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Global Research & Development (R&D): Types, Role, Challenges, Innovation & Compliance

Achieving competitiveness through innovation, in simple terms, means producing products of the best quality at low prices as compared to the products that the competitors produce. The existence of competition is important so as to ensure that the markets are more resilient and flexible. Because of the existence of competition, there is innovation. Otherwise, the markets will become extremely centred and rigid. Since the manufacturers know that there is competition, they keep innovating so that they remain at the top.  

We have believed for a very long that competition drives innovation, and as a result, innovation drives higher welfare, but there is no consensus on the precise relationship between the two in theory. Hence, such analysis could clear the air on the role of competition policies and the theoretical perspectives of the same.

Moreover, the definition of innovation can be understood as the successful social exploitation of new ideas if the idea is successfully brought to the market, it also offers a more effective alternative to the arrangements that exist.

Global R&D

Global Research and Development necessitate the Development of research & development procedures which work towards different countries and cultures. Since the systems are so complicated, proper coordination and planning are critical for their success. However, if the projects are well-executed, it can help the organisation by improving the strategy for innovation.

Types of Innovation

Though with the name ‘Innovation’, it cannot be presupposed that it can also have different types. However, the innovations are also classified based on the intensity and magnitude of the innovation as well as the impact it will have on markets. For instance, the innovation of the bulb can’t be compared to the innovation of any television because the uses of bulbs are far greater than television. While television is just a part of our entertainment at the same time, bulbs are a necessity of our daily routine.   

1. Process Innovation

Let’s say one specific technology is already in existence, then an improvement can be made to the same, which will result in cost reduction. When such improvements are made, the product’s characteristics change, sometimes for the better and sometimes for the worse.

2. Sustaining and Disruptive Innovations

Incremental and breakthrough innovations separate innovations by their magnitude, which is referred to as sustaining and disruptive innovations. Here, the innovations are separated by their magnitude. It analyses the impact of innovation on the value chain.

The innovations known as disruptive innovations drastically alter markets. These are not regular or predictable improvements. They often bring unforeseen changes to the markets. These innovations reduce incumbent firms’ market shares in existing markets or create new business modes and markets.

3. Innovations in the TV Industry

Television appeared in the late 1920s, but only after several years of experiments it was made available to customers. Before the Second World War, the number of televisions was low in the homes, but in the 1990s, 98% of the homes had televisions in the United States. It is considered one of the most powerful innovations that changed the generations of all time. Because news, culture, and advertising to the population became a norm, we never remained the same as compared to our previous generations.

While televisions constantly operate on the same old principles and rely on the same core ideas, the television markets constantly keep improving this innovation by offering new, modified and exciting features to the consumers in order to attract more customers. VCRs (Videocassette Recorders) became available to customers in the late 1980s. It allowed viewers to replay programs for the first time and watch movies in their homes.

The transition of VCRs to DVDs (Digital Versatile Discs) was again a breakthrough. Netflix was not as popular for streaming videos online because the population was not used to online services as much, but as we see today, the owners of Netflix have become one of the richest people in the world. It has now become the most common tool which is used to access video content.

In addition to these, there are some other types of innovations, as given below-

4. Routine Innovation

It is built on a company’s existing technological competencies and fits with the existing business model. An example includes Intel launching powerful microprocessors, which allowed the company to maintain margins and fueled growth for decades. Other examples are Apple iPhone and Microsoft Windows.

5. Radical Innovation

It is the polar opposite of disruptive innovation. The challenges are technological in nature. For instance, biotechnology and genetic engineering in the late 1970s and 1980s as approaches to drug discovery. Pharmaceutical companies that are established with years of experience in chemically synthesised drugs face many hurdles in building competencies in the field of molecular biology. However, the drugs which were derived from biotechnology were a better fit for the companies which called for heavy investment in R&D.

6. Architectural Innovation

It is the combination of business and technological model disruptions, for example, digital photography. Companies like Polaroid and Kodak entered the digital world, meaning mastering completely the new competencies in solid-state electronics. It also means finding a way to earn profits from cameras rather than earning from disposables (paper, processing chemicals and so on). These innovations are very challenging to pursue for incumbents.

Types of R&D Activities

The activities of Research & Development are broadly categorised into three categories as given below:-

Basic Research

Basic Research is carried out to gain certain knowledge about a particular phenomenon, field or theory without the immediate application of the same. Examples include a pharmaceutical company conducting Research on a protein’s molecular structure without any specific drug in mind. This Research enables the researchers to discover new ideas and inventions that might be applied later.

