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5 Industrial R&D Facilities Overseas Locating R&D facilities abroad is the most demanding way for companies to respond to the growing globalization of technology in terms of the commit- ment of resources and the management and technical challenges. However, growing numbers of Japanese and U.S. firms are moving to extend their tech- nology reach by building R&D centers in each other's home territory. When facilities are established abroad, the R&D process can be linked more closely both to potential markets and to foreign-based technical personnel and know how. Compared to their Japanese counterparts, U.S. multinationals have had longer and more extensive experience in developing and managing offshore R&D facilities, particularly in Europe. However, until the last decade, in which there has been a rapid increase in R&D investment in Japan, very few U.S. companies established a presence there. A study being conducted for the National Science Foundation has found that over 200 U.S. firms are reputed to be developing R&D capability in Japan, but further examination has revealed that only about 40 are conducting actual laboratory operations. A total of more than $2 billion in R&D direct investment is estimated to have occurred already.43 Japan External Trade Organization (METRO) figures show more than 100 Japanese firms with R&D capacity in the United States, and the number is growing steadily.44 By the close of this decade, about one- third of lapan's manufacturing companies expect to maintain R&D facilities overseas. Despite the disparity in patterns of industrial R&D in the two countries, 28

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29 Japanese and U.S. firms face similar management challenges in operating effective R&D facilities in each other's countries. The most difficult is attracting and keeping good technical people. Japanese firms must face the prospect of hiring qualified American researchers only to lose them to anoth- er firm offering better compensation and more challenging research assign- ments. U.S. firms must overcome major hurdles to effectively recruit in the highly structured Japanese technical labor market and may find that their lab- oratory becomes a prospective talent pool for other foreign companies. Japanese researchers working for U.S. firms also are likely to mimic their American counterparts in their willingness to leave one foreign employer for another that offers a higher salary and more enticing research assignments. Another problem jointly faced by both countries is how to evaluate the success of their offshore R&D facilities and, related to this, how to determine the appropriate source and level of financial support. How does the parent company decide whether the offshore laboratory is a success? How much of its funding should be contributed by the head office and how much by the local subsidiary (if it is a joint venture), especially when the research goals of the R&D center shift and expand over time? A third set of problems involves the development of effective communica- tions between the offshore facility and the home company. Fostering effec- tive linkages means moving people and determining who, how many, and in what direction. The language barrier clearly is a factor that leads many U.S. firms to bring Japanese researchers to the United States rather than to send U.S. researchers to Japan. Financial issues may be even more important, par- ticularly in locating facilities in Japan. Costs for maintaining an American researcher in Japan easily can amount to $450,000 for the first year, and increase steadily thereafter, whereas the costs for keeping a Japanese researcher in the U.S. are closer to $150,000 for 1 year. The experiences of two major multinationals one American and one Japanese provide some insight into how these challenges are being handled in two very different corporate contexts. Eastman Kodak had several reasons for establishing R&D facilities in Japan; among them were the need to local- ize products for the Japanese market, particularly in its business imaging sys- tems, and the need to meet and monitor its key global competitor in its home market. Also, Japan's growing preeminence in the electronic technologies that are increasingly shaping imaging technology provided incentive. From the perspective of Eastman Kodak, locating an R&D facility in Japan was a demonstration of a commitment to the Japanese market, especially to better develop products suited to the needs of the Japanese customer. With time, however, the R&D facility is expected to be a significant asset in accessing Japanese technology.

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30 The official opening of Eastman Kodak's new Japan R&D center in Yokohama in January 1989 capped 5 years of intense effort to establish the organizational base for the new facility. With a long-term recruitment strate- gy in mind, Kodak began to cultivate close relationships with Japanese uni- versities in 1985 through a variety of means: a Japan lecture series in Rochester that brought leading Japanese professors to the corporate labs, sponsorship of lectures by eminent U.S. researchers at Japanese university campuses, an annual research symposium for university faculty, and a fellow- ship competition for Japanese Masters degree candidates in selected fields. In addition to recruiting midcareer researchers, Kodak made use of employ- ment consultants and placed advertisements in the growing number of employment publications aimed at engineers and scientists in Japan. The midcareer recruits, in tom, worked to develop relationships with universities, particularly those from which they had graduated. The careful cultivation of these recruitment networks resulted in a research staff of over 40 researchers from some of Japan's leading universities and laid the groundwork for long- term strength in recruitment of new graduates-often the most difficult mar- ket for foreign firms. The focus of the center is on development activities, with some involve- ment in basic research in a few targeted areas. Some of the development pro- jects are targeted at the Japanese market, whereas others have a more global focus. Funding therefore is partly from the corporate research budget and partly from the global business units headquartered in the United States. Because the projects are closely tied both financially and technically to the U.S. research organization, communication between the new laboratory and the home office is critically important. Laboratory personnel primarily are Japanese, supplemented by a few researchers on assignment from the United States. The laboratory has found it useful to provide training in crosscultural communication for its lap anese and domestic headquarters R&D staff. Linkages are enhanced further by sending some Japanese researchers on long-term assignments (1 to 3 years) to the United States. These assignment enable the Japanese researchers both to build their technical skills and to establish ties with the U.S. research organization. Despite its short history, the Japan R&D Center can already boast of sever- al major achievements that are not limited to product development. Because Kodak now has respected senior technical people in its Japan organization, it has found it easier to participate in standards setting activities in Japan and now has its own employees sitting on eight standards setting committees. NEC has been expanding its technical capacity rapidly in the United States, particularly in software development. Much of this effort has been directed toward localizing products whose basic design and development are

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31 centered in Japan. To attract top engineers and scientists who could provide the knowledge base for developing global-oriented products, NEC estab- lished a new basic research center in Princeton, New Jersey, called NEC Research Institute, Inc. Three eminent researchers, including two from indus- try and one from a leading university, were selected to build the research team, which eventually grew to about 40 total. The research institute's mission is basic science in computers and com~nu- nication; thus, the evaluation criteria for the new facility focus on excellence of basic research: conference papers that receive favorable attention and con- cepts and ideas that other researchers can respect and use. The facility is a separate company that receives support from the corporate R&D budget. These funds can be expanded by engaging in joint research projects with other industrial and academic laboratories. The research agenda is set by a five member board of research directors at the Princeton laboratory, as opposed to at Tokyo headquarters. Communication between the Princeton institute and the Japanese research organization takes place primarily at the top levels of the facility, although in the future NEC plans to encourage the exchange of junior researchers between Princeton and NEC's Japanese laboratories. Eastman Kodak and NEC illustrate parallel examples of efforts to move parts of the R&D process offshore and to locations distant from corporate headquarters and the central laboratories. These examples do not exhaust the range of mechanisms corporations can use in internationalizing their R&D efforts. In the case of Nippon Otis, a majority-owned subsidiary of United Technology's Otis Elevator, specific R&D functions are performed in Japan that complement Otis's global technology development system. Nippon Otis has the lead in some aspects of elevator and escalator development within a globally rationalized R&D establishment. However, United Technologies does not have a formal R&D organization in Japan. For companies engaged in technology transfer offshore, the rotation of R&D personnel between the central laboratories and the offshore plants is an essential element of techno- logical cooperation.