The Internationalization of Corporate R&D

THE INTERNATIONALIZATION OF CORPORATE R&D2.4.4 R&D in Developing Countries – Cost and Other ChallengesThe recent increase in international R&D investment and collaboration involving developingcountries, such as India and China, is also driven by the factors discussedabove, such as proximity to manufacturing as well as market, technology and manpoweraccess (ACM 2006). Lower cost is usually considered an important driver bymany analysts, often in combination with the availability of qualified R&D personnel(Reddy 2000, UNCTAD 2005a).However, the importance of lower wages for R&D workers as a key driver has beenquestioned by other analysts and contradicted by industrialists. In recent studies(McGuckin et al. 2004, Thursby & Thursby 2006) lower cost was not a major factor,especially not for research. According to IBM: “our decisions on the locations of researchcenters are based on access to locally based talent, far more than on labor rates”(Ruetsche 2005). Closeness to manufacturing is the most important reason for locatingR&D to China according to Ericsson (Ny Teknik 2005).Even if wages are lower in developing countries, the total savings are not huge, onceinfrastructure and coordination costs for managing distributed R&D facilities are included,according to a survey study among 190 U.S. senior executives (EIU 2004a).Reduced economies of scale and challenges related to integration, knowledge transferand management also contribute to higher costs.Analysts and industrialists have identified a number of other challenges and barriers forsetting up R&D in developing countries, including: attracting and keeping researchersand engineers; preventing leakage of key technologies and know-how to local competitors;protecting intellectual property rights; managing cultural differences and lackof face-to-face communication, as well as frequent failures, longer learning curves andconcerns over political instability (EIU 2004b, Thursby & Thursby 2004).The sustainability of R&D facilities in emerging economies is still unclear, since ittakes a number of years for new R&D investments to achieve real impact on companyoperations. It is still too early to tell if benefits outweigh costs in the long run (ACM2006). Nevertheless, the cost aspect combined with the long-term availability of skilledworkers seems to support the argument for increased investments in developing countries,according to the trends described above.80