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Literature, Principle and the basics of Network Value Creation in R&D:The relationship with economy - Article Submission - SEO Scores

Literature, Principle and the basics of Network Value Creation in R&D:The relationship with economy

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Literature, Principle and the basics of Network Value Creation in R&D:
The relationship with economy
Nader Ale Ebrahim1, Shamsuddin Ahmed and Zahari Taha,
Department of Engineering Design and Manufacture,
Faculty of Engineering, University of Malaya, Kuala Lumpur, Malaysia
1Phone: ë17-3942458, Fax: ë3-7967-5330, Email:
The internationalization of R&D network is a recent phenomenon. In this knowledgebased
environment, the driving forces for this phenomenon are digitization, the internet, and
high-speed data networks that are keys to address many of the operational issues from design to
logistics and distribution. From the other direction to surviving in the highly competitive
industry, requires strategies to collaborate with or compete with suitable firms within a network
in the New Product Development process. The growing internationalization of R&D activities
challenges multinational corporations (MNCs) to formulate technology strategies and manage
increasingly diffuse and diverse networks of R&D laboratories and alliances in the context of
disparate national institutions. Research and development functions are fundamental drivers of
value creation in technology-based enterprises. Successful R&D is a function of invention and
R&D network. This paper studies R&D network issues from the perspective of their impact on
value creation. It is observed that most of the research activities encourage and support R&D
networks and influences in economic development.
The mega trends like globalization and high demand fluctuation force companies and
supply chains to innovate new business models to gain and maintain competitive position.
Networking, outsourcing, and information and communication technology are considered as
general tools and means to respond to these challenges (Salmela and Lukka, 2004). As a
consequence multinational enterprises have increased their research and development (R&D)
investment in foreign countries (Reger, 2004). While the outsourcing activities of the MNCs was
highly concentrated in a handful of economies by the beginning of the global R&D wave, the
offshore outsourced R&D activities have now been more geographically dispersed and this
indeed reveals the increasing value of networking and networks. These multiple sites encourage
the development of more ideas, due to the varied international backgrounds in global networks
(Richtne´r and Rognes, 2008) taking into account that under the increasingly competitive global
market, a firm simply cannot survive without new products developed under network
cooperation, especially for high-tech industries (Chen et al, 2008a).
As another important aspects shedding light on the importance of networking it can be
mentioned that since the maximum profit of the network can be obtained by sharing the risk and
the benefit with participants, it is important for corporations to collaborate in networks in order
to develop capacity, capability and competence to perform new product development and
become suppliers of complete systems (Chen et al, 2008b). The main advantage of implementing
a geographically dispersed R&D network structure is the ability to tap selectively into center of
excellence (Criscuolo, 2005). In addition to this such learning networks can generate localized
social capital and endogenous growth dynamics (Conceicao and Heitor, 2007).
From a different perspective virtual teams are formed to facilitate transnational
innovation processes (Gassmann, and von Zedtwitz, M., 2003) and innovation has a positive
impact on corporate performance (Kafouros et al 2008) also a virtual network structure is used to
improve communication and coordination, and encourage the mutual sharing of interorganizational
resources and competencies (Chen et al, 2008b).To be more exact virtual teams
are useful for projects that require cross-functional or cross boundary skilled inputs and the key
to their value creation is to have a defined strategy in place to overcome the issues highlighted,
especially the time zones and cultural issues .While communication could be seen as a traditional
team issue, the problem is magnified by distance, cultural diversity and language or accent
difficulties. For migration or similar large-scale projects, personal project management
competency, appropriate use of technology and networking ability, willingness for selfmanagement,
cultural and interpersonal awareness is fundamentals of a successful virtual team
(Lee-Kelley and Sankey, 2008).
In an innovation network resembling a “traditional” organization, the innovation process
is more restricted by location and time. In other words, the innovation process mostly takes place
within the framework of physical offices and working hours. In virtual organizations,
individuals’ work is not restricted by time and place, and communication is strongly facilitated
by IT. Such a product development environment allows a greater degree of freedom to
individuals involved with the development project (Ojasalo, 2008). Hence multinational
companies (MNC) are more likely to become tightly integrated into global R&D network than
smaller unit (Boehe, 2007).
(Kafouros et al 2008) found that internationalization enhances a firm’s capacity to
improve performance through innovation. Since efficiency, effectiveness and innovation
management have different and contradictory natures, it is very difficult to achieve an efficient
and innovative network cooperative NPD (Chen et al, 2008a).R&D teams need to access and
retrieve information from as many sources as possible. Many innovation strategists argue that a
centralized network is required in order to protect corporate technology (Kafouros et al 2008).
Network and economic development:
In recent years, information technology and networks have merged to create companies with
characteristics quite different from their production-based counterparts. These include
unprecedented market shares, very high returns on invested capital, and rapid growth. As
important, the market doesn’t always anticipate how the fundamentals of these companies