Applied Research

It refers to solving a specific problem or answering a particular question in a practical setting. It means to take the information that was discovered from the basic Research and apply it to developing solutions for different needs. The companies conduct this research so as to improve their products, enhance their services or identify new opportunities. For instance, a cosmetic company might conduct market research to know customer preferences and to develop new products accordingly.

Development

The stage of Development refers to translating the research findings into practical form. Models or prototypes are created, which can be tested to ensure that they meet the project’s desired goals. The development activities involve different stages which include design, modification and testing until the final service is produced. Examples include engineering firms that conduct Research to build new equipment for specific applications.

Hence, basic Research gives the foundational knowledge on a subject, applied Research actually applies this knowledge, and Development uses this Research to develop new products and services. After understanding the different types of Research and Development activities, businesses can improve them to drive success and growth.

Steps Involved in Effective R&D

In order to conduct effective Research, it requires specific steps to make sure that the business’s needs and goals are addressed. The first and foremost step is to identify the issues the company wants to address through Research. Market research must be conducted to collect information about the target market and the needs and preferences for the same. This information is important in order to formulate the research objectives. The objectives must align with the research problem identified earlier and should also be measurable, relevant and time-bound.

Developing a research plan involves deciding on the design of the research and data collection methods. The research design can be quantitative or qualitative and depends on the research questions and objectives. The next step is to collect data and conduct experiments by using the developed research plan. Primary data involves collecting original data by interview, and observations whereas secondary data includes using the previously collected and made publicly available data.

 Primary data involves collecting original data through surveys, interviews or observations, while secondary data includes using previously collected and publicly available data. The next step is to interpret and analyse the data. While analysing, the collected data must be cleaned, summarised and organised; after that, it can be subjected to different statistical tests in order to draw conclusions.

At the time of interpretation, the findings of the tests can be used to answer the research question and match the research objectives. Clear communication is required to be made to the stakeholders about the research question and to match the research objectives. It should be precise, and concise and must be in a format which is understandable to the recipients.

At last, Research and Development must be viewed as an ongoing process which is aimed at innovation and improvement in a business. The continuous redefining of the research objectives and implementing effective R&D strategies is critical to stay ahead of the competition and evolve as per the market’s needs.

Legal Provisions regarding the same

In India, the Competition Act of 2002 has been enacted to ensure the sustainability of competition in the market sector. It also allowed the Indian traders to trade with freedom. The Competition Act has replaced the Monopolies and Restrictive Trade Practices Act of 1969.¹

The Competition Act provides for the formation of The Competition Commission of India. The Commission was founded in 2003 but became fully operational only in 2009. The central government of India appoints a Chairman and six members to the CCI. The responsibility of the Commission is to eradicate anti-competitive practices and to encourage healthy competition in India. It is also the duty of the Commission to safeguard consumer rights.

It broadens the jurisdiction of CCI from simply monitoring the rules to including competition advocacy and creating a competitive environment. According to Section 49 of the Competition Act, 2002, ‘Competition Advocacy’ refers to raising public awareness about the importance of a competitive industry.

The Competition Commission of India has undertaken competition advocacy activities in both Union and State governments in collaboration with sectors like consumer activists and regulatory organisations, which are composed of experts like chartered accountants and corporate executives. Competition Advocacy can perform a variety of functions based on the government’s political and financial context.

The Development in Competition Law

The government of India proposed the Competition Amendment Bill in the year 2022, which proposes to alter the system of the governance of the Competition Commission of India. The bill included-

• To amend the core provisions for accommodating the demands of the modern market industry.
• To check the anti-competitive practices in the world of online business.
• To strengthen the framework by increasing the CCI’s responsibility and implementation capacity.

Measurement of Innovation

Since there are different types of innovations, their impacts and magnitudes can also be measured in different ways. A sound measurement can assist policymakers to better understand the impact that innovation has in contributing to economic goals. The measurement of innovation allows for capturing knowledge-based activities that can be used and implemented for actual use in the market to generate value.

Variables to measure innovation are:-

1. R&D Expenditure– It is a measure via inputs as it usually increases with the size of the firm and is considered as R&D intensity.

