In 2002, General Electric moved a major research and development lab for its medical systems division from Japan to China. The move seemed motivated by the usual enticements – lower costs, thanks to the lower wages paid to Chinese workers, and lower barriers, both formal and info rmal, to doing business in the world’s most populous country.
But Wharton management professor Wilbur Chung interpreted GE’s decision differently. Chung, who studies corporate decisions to expand abroad, saw GE’s lab as an attempt to tap into China’s unique wellspring of knowledge. When the company announced its plans, Chung didn’t focus so much on the number of jobs or the total amount of money that the Fairfield, Conn.-based conglomerate planned to invest.
Instead, what struck him was GE’s assertion that the lab would design products tailored to emerging economies such as China’s. “Whatever China develops is rolled out to other developing countries,” Chung says. “China may have a lower GDP per-capita than developed countries, but the Chinese have a strong sense of how products should be designed for their market.”
Chung and Juan Alcacer, a management professor at New York University, believe that many companies go abroad with the same mindset that GE took to China. That is, they are pilgrims – knowledge seekers, Chung and Alcacer call them – not conquerers. “Firms may expand abroad in search of capabilities that are not available in their home markets,” they write in a paper published in Management Science entitled “Knowledge Seeking and Location Choice of Foreign Direct Investment in the United States.”
Old-line strategic thinking saw companies as budget-minded shoppers trying to shave a few dollars off their grocery bills, or, alternatively, as farmers who bypassed the local distributor for the farmer’s market in a yuppie city neighborhood. In other words, companies went abroad mainly to find cheaper inputs or profitable markets.
Two famous budget shoppers were BMW and Mercedes-Benz. During the 1990s, BMW built a big car plant in Spartanburg County, S.C., while Mercedes constructed one in Vance, Ala. These states might have had much to recommend them, but no one pretended they rivaled Detroit as auto-making centers. Both German automakers publicly announced their intentions and thus started bidding wars among states vying for the investments. In the end, Alabama offered more than $250 million worth of inducements to Mercedes, while South Carolina shelled out about $130 million to BMW.
Yet for more than a decade, some scholars have advanced the idea that not all companies go abroad to grab cheap land, eager workers or generous tax breaks. Instead, some firms are the sorts of knowledge seekers that Chung and Alcacer study. While these seekers have historically been characterized as technology laggards trying to catch up with market movers, more recently scholars have embraced the idea that leaders, too, invest abroad as they seek to broaden or deepen their knowledge.
Chung and Alcacer take this idea as their jumping off point. In which industries, they ask, is knowledge-seeking most prevalent? And what are the characteristics of markets that attract knowledge-seekers?
To answer these questions, they examined 1,784 foreign corporate investments into the United States ’ 48 contiguous states from 1987 to 1993. They looked at both acquisitions and so-called greenfield deals (blank-slate investments where a company comes in, buys land, erects a building and starts operations). Then they repeated their analysis using 170 economic areas defined by the U.S. Commerce Department’s Bureau of Economic Ana lysis, which allowed them to analyze big cities within states as well as multi-state metro areas such as Greater New York, or Washington, D.C. and its suburbs in Maryland and Virginia.
To determine whether an area had a lode of knowledge that foreign firms could mine, they counted the number of engineers and scientists in each, the number of patents each area generated and the amount of money spent locally on research and development.
Not surprisingly, they found that knowledge seeking is most prevalent among foreign companies in R&D-heavy industries such as pharmaceuticals, semiconductors and electronics. In fact, they found that drug makers are twice as likely to seek knowledge abroad as companies in any other industry.
Where were knowledge seekers most likely to invest? R&D-intensive areas. “Many investments, 32% of the sample, fall into four major metropolitan areas: New York City, San Francisco, Los Angeles and Chicago,” the researchers write. In contrast, a region of the United States known mostly for agriculture – the Dakotas and Idaho – “had no investments during our investigation period.”
An objection to Chung and Alcacer’s research – and to the notion of knowledge seeking via foreign expansion, in general – might be that investing abroad is a costly way to learn. After all, patents and technical manuals are widely published, and newly graduated scientists and engineers are eager for jobs.
But Chung argues that this objection misconstrues the nature of knowledge. “Knowledge can be broken into a codifiable piece – the stuff you can write down – and a tacit piece,” he explains. “It’s things you can break down vs. things that are intuitive. It’s like riding a bike. You can explain to someone the mechanics of it, but that’s not the same as doing it.”
Consider eating at a restaurant, he says. “You don’t really experience it unless you go there yourself. You can have someone tell you about it. You can order takeout from the restaurant. You can buy the cookbook. But to get the full benefit of the experience, you have to go there.”
What do Chung and Alcacer’s findings mean for managers? “Managers should enhance existing safeguards that protect proprietary knowledge,” they write. In other words, managers might want to think carefully before entering into joint ventures with companies that are expanding into their markets from elsewhere. They should at least make sure they have legal agreements to prevent their new partners from making off with their companies’ technologies or employees.
“You need to think about clear complementary gains,” Chung says. “You need to be getting something from them, and they need to be getting something from you.”
What about policymakers? What should they make of Chung and Alcacer’s arguments? Traditionally, investments from foreign firms have been celebrated by holding press conferences and ribbon-cutting ceremonies, as South Carolina and Alabama did when they landed BMW and Mercedes. But if Chung is right, these investments may not always be unalloyed victories. “If many foreign firms enter seeking new knowledge, [productivity] gains may not accrue, and a nation’s technological uniqueness might be more quickly replicated,” he and Alcacer point out in their paper. Of course investments from foreign firms may still bring benefits such as more jobs and spin-off economic activity as, for example, suppliers spring up near the foreign firm’s new plant.
Even so, Chung and Alcacer’s analysis suggests that the “elephant-hunt” strategy of corporate recruiting – i.e. focusing effort and money on landing blockbuster deals like BMW and Mercedes as opposed to encouraging local development – may be wrongheaded, at least for areas that are technology leaders. In effect, a state or municipality may be paying an outside company to come in and swipe knowledge from its homegrown firms.
Knowledge Seeking and Location Choice of Foreign Direct Investment in the United States