unfold, leading to investable opportunities. Networks channels, railroads, and highways have
been around for a long time and played an important role in global economic development.
However, our primary interest is not in physical networks but rather in networks that rely on
information technology. Economists have successfully described the economics of both
information and networks. These economic principles appear durable. It is the combination of
information and network properties that creates opportunities for businesses and investors. Most
investors have not internalized these ideas. The importance of information-based networks is
increasing in today’s global economy for four reasons (Mauboussin, 2004):
1. Physical capital needs are lower than they were in the past. Information-based networks
require less capital as they grow than physical networks do.
2. Networks demonstrate increasing returns. Most industries benefit from supply-side
increasing returns to scale: higher volume leads to lower unit costs, up to a point. In
contrast, successful networks generate increasing returns from the demand-side as users
beget users.
3. Networks can form faster and more frequently than in the past. Because of plummeting
communication and computing costs, the barriers to creating a network are declining. But
even though the barriers to entry are low, the barriers to success remain high.
4. Networks can spread globally. Because many networks have high upfront costs and low
incremental costs, they can expand rapidly within countries and across borders.
Ethernet inventor Bob Metcalfe formalized network idea mathematically in the 1970s.
Metcalfe’s Law states that the value (V) of a network increases by the square of its nodes (n).
Metcalfe’s formula states that V = n2 – n. So a network of ten people has a value of ninety (100 –
10 = 90) but a network twice the size has a value three times higher (400 – 20 = 380). While
Metcalfe’s fundamental insight is correct, the precise formula has no basis in economic theory
and substantially overstates the value of large networks (Metcalfe, 2000) (Rohlfs, 2001)
(Mauboussin, 2004).
When you connect computers together, the cost of doing so is n, but the value is n2, because
each of the machines that you hook up gets to talk to all of the other machines on the network.
When you graph that, you see that over time your costs go down while the value of the network
goes up. Network effects are central to evaluating networks, but we have to bear in mind that the
intensity of network effects varies from network-to-network and that network values dissipate at
different user-base levels. In networked model companies concentrate on their core business, and
in the smooth demand they utilize their own resources and participants can share risks (e.g.
investments), which arise from uncertainty of demand (Salmela and Lukka, 2004).
Networks and independency:
Although network companies belong to a network, they are independent. They have for
example their own strategies, financial accounting and customer relationships. Furthermore they
can belong to other networks, which have their own strategies. Therefore, network rules cannot
be too stiff. Companies run their own business, but simultaneously they must agree with network
From traditional industries, construction industry is much networked. New teams are
formed for every new project and these teams disperse once the project is complete, thereby,
contributing to the fragmentation. Also a construction project itself is a complex activity
involving several multi-disciplinary participants. It is a team effort, which involves several interorganizational
activities and dialogues. However, the uptake of electronic commerce in
construction has been relatively slow compared to other industries. It is seen that a majority of
the industry players are unsure of the exact benefits of electronic commerce applications in
construction (Ruikar, 2003).
IT and Network:
Information and communication technology (ICT) has brought about significant changes in
organizations and produced important benefits, including in the areas of marketing and
innovation. Many works highlight the importance of ICT as a key element in integrating
marketing into the NPD process (Vilaseca-Requena et al, 2007). There has been much of
correlation between IT intensity and the creation of networks, the mega trends of information
systems are (Hiekkanen, 2003):
1. from technology central to business central;
2. from wide and complex total systems to decentralized small and simple services and
3. from own system to leased system;
4. from proprietary and legacy systems to flexible and networked systems;
5. from customized systems to modulated systems;
6. wireless, mobility and new terminal devices;
7. The role of information system from support process to primary process.
The employed Web Services technology, although very popular nowadays but it is still not
mature enough, so dealing with it can bring new findings (Witczynski, 2006). R&D teams need
to access and retrieve information from as many sources as possible (Kafouros et al 2008). It
seems that the Internet is at least highly complementary to the already powerful trends that are
forcing companies to become global, and at most a key driving force of the continued
globalization of existing companies (Yip and Dempster, 2005). The internet can facilitate the
collaboration of different people who are involved in product development, increase the speed
and the quality of new product testing and validation and improve the effectiveness and the
efficiency of product development and launch (Sanchez et al 2006) also Information and
Communication Technology (ICT) enhance the new product development (NPD) which is a
results of R&D activities, process by shortening distances and saving on costs and time and
makes NPD processes quicker, simpler and less risky (Vilaseca-Requena et al, 2007).
Innovation and Network:
Innovation is something new that was introduced in an environment, i.e., a new product,
a new way of realizing a process, etc. (Sorli et al, 2006) . Therefore, an innovation represents the
final stage of a development process, representing the final result achieved and implemented
successfully. Innovative activities may relate to new products, new services, new methods of
production, opening new markets, new sources of supply, and new ways of organizing.
