The Internationalization of Corporate R&D

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THE INTERNATIONALIZATION OF CORPORATE R&DRecent years’ rapid expansion of the high-tech industry in India has driven up wagesand other costs. High attrition rates and shortages of highly skilled technical staff andexperienced project managers have resulted in a sharp rise in wages in years with rapidhigh-technology industry growth (such as the 2004–2006 period). While this trend maycontinue, especially in overheated market environments, total cost levels are likely toremain significantly lower than in high-income countries (Farrell et al. 2005). Also, itis important to acknowledge that many multinational companies are willing to payadvanced-economy wages to high-level staff in many areas of R&D, and top managementjobs in particular, as access to competency in these cases is considered crucial.While access to a large pool of human-resources is a key consideration in corporate investmentdecision-making, several other issues also come into play. The followingIndia specific factors can be identified as driving forces for foreign companies to locateR&D in India: 3• Availability of a large, diverse and geographically mobile skilled workforce thatenables rapid expansion in a wide range of fields.• Wage levels and other cost advantages.• Strong human resource competency potential to execute quality software and engineeringwork, including IT applications and quantitative work as well as provenability to work in international teams.• Existence of a diverse set of education and R&D institutions and options forcollaboration with Indian companies.• Well-established legal system and democratic institutions, including a favorabletrack record in intellectual property rights compliance in industrial R&D.• Favorable trade and foreign investment policy regime, plus special provision of taxincentives for R&D.• Large potential of the Indian market coupled with proximity to other fast-growingAsian markets.• Time zone advantages, enabling 24 hours work cycle.• Global and local network-related dynamics, including the formation of industrialclusters and the role of the Indian Diaspora.• Demonstration effect of corporate success stories helping to provide arguments fordecisions to expand Indian based business operations.3 Findings are based on interviews conducted for this report, as well as reports from A.T. Kearney, theBoston Consulting Group, Evalueserve, Forrester Research, Gartner, IDC, McKinsey & Co and PWC.280
THE INTERNATIONALIZATION OF CORPORATE R&DThe major constraining factors include:• Weaknesses in physical infrastructure such as transportation and communication systems,and general provision of energy and other utilities – including in major cities.• Wage inflation and high attrition in heated market conditions.• Capacity and quality limitations in higher education and training institutions resultingin uneven standards and shortage in supply of competent engineers, Ph.Ds and projectmanagers.• Remoteness from advanced industrial markets, headquarters and other R&D centers.• Concerns of security and piracy in the consumer mass market, such as use of standardsoftware• Cumbersome industrial, labor, land and other legal and regulatory frameworks,coupled with weakness in compliances and time consuming settlements.• Governance and cultural issues such as: generally mixed performance record inpublic and private sector productivity; accountability and transparency (and associatedissues of trust and corruption); communication gaps; and impediments toinnovation (e.g. reluctance to share information; strong hierarchy, timeliness andother issues related to bureaucratic inertia).In summary, a nexus of external and India specific factors have resulted in rapid expansionof R&D operations. Access to manpower and cost factors are central but a widerange of other issues such as competency, quality, intellectual property rights, links toproduction and access to markets are also important considerations.11.3.3 India-Based Operations by Foreign CompaniesForeign companies locating R&D in India have been a key driver for revitalizingthe Indian R&D scene. Multinational companies began to seriously explore India’spotential as an R&D destination two decades ago. In the late 1980s and early1990s, some companies set up R&D facilities in the country. In this early stage,most companies focused on productive support or R&D for adaptation oftechnologies to the domestic market. Many companies had manufacturingoperations in India, motivated partly by government policies and the fact that theIndian market itself was large enough to warrant local operations.In the 2000s, multinational companies continued to expand their India-based R&D.Foreign companies began to set up innovative R&D operations to cater for thetechnology needs of their global markets. Texas Instruments was a pioneer ofinnovative R&D in the mid–1980s. General Electric and Intel have followed, ashave other global high-tech companies like Cisco, Microsoft, Motorola, Oracle,281
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