ERIA Research Project Report 2010, No. 9 HHOWW TTO EENNHAANCE IINNNOVVATIONN CCAPABILIITTY WITH IINTTERNALL ANDD EEXTERRNAL SSOURCCESS EDITED BY PATARAPONG INTARAKUMNERD June 2011 TABLE OF CONTENTS Table of Contents i List of Project Members ii Executive Summary iii Patarapong Intarakumnerd The Indian Automotive Industry: Enhancing Innovation Chapter 1. 1 Capability with External and Internal Resources Sunil Mani Chapter 2. Technological Capability of Indonesia’s Automotive Industry 41 Haryo Aswicahyono, Pratiwi Kartika, Yan Rianto, Chichi Shintia Internal and External Resources for Enhancing Innovation Chapter 3. Capabilities – An Exploratory Study based on Cases from 105 Malaysian Automotive Sector Avvari V. Mohan Innovation in the Automotive Sector of the Philippines Chapter 4. 151 Francis Mark A. Quimba, Maureen Ane D. Rosellon Innovation Capability of Thailand’s Automotive Industrial Chapter 5. Network 219 Somrote Komolavanij, Chawalit Jeenanunta, Veeris Ammarapala Development of Automotive Industries in Vietnam with Chapter 6. Improving the Network Capability 273 Truong Thi Chi Binh, Nguyen Manh Linh Empirical Study of the Formation of Internal Innovation Chapter 7. Capability and External Linkages in ASEAN Economies 309 Masatsugu Tsuji, Kazunori Minetaki, Yuji Akematsu The Innovation Impact of Knowledge Exchanges within and Chapter 8. across Connected Firms 357 Tomohiro Machikita, Yasushi Ueki i LIST OF PROJECT MEMBERS DR. PATARAPONG INTARAKUMNERD (PROJECT LEADER): College of Innovation, Thammasat University, Thailand DR. YASUSHI UEKI (PROJECT COORDINATOR): Bangkok Research Center, IDE, Thailand DR. SUNIL MANI: Centre for Development Studies, Trivandrum, Kerala, India DR. HARYO ASWICHAYONO: Centre for Strategic and International Studies, Indonesia DR. TOMOHIRO MACHIKITA: Institute of Developing Economies (IDE-JETRO), Japan DR. KAZUNORI MINETAKI: Tokyo Medical University, Japan DR. MASATSUGU TSUJI: Graduate School of Applied Informatics, University of Hyogo, Japan DR. AVVARI V. MOHAN: Nottingham University Business School, University of Nottingham - Malaysia Campus Malaysia DR. FRANCIS M. A. QUIMBA: Philippine Institute for Development Studies, Philippines DR. SOMROTE KOMOLAVANIJ: Sirindhorn International Institute of Technology, Thammasat University, Thailand DR. TRUONG CHI BINH: Institute for Industry Policy and Strategy, Vietnam ii EXECUTIVE SUMMARY PATARAPONG INTARAKUMNERD 1. Rationale and Objectives of the Project The developing economies in the Association of Asian Nations (ASEAN) and East Asia have undergone a distinguished transformation over the past three decades. Foreign direct investment has grown, while aggregate output and market size have increased across the countries. Despite huge urban congestions, it appears that agglomerations of industry have grown. These changes in spatial economy have been accompanied by large declines in transport and service link costs within and across agglomerations, leading to economic integration. As an economy integrates, firms and plants may extend their channels to markets or sources globally. At the same time, economic integration has had a pro-competitive effect on middle-income countries in ASEAN, such as Indonesia, the Philippines, Thailand, and Vietnam that compete with lower price and large home market countries like China and India. As competition grows within an integrated economy, firms and plants with less productivity are forced to exit and upgrade to maintain profits. Previous research, for example, Machikita and Ueki (2010) and Machikita, Miyahara, Tsuji, and Ueki (2010), shows that firms and plants in these countries combine internal with external resources to achieve innovation (introduce new goods and new production processes); this includes Indonesia, the Philippines, Thailand, and Vietnam. As a result, firms with more external resources achieve greater innovation. More specifically, the last phase (FY2009) of the ERIA project entitled “Fostering iii Production and Science & Technology Linkages to Stimulate Innovation in ASEAN” elucidated that agglomeration does matter for production linkages and technological upgrading, especially for less capable firms. However, in some cases, it is less important than linkages outside of an agglomeration. In these cases, production and knowledge linkages with capable and better-managed multinationals (MNCs) located in other places are more important for the upgrading of local firms. The study also found that linkages with universities and public laboratories are less important. However, such linkages are more important for higher-capability firms like, for example, those with research and development (R&D) capabilities since the interests and activities in said firms and universities are more similar at