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China and India may gain in transnational R&D from this crisis
By Gert Bruche |
May 7, 2009, Thursday
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WITH some delay, the internationalization of business R&D is following the globalization of production.
Starting on a small scale during the 1970s and 1980s, the emergence of globally distributed R&D networks of multinational enterprises (MNEs) accelerated rapidly in the 1990s.
Until the end of the 1990s, the geography of (business) innovation was largely congruent with the triad of developed world regions: North America, Europe and Japan.
Then, around the turn of the century, two interrelated strategies led to the "iron cage of the triad" starting to open: a R&D FDI shift to the two main emerging economies of China and India, and the upward move of Indian and Chinese vendors and contract research organizations (CROs) from providing routine services to knowledge process and R&D offshoring.
By around 2001, the number of MNE R&D centers had only gradually grown to under 100 in each of the two countries from the days of Texas Instruments' early engagement in India in the mid-1980s and Motorola's pioneering R&D investments in China in the early 1990s.
The subsequent upsurge in MNE R&D centers in China and India calls to mind a take-off situation.
In a rather sudden shift, the number of MNE R&D centers in China rose more than tenfold to around 1,100 (representing 920 MNEs) by the end of 2008 and to 780 (670 MNEs) in India.
Causes of change
Why has there been such a sudden shift to China and India? There are a number of clearly discernible factors.
Toward the end of the 1990s, China had established itself as a global lead market and world manufacturing center in a number of high and medium tech industries.
While this implied a growing need for local asset exploiting R&D, greater competitive intensity also required increasingly new product development for the local market.
Compared to the primarily market and customer oriented R&D investments in China, the bulk of R&D offshoring to India is so far mainly asset seeking, designed to take advantage of India's large and growing low-cost intellectual infrastructure.
In India, especially US-based MNEs profited even more than in China from the large diaspora of highly qualified non-resident Indians in leading positions, and from return migration.
While after 2000 China and India have become the most favored R&D destinations of MNEs outside of the triad (with the exception of Israel, which does however not offer a sizable market), they are in competition with other emerging economies like Russia, Eastern Europe and Brazil for R&D FDI and R&D outsourcing contracts.
Although their combination of comparative advantages like market size, the large low-cost talent pool, English communication skills (India), very large highly qualified diasporas and reasonably developed R&D ecosystems is a difficult match for competing emerging markets, escalating wage cost and attrition of qualified R&D personnel recently seemed to endanger this position.
Seize the chance
The financial crisis can in this context be seen as a windfall helping to constrain escalating costs and providing the time and space for a restructuring and further advancement of the talent pools in both countries.
It remains to be seen how far the financial crisis will trigger changes in the ongoing R&D relocation plans of MNEs.
Strong companies that closely track their innovation drive, such as, for example, Bosch or Siemens in Germany, or Cisco and Microsoft in the US, as well as companies in less affected industries, eg, pharmaceuticals, may seize the chance to further enhance R&D efficiency and profit from a relaxation in the talent markets in China and India.
They may also prepare for even stronger positions after the crisis when China and India may still be the fastest growing markets in the world economy.
(The author is professor of international management at the Berlin School of Economics and Law. The views expressed are his own. The full version of this article can be found on the Website of the Vale Columbia Center on Sustainable International Investment.)
Starting on a small scale during the 1970s and 1980s, the emergence of globally distributed R&D networks of multinational enterprises (MNEs) accelerated rapidly in the 1990s.
Until the end of the 1990s, the geography of (business) innovation was largely congruent with the triad of developed world regions: North America, Europe and Japan.
Then, around the turn of the century, two interrelated strategies led to the "iron cage of the triad" starting to open: a R&D FDI shift to the two main emerging economies of China and India, and the upward move of Indian and Chinese vendors and contract research organizations (CROs) from providing routine services to knowledge process and R&D offshoring.
By around 2001, the number of MNE R&D centers had only gradually grown to under 100 in each of the two countries from the days of Texas Instruments' early engagement in India in the mid-1980s and Motorola's pioneering R&D investments in China in the early 1990s.
The subsequent upsurge in MNE R&D centers in China and India calls to mind a take-off situation.
In a rather sudden shift, the number of MNE R&D centers in China rose more than tenfold to around 1,100 (representing 920 MNEs) by the end of 2008 and to 780 (670 MNEs) in India.
Causes of change
Why has there been such a sudden shift to China and India? There are a number of clearly discernible factors.
Toward the end of the 1990s, China had established itself as a global lead market and world manufacturing center in a number of high and medium tech industries.
While this implied a growing need for local asset exploiting R&D, greater competitive intensity also required increasingly new product development for the local market.
Compared to the primarily market and customer oriented R&D investments in China, the bulk of R&D offshoring to India is so far mainly asset seeking, designed to take advantage of India's large and growing low-cost intellectual infrastructure.
In India, especially US-based MNEs profited even more than in China from the large diaspora of highly qualified non-resident Indians in leading positions, and from return migration.
While after 2000 China and India have become the most favored R&D destinations of MNEs outside of the triad (with the exception of Israel, which does however not offer a sizable market), they are in competition with other emerging economies like Russia, Eastern Europe and Brazil for R&D FDI and R&D outsourcing contracts.
Although their combination of comparative advantages like market size, the large low-cost talent pool, English communication skills (India), very large highly qualified diasporas and reasonably developed R&D ecosystems is a difficult match for competing emerging markets, escalating wage cost and attrition of qualified R&D personnel recently seemed to endanger this position.
Seize the chance
The financial crisis can in this context be seen as a windfall helping to constrain escalating costs and providing the time and space for a restructuring and further advancement of the talent pools in both countries.
It remains to be seen how far the financial crisis will trigger changes in the ongoing R&D relocation plans of MNEs.
Strong companies that closely track their innovation drive, such as, for example, Bosch or Siemens in Germany, or Cisco and Microsoft in the US, as well as companies in less affected industries, eg, pharmaceuticals, may seize the chance to further enhance R&D efficiency and profit from a relaxation in the talent markets in China and India.
They may also prepare for even stronger positions after the crisis when China and India may still be the fastest growing markets in the world economy.
(The author is professor of international management at the Berlin School of Economics and Law. The views expressed are his own. The full version of this article can be found on the Website of the Vale Columbia Center on Sustainable International Investment.)
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