Why do companies move R&D offshore?

Is there really a logic behind where companies decide to do their R&D? Research directors might like to think so, especially when they have to persuade management to spend money, but it isn't always obvious. Marie Thursby and Jerry Thursby have been investigating this question and offer some conclusions in an article in the latest issue of the journal Science, Where Is the New Science in Corporate R&D?.

 

The Thursbys, she professor of strategic management at Georgia Tech College of Management and he professor of economics at Emory University, surveyed 249 R&D-intensive companies headquartered in the United States and Western Europe.

 

The press release from Georgia Tech, the Georgia Institute of Technology, that went out with the paper says that "49.6 percent of the R&D effort in developed nations is for new science while the proportion in emerging countries is 22 percent". The "new science" is in there because the Thursbys "distinguish 'new science'  R&D from the application of 'familiar' sciences already in use by a company and/or its competitors".

 

The paper says that the companies they surveyed "expect their R&D to grow in emerging economies and to decline in developed economies for complex reasons". In a finding that will delight those in the UK who urge Gordon Brown to keep pouring money into academic R&D, the paper says "Lower R&D cost in emerging economies was not the main reason; market factors, collaboration with university scientists, and quality of R&D personnel were all at least as important as cost".

 

The Thursbys believe that "appropriate policies in the face of globalization should focus not only on the factors affecting location but also on the type of R&D conducted".

 

The researchers asked the corporate R&D people to look at their research operations around the world and to describe what they get up to in them. This is how they come up with the "new" and "familiar" tags. The former refers to "a novel application of science as an output of the R&D" while the latter is "an application of science currently used by the firm and/or its competitors".

 

The survey showed that "On average, 49.6% of R&D effort in developed economy sites is for new science; in emerging economy sites, it is only 22%".

 

Why this happens is complex. It depends less on such factors as the supply of qualified people and IP protection than on the cost of doing R&D. "Cost was significantly related to the type of science with an increase in cost decreasing the ratio of new to familiar science," says the paper.

 

Universities will be delighted to read that "The most striking result is that the factors related to universities (presence of university faculty with special expertise and ease of collaboration with universities) had the strongest impact on the type of science conducted."

 

To put it another way "The new science at sites identified by our respondents is largely conducted in developed economies, and this is significantly related to university factors." But before the profs in the developed world get too carried away, they might like to reflect on the Thursbys' warning that "Although respondents claim it is easier to collaborate with universities in developed countries, there is mounting evidence of changing corporate sentiment."

 

The business world is fickle. It only takes a bright new head of R&D to come in and a company's strategy will lurch off in a new direction. Universities on the other hand are famously slow to adapt – just look at Oxford's attempts to crawl into the 20th century.

 

It might not take a lot to accelerate the move of new science. For example, the Thursbys warn that "universities have become more aggressive in negotiating IP terms" and this could make companies rethink their relationships. Add to that the rising quality of universities in emerging economies and more of that new science could float offshore.