2. Patent Activity- Patent activity measures outputs and is calculated by the number of patents granted or requested.

How Competition Affects Innovation- Theoretical Insights

At the time of developing economic policies, the key considerations are how competition affects innovation. The outcomes are also affected by the differences that are used in the definition of innovation and competition, including the measurement challenges. At the same time, successful innovations can also lead to escaping competition.

The Classic Discussion

The theoretical relationship between innovation and competition is analysed on the basis of two central economic ideas. First is the positive relationship between technological progress and competition, which is based on the assumption that the competitive market structures generate the need for more efficient production methods, leading to the Development of innovative processes.

Second is the inverse relationship between innovation and competition, which is based on the idea of creative destruction. According to creative destruction, if there are a limited number of big firms in the markets, it can lead to progress in the long run. This phenomenon is also known as the Schumpeterian Effect. It generally happens because the profits which are earned in the non-competitive markets increase the incentives to innovate.

As per this theory, if the competition is too high, it will tend to discourage innovation because the mindset of the markets will become very short-term. Hence, the firms would not invest in the longer run and in risk-based research and development projects.

While these ideas are constantly viewed as opposing views, the Research has focused on the conditions under which any of the previous effects are likely to dominate, or there are scenarios where they both can exist in a compatible manner. The most commonly accepted Development is the assumption that there is an inverted U relationship between innovation and competition. If the degree of competition is low, a positive impact is there on the innovation efforts, which is known as Arrow’s approach. After reaching a certain level of competition, if there is a little more increase, it reduces incentives for innovation.

Hence, an optimum level of competition produces higher levels of innovation. In industries, where firms differ in their technologies, the innovation incentives would come from the profits that are earned because of the lack of competition. Now, if the award for catching up with the leader is not much, then firms have little incentive.

The New Developments

With the new developments, there are three principles that have emerged- The first is that innovation is encouraged if the market is contestable. The contestable market refers to the market where entry barriers are low and the conditions in general allow the companies to compete with each other easily if they offer a product which is attractive to the consumer. It also suggests that a monopolist, who is not exposed to potential competition, has no incentives because there is no basis for earning higher profits in the future. The contestability of the market can be affected by different factors like brand loyalty, access to technology, etc.

Appropriability

The ability of the firms to appropriate the benefits of their innovations also depends on the costs and demand because changes in the production technology or the cost might also change the willingness of the customers to pay. The imitation also affects incentives to innovate because the appropriability would be limited.

The last principle relates to Synergies. So, the possibility of combining the assets in order to produce greater benefits as compared to when used separately also increases the incentives to innovate. The successful innovators could temporarily capture the benefits of innovation and the extent of synergies between the companies and assets since increased synergies lead to more innovation.

Relationship between:-

Well, there is no one-size-fits-all explanation of the relationship between the two. The results highly depend upon the industry. In order to review the empirical relationship between these variables, a multi-sectorial analysis can also be performed. The Competition Authority in Colombia published a study in 2019 which examined the relationship between the two variables based on the estimation of the panel data models containing information from 75 countries from 2007 -2015.

The results supported that there is an existence of an inverted u relationship between competition and innovation, and they were also robust to different variables which are used for innovation and competition. The authors also observed that the higher the competition, the higher the innovation.

The common Challenges

Global Research & Development faces many challenges, which are explained below-

• If the players are in different time zones, then there are several issues they might face because they will have to organise schedules in order to communicate and collaborate effectively.
• The protection under the Intellectual Property Laws can be difficult in a global environment because of the differences in laws of different countries.
• Linguistic barriers play a very important role because they pose serious difficulties in communication and collaboration.
• The infrastructure and technology may be less developed in some parts of the world than in others, which might stymie the R&D efforts.
• Research and development could be expensive; hence, obtaining funding for ventures can be hard.

Conclusion

As we have seen, the innovation system is based on the connections between the organisations that produce knowledge and utilise this knowledge in the context of commercialisation. In order to boost the effectiveness of a system in delivering innovation, it is important to take the audits of Existing connections, sectoral interests, emerging opportunities to support the connections with the public research institutions and public-private partnerships, etc.

If we want healthy competition in the market, it is important to keep a check on the competition policies of a nation. As we have seen above, if this competition is not regulated properly, it can also lead to the markets and firms having very short-term thinking. So, how much of competition should be there must be checked so that it will not hinder the innovation.

1. https://www.mca.gov.in/Ministry/annual_reports/annualreport2005/CHAPTER4.pdf