huge market potential of India has Hewlett-Packard (HP) thinking
of products specifically for its vast legions of prospective buyers.
For instance, its research and development facility in Bangalore,
India, is working on a keyboard with a palette that can decipher
the brushstrokes used in some languages on the Indian subcontinent.
Meanwhile, in Romania, National Instruments (NI) established a good
rapport with the Technical University of Cluj-Nopoca back in the
’90s and was impressed with the quality of its graduates.
That relationship eventually led NI to create a small (10-person)
R&D facility at Cluj-Nopoca.
Both of those business decisions underscore the findings of a new study exploring the main factors used by multinational corporations when deciding where to locate R&D operations: When they opt for a site in an emerging economy, the country’s market potential and the availability of talented engineers and technical workers were more important than saving money. Cost factors came in third, tied with the need to establish strong collaborations with top research schools and having access to faculty expertise. “Cost is a factor in emerging economies, it’s just not the most important factor,” says Marie Thursby, a management expert and economist at the Georgia Institute of Technology, who coauthored the survey with her husband, Jerry Thursby, an Emory University economist. Joe O’Brien, HP’s university relations program manager, agrees: “It’s not about being cheap.”
Indeed, the even higher costs of conducting R&D in the United States and other developed countries were easily mitigated by factors more appealing to multinationals. The quality of the workforce and strong intellectual property (IP) protections were the main considerations for locating in developed countries, followed by the need to collaborate with universities and work with their faculties. For instance, when IBM opened a new $40 million R&D facility in Moscow last June, it was primarily attracted to Russia as a growth market. But IBM also knew it could hire highly trained people. “We have good faith in the education level of the people we’ve hired,” says Jennifer Trelewicz, lab director. It also has strong relationships with many top Russian schools, including Moscow Bauman University and the Russian Academy of Sciences. “The quality of the education system is excellent.”
The Thursbys’ report, “Here or There,” was commissioned by the Government-University-Industry Research Roundtable (GUIRR), a National Academies group that brings together business, academic and government leaders to discuss nationally important matters of science. The report’s intent is to statistically examine the rationales behind R&D locations, rather than relying on anecdotal evidence.
The Thursbys talked to more than 200 American and European corporations. About 90 percent of them had at least some R&D facilities outside their home country, and 20 percent reported that more than half of their R&D employees were based overseas. “The decision to locate R&D is quite complex and influenced by a variety of factors,” the report states. Ray Almgren, vice president of product marketing and academic relations at National Instruments, says the results are compelling. “NI’s experience almost exactly fits the findings.”
The Big Issue
The report clearly indicated the importance of IP to major corporations. Not only are multinationals concerned about protecting their patents and copyrights, but they’re also concerned with issues of IP ownership. The report highlights ongoing industry concerns about having to haggle with American universities over the IP rights of industry-sponsored research conducted in university labs. Companies say too often the value of most inventions isn’t worth the cost and length of time it takes to negotiate the IP rights. Although the desire to collaborate with top schools was the second biggest reason for locating in the United States and other developed countries, the survey found that the positive aspects of collaborations were undermined by protracted IP negotiations. “It is a detractor,” says Merrilea J. Mayo, GUIRR director. HP’s O’Brien says industry wants to work with American engineering schools, and their deans and faculty want to accommodate industry. “It’s the universities’ tech transfer offices that are the problem, they are the bottleneck.” The problem is considered so troublesome that GUIRR, the American Society for Engineering Education and even IBM have all convened special groups to work on resolving it.
One IP advantage the United States and other developed countries have over emerging economies are laws offering strong IP protections. The weakness of IP protection regimes in countries like China was clearly seen as a big negative. To be sure, companies can be hit by pirating regardless of where a patent is filed. “But in America and the other developed countries, you are protected” by laws and enforcement processes, Mayo says. That’s often not the case in developing countries. NI’s Almgren agrees. “We do worry about the problem of IP walking out of the door. It (the risk) is just higher there. It’s a fact of life for all of us.”
Thursby admits she was somewhat surprised at just how important forging links to universities and having access to faculty researchers was to companies, in both developed and emerging countries. “That came through very strongly; it was a particularly strong result.” Mayo thinks the relevance companies place on campus collaborations is directly tied to the even greater need they place on having a quality workforce. Good schools churn out good researchers. A top-quality workforce studded with “rainmakers”—star researchers who continually deliver commercial inventions—is essential, Almgren says. “We live and die by rainmakers, that their decisions and teams can keep coming up with the coolest innovations and products.” NI collaborates with schools like the University of Texas, Austin, and the University of California, Berkeley, in part to make use of faculty expertise. But just as important is recruitment: gaining access to top grad students. “These schools have a history of producing rainmakers,” he says.
Perhaps because of concerns over IP protection, 45 percent of the multinationals say that all new science is still done in labs located in home or developed countries. Only 22 percent say they work on new science in emerging economies. NI retains about 85 percent of its R&D work within North America, mostly at its headquarters in Austin. (Beyond Romania, it also has foreign R&D facilities in Bangalore, India, and Shanghai). “All the heavy duty, early work is done at Austin,” Almgren says. But other factors can come into play, too. HP, for example, conducts research that may have security implications, like logarithms and compression, in Israel, to avoid breaking U.S. laws limiting the export of that kind of IP.
The move to overseas facilities isn’t, however, a wholesale uprooting: 75 percent of the foreign outposts are expansions of R&D operations. Less than 30 percent say they’ve relocated their R&D operations overseas. R&D destinations dot the globe. But overall, Thursby says, “China is the big winner.” Nearly 70 of the 209 companies responding expect to expand their R&D operations into China within the next three years, while nearly 45 plan expansions in India. Only 15 expect to expand their U.S. operations, while 23 say they’ll decrease their American R&D workloads.
Another reason the cost factor in the developing world is played down by companies is that R&D facilities don’t tend to be huge, so they’re much less expensive than manufacturing plants. Also, supposed cost savings can be illusory. Executives told Thursby that any company thinking of moving R&D to China to save costs should think again. Turnover is high, and there are many other costs involved. Moreover, the global labor market for highly skilled researchers means that current relatively low wages will rise. “These (tech employees) are not people constrained by local economies,” Thursby explains.
America and other developed countries have an advantage now because of strong IP protections and top-notch researchers, Mayo says, but “that could soon be eroded.” Adds Thursby: “Globalization is improving universities worldwide, and if IP protection gets better,” they will become more competitive. “Developed countries cannot just sit on their laurels.” Clearly, multinationals want to collaborate with good schools, and U.S. universities need to do what’s necessary to accommodate them in an era of shrinking federal research funds, Mayo says. Companies have money to spend. But while corporate research spending in the United States has leveled off, it’s growing rapidly overseas. “They (universities) are losing opportunities,” she contends.
is likely that IP ownership concerns in the United States and ropey
IP protection regimes in the developing world will eventually be
fixed. That means the key factor for luring R&D operations will
come down to who can offer the most-qualified researchers. That’s
particularly worrisome for the U.S. economy, since the demand for
engineers is already outstripping the number of engineering graduates.
Mayo says the United States retaining its R&D edge will require
more federal and state funding of universities because it’s
the universities that churn out the researchers that corporations
need. Nevertheless, while government funding of higher education
is falling here, “many other countries are investing huge
amounts in their university infrastructures,” Mayo warns.
“That’s a cautionary tale for both the federal and state
Thomas K. Grose is a freelance writer based in Great Britain.