The Global Innovation Migration

As more U.S. companies send their sophisticated R&D offshore, America must provide worker retraining to maintain its tech leadership

By Vivek Wadhwa

Research and development is increasingly going global, according to a new report by Duke's Offshoring Research Network (ORN). More than half of U.S. companies now have corporatewide initiatives to outsource innovation activities, up from 22% in 2005, according to the ORN, which has been tracking the growth of outsourcing since 2004. And of those companies already offshoring development, 60% intend to do so more aggressively.

The days when you could trace development of the majority of the world's innovative technologies back to U.S. labs are fading fast. Outsourcing of R&D is irreversible. Still, the U.S. retains key advantages and remains well-positioned to continue its technology leadership. But that can happen only if as a nation we recognize the changing role of R&D and refrain from wasting scarce resources trying to recapture a bygone era. Mandating that R&D traditionally performed in the U.S. should stay in America would tie the hands of companies at precisely the time they need flexibility to compete against up-and-coming foreign competitors.

First, we need to understand what is driving the shift. While cost savings are the strongest motivation, companies are also going abroad to tap global talent pools and to be closer to growth markets. Some of the biggest U.S. companies now get most of their revenue from abroad. Hewlett-Packard (HPQ) gets 69% of its revenue from outside the U.S., and Caterpillar (CAT) gets 67%. IBM (IBM) gets 63%, while Intel (INTC) and Pfizer (PFE) each generate 57% of sales from foreign markets.

higher-end work

American companies are also moving major portions of their operations abroad. IBM employs nearly 100,000 workers in India, HP has 26,000, Microsoft (MSFT) has 5,500, and Cisco (CSCO) has 5,000. Pfizer employs 4,000 in China and 2,300 in India. These companies are developing some of their most sophisticated products abroad, often to target the same markets.

What's more, foreign countries are increasingly up to the task. India's outsourcing industry has moved from back office to business process to core R&D work once thought immune to outsourcing. Indian call-center operators such as Genpact are now developing processes to enhance patient care for American hospitals and reengineering financial operations for Australian banks. Top IT outsourcer Infosys is developing advanced hybrid structures for U.S. material manufacturers.

What can the U.S. do to continue to prosper in this increasingly competitive environment? First, we need to accept that R&D will now happen globally. We have to build new business models that recognize this reality. That means our companies need to be looking for innovation abroad and finding ways to bring it to the U.S.

Business Exchange

Track and share business topics across the Web.