R&D Offshoring: Is It Working?

If you're an executive planning a new research and development center, where would you locate it? For just about anyone from a big company, that's a no-brainer: Either India or China. A just-released survey of 186 of the world's biggest corporations found that 77% of new R&D centers over the next three years will go up in one of these two emerging economic superpowers.

Whether corporations know how to make the best use of Chinese and Indian tech talent is another question. The prime motives for opening R&D labs in China are to develop products for the mainland market or to be closer to their manufacturing plants, the study by consulting firm Booz Allen Hamilton and France's INSEAD business school found. In India, the key attraction is the nation's immense pool of top-notch, low-cost technical manpower. The survey canvassed companies in 19 nations with combined annual R&D spending of $76 billion in 2004.

But only a small portion of the multinationals surveyed are fully integrating their Chinese and Indian labs into their global innovation networks, in which engineers at home would collaborate full-time with counterparts in Asia. Only 38% of product-development projects currently are conducted at more than one site. The study also found that a small minority of projects involve research staff that report to managers at a different location -- another sign of low cross-border collaboration. While "many companies are building more international R&D networks," the study concludes, "few have really begun to build the internal capabilities to run these networks effectively and efficiently."


  The study suggests that despite all the buzz about "networked innovation" and "24/7 global development" among engineers in Silicon Valley, Bangalore, and Shanghai, in practice corporate R&D teams still operate largely in silos. This weakens the argument that Corporate America's scramble to hire Indian and Chinese tech talent is aimed at exporting U.S. engineering jobs. Instead, much of the R&D buildup in China and India is aimed at developing products "to meet local needs, not necessarily to do things that otherwise would be done in the U.S," says Barry Jaruzelski, vice-president of Booz Allen's innovation practice.

This is especially true of China, where 47% of companies said their top motives in local R&D are to gain access to the local market or customers or to be close to production facilities on the mainland, while only 36% said they are there primarily to tap qualified workers and the low-cost skills base. In India's case, 55% of companies say their main interest is the nation's low-cost talent pool, but few are actually integrating this talent into global product development.

Why are companies slow to make full use of their offshore brainpower? Because managing a globally integrated product-development team is difficult. One obstacle is "not invented here" syndrome: Developers at headquarters tend to look down on suggestions from offshore affiliates. Internal competition between different R&D teams within the same company remains rife. On top of this, many companies lack harmonized work processes and systems, and few have enough staff with international experience. The bottom line: "Few companies are currently reaping the gains from this globalization," Booz Allen/INSEAD stated.


  Another stumbling block is that few companies have built the kind of organization required for global collaboration. Three out of four of those surveyed have the capability to develop products entirely in their home markets, while only 45% of their foreign sites have full R&D capabilities. Instead they tend to focus on specific parts of the development process. In other words, companies "are adding the nodes of their global networks, but they need to have a much more global and networked approach to how they are doing R&D," says Jaruzelski.

Despite these challenges, corporations are boosting offshore development. In the next three years, "almost all planned growth in foreign R&D will be in China and India," the study predicts. By the end of 2007, 31% of corporate R&D staff will be in those countries, up from 19% in 2004. The number of R&D staff at sites in Western Europe and the U.S., meanwhile, will remain constant.

The enormous cost of these investments puts greater pressure on companies to learn to effectively deploy these resources. That seems to be the intent of the companies surveyed. Most said the prime reasons behind their new offshore R&D centers are to boost the speed and quality of innovation, while only 24% cited the lower costs of Chinese and Indian engineers. "People see all sorts of challenges, but those are easily overwhelmed by the fear of not participating in India and China," says Jaruzelski. The era of global, networked innovation hasn't fully dawned yet, but it still appears to be the wave of the future.

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