Where the ACTION Is

THERE ARE A NUMBER OF REASONS WHY COMPANIES ARE OUTSOURCING THEIR R&D ABROAD. THE COUNTRY'S MARKET APPEAL IS ONE OF THEN.

The 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 brush-strokes 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."