Industrial Policy and Corporate Strategy: Examining the Co-Evolution of Institutional Demands and Strategic Responses

The GVC framework gives scholars and policymakers a useful tool for examining the globalization of production, as well as the inter-organizational linkages that emerge as industries disintegrate (Gereffi 1999; Gereffi et al., 2005). While firms have now been offshoring – and in many cases outsourcing – production for a long time, the spread of knowledge-intensive business services across borders and beyond firm boundaries is a fairly new phenomenon (Fernandez-Stark et al, 2011). Newer still in the spread of the R&D function to developing countries. This paper seeks to explore how some developing countries participate in multinational R&D networks, and why their participation may not produce the development outcomes anticipated.

Firms from industrialized countries have traditionally offshored R&D to acquire talent, to localize products or to engage in labor arbitrage (Mansfield et al., 1979; Lewin et al., 2009). Some developing countries typically excluded from the action have established industrial policies aimed at attracting multinational R&D centers, offering fiscal incentives in exchange for a role in their global R&D networks. Some have argued that these efforts are shortsighted and counterproductive; that multinational firms will not localize complex work, and that these centers will be isolated from the rest of the national economy, thus eliminating the realistic possibility of induced knowledge spillover (Guimon, 2013). The aim of this paper is to explain why this might be so, from an institutional perspective.

When firms invest abroad, they are subjected to often conflicting institutional demands on the part of their parent companies as well as their host governments (Pache and Santos, 2010). Both parties require that subsidiaries conform to their demands along regulatory, normative and cognitive lines. But as Kostova and colleagues (2008) suggest, multinational firms do not acquiesce to isomorphic pressure outside their home countries. They argue that yes, firms will comply with the host government’s legal or regulatory requirements, but that since they don’t depend on foreign governments for their most critical resources, they are unlikely to comply with their normative and cognitive demands.

This paper is about how institutional conflict manifests locally, and how it impacts the developmental outcomes traditionally associated with R&D investments (i.e. patents, publications, spinoffs). It focuses on five R&D centers in Brazil established by multinational information and communication technology (ICT) firms, and explores how their strategic responses have co-evolved with the government's industrial policies over time. Data collection consisted of interviews with managers, executives, engineers, observational data collected through extended stays and secondary materials provided by the R&D centers themselves as well as the Brazilian government. This paper aims to contribute to the growing body of work at the intersection of GVC analysis and innovation studies, specifically work on the role of innovation intermediaries in supporting supplier upgrading efforts (Pietrobelli and Rabellotti, 2011; Corredoira and McDermott, 2014).