Innovation has been characterized as a process of commercialization of a newly developed
product or practice (Dickson and Hadjimanolis, 1998). Innovation correlated with the
performance of firms and the new products and process improvements partially account for the
higher sales and employment growth as well as the higher profit margins (Dickson and
Hadjimanolis, 1998).
(Dickson and Hadjimanolis, 1998) in their study conclude that the more innovative firms,
not only in terms of new products introduced in the last 2 years and their relative novelty, but
also in terms of process innovation adopted or locally developed, tend to follow proactive
innovation strategies, being first-to-market with new products and investing in order to solve
problems, increase capacity or upgrade quality of products. Sometimes the production of new
products also involves a new production line. The proactive firms usually have a wider variety of
technology sources than less innovative firms. As an example that shows the importance of
innovation network, imagine you are the first person to own a cell phon. It is effectively
worthless because of its inability to communicate with other cell phones. As more people
purchase cell phones, the value of your device rises sharply: the larger the network of innovation,
the greater the value of the network.
The role of R&D in innovation:
Nowadays unpredictable environment suggests that many firms seek new ways of
conducting their business through some kind of innovation to make a profit and stay ahead of the
competition (Laforet, 2007).Around the world innovation is now recognized as a prime source of
national competitive advantage (Hegde and Hicks, 2008).The principal purpose of business R&D
is to develop differentiated products and services to meet the market needs, for technology
companies this is core to their survival. Research and development (R&D) and technology as a
result of it, have tremendously improved our quality of life over the last five decades. (Von
Zedtwitz and Gassmann, 2004).
Research and Development (R&D) is an ongoing process for forward thinking
technology-based companies. Development of existing products is advisable to keep ahead of
advances that competitors may be making. Further, when a potential customer approaches a firm
outlining its requirements for a product, R&D may be required to fulfill the request (Lawson et
al, 2006).The market success of a company’s R&D effort is strongly related to the uniqueness of
the product, both in terms of product functions and technical aspects (Kratzer et al, 2005).
Research is an investment, not an expense, invest in commercial R&D is usually involve a highrisk
investment with a deferred payoff although like the other high-risk investments, return can
be extremely attractive (Boer, 2005).
R&D units in foreign countries have gained more responsibilities and competencies besides
the still-existing traditional mode of adapting products developed in the home country and
technical support for production abroad (Reger, 2004).Trends over the last decade have seen
China and India emerge as attractive R&D destinations for U.S.(Hegde and Hicks, 2008).In a
recent study, (Li and Yue, 2005) suggested that international research and development
processes have two key dimensions: functional focus (either research oriented or development
oriented) of R&D activities and geographic dispersion or concentration of R&D sites. These two
dimensions lead to four categories of R&D configuration in a host country (Figure 1):
1. Concentrated research and development;
2. Dispersed research and concentrated development;
3. Concentrated research and dispersed development;
4. Dispersed research and development.
Figure 1: Four categories of R&D configuration in a host country. (Li and Yue, 2005)
Changes in telecommunications and data processing capabilities make it possible to
coordinate research, marketing and production operation around the world (Acs and Preston,
1997).(Hegde and Hicks, 2008) noted that overseas R&D sites are auxiliary outposts, subservient
to home R&D laboratories. “corporate growth and positioning” and “knowledge sourcing” are
two forces which result in companies having a more global R&D (Richtne´r and Rognes, 2008).
Technological change is a highly dynamic process that may quickly relocate to take advantage of
optimum conditions for growth (Hegde and Hicks, 2008).
There are different types of networks with varying degrees of network effects. Network
businesses offer substantial opportunities for wealth creation and successful networks see sales
grow faster than costs. A network effect exists when the value of a good or service increases as
more people use that good or service. In a typical network, the addition of a new customer
increases the willingness of all participants to pay for network services. Networking and
outsourcing have been increasing especially in rapidly changing industries where demand is
difficult to forecast and technology develops fast. Companies pursue to decrease equity in order
to maximize return on capital and they focus on business, which adds most value for their
Value added (V) of a network increases by the square of its nodes (n). Metcalfe’s formula
states that V = n2 – n. From the R&D and innovation perspective, networks can play a very
important role in incorporating more creativity in the products and services offered by an
enterprise, and as witnessed in the recent trends, the development of networks, virtual teams…
has been quite a tremendous trend widely applied by MNCs and TNCs.
To sum up, networking and functioning in a networks is not a choice but an obligation for
enterprises these days and most definitely the term “networkization” shall be incorporated within
all business operations from sales to marketing, services, recruitment, strategic planning as
occurred to R&D and innovation.
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About the Author

Nader Ale Ebrahim is Technology Management PhD candidate in the Department of Engineering Design and Manufacture, Faculty of Engineering, University of Malaya (UM), Kuala Lumpur, Malaysia. He holds a Master of Science in the mechanical engineering from University of Tehran, Iran.

Literature, Principle and the basics of Network Value Creation in R&D:The relationship with economy - Article Submission - SEO Scores

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