Looking For Innovation In The East, Where The Engineering Pool Is Deep

The former East Bloc is an R&D gold mine for Microsoft, Nokia, and others

University graduates from Warsaw to Bucharest are suddenly the region's hottest commodity. International giants from Oracle (ORCL ) to Delphi (DPHIQ ) to Samsung Group are snapping up highly skilled youth with degrees in engineering and computer science, and setting them to work on the next wave of innovative products. "This is great for Central and Eastern Europe," says Dalia Marin, a professor of economics at Ludwig Maximilian University in Munich who has published a recent study on the rise of research and development outsourcing to the former East Bloc. "Where R&D goes, innovation and growth follow."

Microsoft (MSFT ), Nokia, (NOK ) and Intel (INTC ) began to scout the region for R&D sites as early as the mid-1990s, as managers began to recognize the wellspring of talent available. But the rush among multinationals to grab a slice of Central Europe's brain trust really revved up after 2000, as infrastructure improvements, economic reforms, and preparations to join the European Union made the investments more alluring. A recent corporate survey compiled for Ernst & Young International involving some 17,000 foreign direct-investment projects showed European companies planning to make 38% of their total investments in R&D in Central Europe.

So far this year, Poland, the region's largest country, has won some 25 major tech or research-driven investments, according to the Polish Foreign Investment Agency. One lure is the country's thriving universities, which are churning out 55,000 graduates per year in math, science, computing, and engineering. Krakow, which boasts three universities within a 100-kilometer radius, is attracting the likes of Motorola (MOT ), Capgemini, and Delphi -- all of which have set up R&D centers in the area. Siemens employs 500 telecom-software and systems-software engineers in its Wroclaw R&D center. Says Richard Lada, vice-president for Central and Eastern European operations at Motorola, "Poles have a can-do spirit."

IBM (IBM ), the latest to join the migration, announced in September that it will open a development lab in Krakow focused on systems and security management. India's Tata Consultancy Services, which already operates an IT outsourcing center in Budapest, is considering setting up another in Krakow.

It's not just high tech that's shifting R&D labs to Central Europe. Auto suppliers, grappling with razor-thin margins, have been among the quickest to build an R&D presence, taking advantage of labor costs for skilled engineers that are roughly 60% to 70% lower than those in Western Europe or the U.S. Delphi's five-year-old technical center in Krakow, for instance, is the parts maker's global headquarters for the design of suspension and fuel-handling systems, and also develops electronics and safety components. The building, designed for 350 employees, is bulging at the seams with 610 engineers and technical staff. By 2007, Delphi expects to employ 900 highly skilled workers in Krakow, as it takes on more electronics and software development, plus advanced systems-integration work, which is now typically done in places like Paris. "The Poles are extremely fast learners," says Chief Engineer Jack Hackett, who has to make sure his staff can meet the criteria imposed by BMW and DaimlerChrylser (DCX ), among others.

Could the R&D boom in Central Europe be slowed by its own success? Hackett, for one, worries that wages could eventually rise enough to dampen the region's competitiveness. He saw it happen before, in Spain, where Delphi has operations. For now, though, it looks like Central Europe offers Western companies the best brains at the right price, a vital combination in today's global economy. That should keep the R&D dollars rolling in.

By Gail Edmondson in Bucharest

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