that level. Based on that last fiscal-year study and the aforementioned research, this year’s (FY2010) research project entitled “How to Enhance Innovation Capability with Internal and External Resources” focuses on the interaction between external and internal resources leading to building up and/or enhancing the innovation capabilities of firms. The automotive sector has been selected as a case study, since it is very economically important to the ASEAN region and a country like India. The sector is undergoing major technological changes and many countries would like to move up the technological ladder from being simply a production base to being a base for more sophisticated activities like advanced engineering, design and research development. By doing so, firms in the sector might need increased interaction with local knowledge-producing agencies such as public research institutes and universities. It is therefore timely for a comparative study on such a sector. iv 2. Research Methodologies The research used Schumpeter’s definition of innovation, such as: (1) product innovation; (2) application of new technology; (3) organizational change; (4) securing of new suppliers; and (5) securing of new markets. Both questionnaire surveys and in-depth interviews were conducted. The questionnaire survey covers an agglomeration of manufacturing firms (and other actors) in five geographical areas in four ASEAN countries, namely, the Greater Jakarta Area (JABODETABEK) in Indonesia, the CALABARZON Area in the Philippines, the Greater Bangkok Area in Thailand, and the Hanoi and Ho Chi Minh Areas in Vietnam. Firms were asked about their business profile, innovation and upgrading activities in the past three years, sources of new technologies and information for upgrading and innovation in the past 3 years, business linkages with main customers and suppliers, capabilities and strategies for technological upgrading and innovation, and geographical distribution of production and distribution networks. For better insights, in-depth interviews of 10 firms in the automotive industry in the aforementioned countries plus India and Malaysia were also conducted. Based on the Innovation Audit Tool developed by Professor Mike Hobday of CENTRIM, University of Brighton, the following nine dimensions of technological/innovative capability of these selected firms have been evaluated: 1. Awareness of the need to improve, 2. Search ability in relation to external threats and opportunities, 3. The building of distinctive core capabilities, 4. The development of a technology strategy to support the business, v 5. The ability to assess and select the appropriate technological solutions, 6. The acquisition and absorption of the technologies in question, 7. The implementation and effective use of the technologies, 8. The ability to learn from experience to improve technological change capabilities, 9. The ability to form and exploit linkages with a network of suppliers and collaborating firms. The results of the evaluation are used to rank firms into the following four categories according to their technological and innovative capabilities. Type A Firms: Unaware/Passive These firms can be characterized as being “unconscious” or unaware of the need for technological improvement. They do not realize or recognize the need for technological change in what may be a hostile environment and where technological know-how and ability may be vital to survival. They do not know where or what they might improve, or how to go about the process of technology upgrading. As such, they are highly vulnerable to competitive forces. These companies are weak and ill- prepared in all major areas of technology acquisition, use, development, strategy and so on. Type B Firms: Reactive These firms recognize the challenge of change and the need for continuous improvements in manufacturing and other technological capabilities. However, they are unclear about how to go about the process in the most effective fashion. Because their internal resources are limited - and they often lack key skills and experience in vi technology – they tend to react to technological threats and possibilities, but are unable to shape and exploit events to their advantage. Their external networks are usually poorly developed. Most technological know-how comes from their suppliers and from observing the behavior of other firms in their sector. They may well be “keeping up” with other firms which may have similar weaknesses and limitations in technological capability. Typically, this group treats symptoms rather than root causes of problems – for example, dealing with bottleneck operations by replacing machinery only to find that the problem gets worse because the root cause is, in fact, in production