Research shows that R&D investment is a priority for businesses growing internationally. Successful growth companies are often defined by two characteristics – they prioritise R&D investment and global expansion. so how might R&D support your business’s overseas expansion?
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.
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.
With reference to the Italian situation, Gabriele Labombarda, Partner and IBC Director at Bernoni Grant Thornton, stated: “Italy is perfectly represented by the scenario described in this article. In fact, Italian economy is mainly based on small and medium enterprises, which had to go through various hindrances over the last crisis years, but, at the same time, have demonstrated a great ability to adapt.
Despite a lower investment capacity compared to large companies, the primary aim of small and medium enterprises is now starting new commercial development cycles, mainly thanks to innovation and international distribution channels. According to the latest Cerved estimations, the economic recovery is led by those SMEs with an international drive. Some economic indicators show that those companies that have invested in R&D over the last years, breaking through the new global economic context, have registered a growth in turnover, while those companies which did not invest in R&D have suffered the market ups and downs and more relevant consequences”.
R&D helps businesses adapt their offering to local markets
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. In this direction, 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. 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. You can have an incredibly aspirational product or offer a unique service. But if your aim is to expand in a specific market, you need to moderate that product or service to make it compliant with the new market, taking into account all the possible consequences thereof.
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.
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.
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.
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. 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.
[i] Of countries surveyed by IBR.