Research shows that R&D investment is a priority for businesses growing internationally – so how might R&D support your business’s overseas expansion?
Successful growth companies are often defined by two characteristics – they prioritise R&D investment and global expansion. The great enabler of global expansion is R&D, and in this article we explore some common ways in which companies are using R&D to support their internationalisation.
The latest Grant Thornton International Business Report (IBR) identifies a strong correlation between export and R&D intentions. Some 71.9% of businesses looking to grow exports are increasing their spend on both R&D and IT, compared to an average of 45.2%.
And the top 10 ranked countries[1] for both R&D investment and export expectations, feature six identical geographies – namely Nigeria, South Africa, Vietnam, India, Brazil and the Philippines.
The relationship between R&D and international growth is in evidence elsewhere, a recent study of German manufacturers by the Centre for Economic Policy Research (CEPR), found that exporting firms have higher rates of product and process innovation and in turn these innovations yield a higher economic return than for non-exporting firms.
So, how do companies use R&D to support their international growth? For starters, spending on new technology and processes inevitably opens up opportunities to exploit that intellectual property (IP) in as many markets as possible.
Hubert Turaj, user experience (UX) director at Polish digital consultancy Edisonda, part of the Grant Thornton network, says he sees a lot of smaller businesses investing in R&D to grow and go global very quickly. “Poland right now has become very active with businesses developing internet, internet of things (IOT) or a combination of different online services, because this is the way these companies believe they will scale globally very quickly. These businesses started with the aim of going global, and they are investing heavily in R&D, creating key assets to make them the main differentiator on the market.”
The Krakow-based ed-tech business Brainly is a good example of this. The peer-to-peer learning network founded in 2009 was developed to connect students and teachers all over the world. Today Brainly has grown to 150 million monthly unique users across 35 countries and has recently confirmed US$30 million in funding to expand its learning community in the US.
The specific nature of a business determines the extent and type of R&D activity invested in, but a key challenge common to most export-focused businesses is localising goods and services to the market they are entering. One of the critical mistakes many companies make can be expecting what’s worked well in one country to work well in another.
Monique Pisters, International Business Centre director and partner at Grant Thornton Netherlands says: “Your products have to adapt to the consumers in that market. Your product might have to be adjusted and modified if you want to enter a different market such as Asia or Europe. From that perspective, we see many companies who want to enter a new market invest in R&D because that product doesn’t match what is needed there. We see that, for instance, with pharmaceuticals, and also with ICT.” Grant Thornton has a network of 23 International Business Centres which operate as gateways to worldwide resources.
When businesses look to the long-term horizon, they are not just thinking about how they can sell more of the same product in a different market, but how they can create a product that is more suitable to that new market.
Duncan Levesley, part of Grant Thornton UK’s Growth 365 International team, says: “Businesses need to ask what their value proposition is in that market and the way to do that is through good research rather than making costly mistakes. Whether it’s focus groups or market research, spending time in that country, speaking to people on the ground, including distributors or agents – it’s crucial to get a sense of what it’s going to sell with the local consumer.” Growth 365 International helps ambitious CEOs and leaders of dynamic businesses to expand their operations and enter new global markets.
An example of this was when L’Oréal started growing in India; the business discovered one of the key formats that sold well was sachets of products. Those sachets were bought and used in India because customers, who on average did not have as much disposable income as those customers in existing markets, preferred to buy smaller amounts more frequently.
The R&D involved to determine product localisation and how to position it in the market can include many different activities, from understanding the regulatory environment, market profile and culture. Launching a website in China, for example, requires not only getting the language right but understanding that Chinese customers engage with websites very differently from western customers.
One of the biggest challenges to R&D when going global is global compliance says Paul McGreevy, Grant Thornton UK. “You can have an incredibly aspirational product but then you start moderating it to make it compliant with Japan or the US, by the time you modify these products on a global scale you can compromise your product. So do you develop your product market by market or develop it for global execution and all the economies of scale that goes with it? It can constrain the development, but equally it can make it a really commercially valuable as well.”
Another application that’s particularly relevant to businesses trading over long distances is using R&D to improve logistics, storage and shelf life to ease some of the distance challenges in exporting goods overseas. Australia, for example, is currently enjoying an export boom in its food and beverage sector, driven by increasing demand for high-quality food products in South East Asia.
Sukvinder Heyer, an R&D tax partner at Grant Thornton Australia, says: “The challenge is how do you get food there? How do you keep it fresh? Several companies are identifying those opportunities and seeking to develop solutions that can facilitate that. If we can increase the shelf-life of fresh milk, of fruit and vegetables, of ready prepared meals, for example, that opens up a whole bunch of excellent opportunities.”
While R&D supports growth into new market, some companies will also look to set up or acquire R&D centres in foreign countries to access talent and make use of beneficial tax regimes.
Pisters says: “India, for example, is well-known for attracting R&D from abroad. India focusses heavily on knowledge-based services, primarily in the areas of science and technology. There is a huge work force of highly skilled people who can provide numerous R&D services at lower costs. That’s one challenge that western countries face; they often do not have enough skilled people to do all the R&D and the costs involved are higher.”
Global perceptions of a given country’s IP may also encourage businesses from that country to establish R&D in different countries associated with prestigious tech.
Jason Jinshen Li, senior manager, strategy consulting, based in Beijing at Grant Thornton China, says: “There is a perception that technologies developed in China, especially those developed by smaller companies, are not always up to the global standard or fully recognised internationally. Given this, some Chinese businesses tend to acquire overseas IP and continue to develop them in overseas markets to increase the recognition. Another reason for Chinese companies to do R&D overseas is that they think technologies developed overseas are more disruptive, which gives them better competitive edge globally.”
Chinese smartphone company Oppo recently opened a research centre in Hyderabad, India as part of the business’s US$1.4 billion investment in R&D strategy. It aims to use the facility to harness local R&D for its global products and anticipate trends faster than competitors while gleaning consumer insights in India’s fast-growing market.
There is a split between companies that are opportunity-led, and companies that are strategic about their international growth.
Levesley says: “A majority of businesses tend to be somewhat opportunity-led in their export strategy, they get an unsolicited order to supply to a different market, and all of a sudden, they’re just doing business there without having gone through a process of thinking ‘am I doing this in a certain order?’ and ‘what can I do to maximise the returns in a particular country?’ A more strategic approach, incorporating your R&D plans and localising for selected markets, can lead to more impressive, and more sustainable, results.”
While it can take time to realise the benefits of R&D, it needs to form part of the long-term strategic thinking that will sustain and build the business in that market. Long-term companies invest in R&D and are also likely to be the ones thinking about the international market and expansion.
Wherever clients set up their R&D entities, they should understand how the guest country protects IP and make sure that their IT systems – and those of their local R&D partners – are sufficiently protected against hacking and spy attacks.
Torsten Schrimpf, International Business Centre director in Germany and partner of Warth & Klein Grant Thornton notes, “Our clients often do not realise their R&D activities could be an attractive target for industrial spying or sabotage. We support our clients in assessing the IP law environment and the IT security of the current environments or improvement projects.”
Find out more about how we support your R&D and internationalisation efforts by contacting one of our advisors or find your local Grant Thornton firm.
[i] Of countries surveyed by IBR.