Study Identifies Factors Driving Offshoring of R&D

Contrary to popular belief, lower cost isn't the chief factor driving companies to locate their research-and-development (R&D) operations in foreign countries like China and India, according to a new study sponsored by the Ewing Marion Kauffman Foundation.

The quality of R&D personnel available and opportunities for university collaboration are often more important attractors, find Marie Thursby, professor of strategic management at Georgia Tech College of Management, and Jerry Thursby, professor and chair of economics at Emory University. They presented their research findings February 16 at a meeting of the Government-University-Industry Research Roundtable of the National Academies in Washington D.C.

Their survey of more than 200 multinational companies across fifteen industries (mostly based in the United States and Western Europe) shows that China and India will continue to be major beneficiaries of R&D expansion over the next few years as companies seek new market opportunities, access to top scientists and engineers, and collaborative research relationships with leading universities.

Despite the trend toward offshoring R&D operations in Asia, companies are keeping their most cutting-edge research in developed countries where intellectual property (IP) protection is the strongest. According to the study, only 22 percent of the R&D effort in emerging countries is for new science. "While costs are higher in the United States and other developed countries, these economies still have a comparative advantage in R&D because of the high caliber of their scientists, particularly given the IP environment," says Marie Thursby. "Not everything's moving to China and India."

But to remain competitive, the United States must maintain the quality of its R&D personnel by providing more basic-research support and removing obstacles to immigration for highly skilled workers. "We are educating the world's best and brightest, but make it difficult for them to stay in America," Thursby says.

In their study, the Thursbys identified and ranked the importance of different factors influencing the location of R&D facilities. They also tracked the R&D work coming into the United States from abroad as well as projects moving in the reverse direction, identified favored countries for locating R&D work, and outlined trends for future R&D expansion.

More than half of the U.S.-based companies that responded to the survey report that they have either recently expanded or planned to open R&D facilities in China and India versus other developed countries. Of sixty-three Western European companies responding, thirteen plan on expanding or locating new R&D facilities in the United States.

In both developed and emerging countries, the top factors influencing corporate decisions about R&D locations are market growth potential, quality of R&D talent, university collaboration, and IP protection, according to the survey. Cost wasn't the most important consideration in either developed or emerging countries, despite what major media have often reported on multinational R&D locations in recent years.

One of the study's most surprising findings, according to the researchers, was the role university collaboration plays in the corporate decision-making process. Collaboration was a particularly important factor in the decision to expand R&D into emerging countries, even though they offer less IP protection, the survey shows.

"The study underscores the critical role universities play in a country's national innovation system, not just in the training of new scientists and access to the best talent, but in the ease of developing and licensing technology," said Carl Schramm, president and CEO of the Kauffman Foundation, a private, nonpartisan foundation seeking to advance entrepreneurship in America and improve education.

For more information, contact Marie Thursby at 404-894-6249 or marie.thursby@mgt.gatech.edu.

Writer: Brad Dixon, College of Management

The Georgia Institute of Technology is one of the world's premier research universities. Ranked seventh among U.S. News & World Report's top public universities and the eighth best engineering and information technology university in the world by Shanghai Jiao Tong University's Academic Ranking of World Universities, Georgia Tech’s more than 20,000 students are enrolled in its Colleges of Architecture, Computing, Engineering, Liberal Arts, Management and Sciences. Tech is among the nation's top producers of women and minority engineers. The Institute offers research opportunities to both undergraduate and graduate students and is home to more than 100 interdisciplinary units plus the Georgia Tech Research Institute.