Full size table

Questions Asked: Interview Structure

Conversations with managers were divided into two parts. During the first half of the interview, managers were presented with the results of the study. Subsequently, discussion was guided through a set of open questions. Open questions were presented according to the following sequence:

  • How “essential” are the essential patents?

  • How “non-essential” are the non-essential patents?

  • Why are essential patents homebound?

  • What can we say about the internationalization of R&D if we look at patents?

  • What is the firm's distribution of R&D Labs?

  • In what way is your firm's R&D location model different from that of other patents?

  • Please comment on the phenomenon of upstream standard-setting and downstream technology integration.

  • What are the IP management challenges?

  • What's next in terms of standards and emerging countries?

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Di Minin, A., Bianchi, M. Safe nests in global nets: Internationalization and appropriability of R&D in wireless telecom. J Int Bus Stud 42, 910–934 (2011). https://doi.org/10.1057/jibs.2011.16

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