Growth of new R&D sites fastest in China and India

Paul Boughton

Innovation has become increasingly global, and over 75 per cent of new research and development (R&D) sites planned over the next three years will be established in China and India, according to a recent survey on global R&D networks jointly conducted by INSEAD, a business school, and management consulting firm Booz Allen Hamilton.

However, while many companies are growing their R&D networks and increasing the number of sites outside their home countries, few have the internal capabilities in place to run these networks efficiently and effectively.

Booz Allen and INSEAD surveyed 186 companies around the world to learn about their experience configuring and managing global innovation networks, the effect of R&D dispersion on the cost and speed of innovation and approaches to finding new knowledge. Participants represent 19 countries and 17 industry sectors with a combined annual R&D spending in 2004 of US $76 billion, representing nearly 20 per cent of the global total for all corporations. Key findings of the study include:

As innovation globalises, it is moving East. Over the past 30 years, the share of R&D sites outside companies' headquarters markets has increased - from 45 per cent in 1975 to 66 per cent in 2004. The relative share of R&D sites by location has been shifting towards China and India, who together accounted for 3.4 per cent of foreign sites in 1990, increasing to 13.9 per cent by 2004. Over the same period the share of foreign R&D sites in the U.S. fell from 19.6 per cent to 15.9 per cent, while in Western Europe it fell from 30.0 per cent to 28.1 per cent.

The survey respondents also suggest the pace will increase, with 77 per cent of new R&D sites planned through 2007 slated for either China or India. By the end of 2007, China and India will account for 31 per cent of global R&D staff, up from 19 per cent in 2004. Combined, China and India are on the brink of overtaking Western Europe as the most important locations for foreign R&D for U.S. companies.

The location of R&D sites is driven by skills and capabilities as well as markets across the globe. The survey found that future R&D sites in the developed world of Western Europe, the US and Japan will be selected primarily because they offer proximity to technology or research clusters, access to markets or customers and access to a qualified workforce.

R&D growth in the developing world is driven by a different set of needs. In all developing regions, access to a low cost skills base and access to markets and customers are important factors for establishing new sites. However, in India and Eastern Europe, companies are also attracted by highly qualified staff. In China, the low cost skills base is paired with a need for market and customer access, which suggests that companies are focusing on less sophisticated innovation projects in China than in India or Eastern Europe.

“Companies are increasingly looking abroad to spur innovation and build new markets,” said Barry Jaruzelski, Vice President at Booz Allen. “In today's competitive environment, business can't be held hostage by the 'not invented here' syndrome.”

Most companies are still struggling to establish the new organisation needed to manage and integrate global innovation activities. Although companies are increasingly building international networks of R&D facilities, few regularly review these networks to ensure they are efficient and integrated. For example, respondents reported that 23 per cent of their foreign sites do nothing but customise products and services for the local market. Yet leaner, more consciously-designed networks offer more than financial benefits. For example, survey participants projected that they could achieve a 37 per cent faster time-to-market and 24 per cent lower costs with an innovation network that was efficiently organised and integrated.

The survey highlighted the growth of foreign R&D sites based on access to differentiated knowledge and capabilities, a recognition of the importance of sensing for new knowledge from a wide range of locations and the important role played by external collaboration. But even as innovation becomes more global in these areas, the actual percentage of R&D projects undertaken across multiple sites is relatively low, at an average of just 36 per cent of all projects performed.

In addition, over half the sample believe that customer needs are very different across regions, and 90 per cent feel deep customer insights play a vital role in identifying the potential for new products and services. Yet only technology innovators, the subset of respondents that seek to be the first to market with breakthrough technologies, place a strong emphasis on uncovering these deep customer insights.

The survey shows that technology innovators get a significant advantage by sensing knowledge more globally.” said Thomas GoldbrunnerPrincipal and co-lead of the survey for Booz Allen. “This includes the exploitation of knowledge about customer needs and technologies from multiple locations for idea generation and advanced projects."

The survey also indicates that most companies firmly believe that people with multi-cultural experience perform better in the virtual teams that are becoming more prevalent as networks grow. However despite this recognitionfew companies seemed to be building a cadre of such people. The technology innovators were more likely to offer career or financial rewards to encourage people to work in different geographies and functions than the rest and were also more likely to require an international background for senior managers.

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