New Kauffman Foundation Study Identifies Key Factors Driving Offshoring of Corporate R&D

-Article Reprint-
Kauffman Foundation

KANSAS CITY, MO, February 16, 2006 - Contrary to popular belief, it is intellectual capital and university collaboration, not just lower costs, that primarily attract companies to locate R&D activities in locations away from their home country, according to a new study sponsored by the Ewing Marion Kauffman Foundation. The study of more than 200 multinational companies across 15 industries, mostly headquartered in the United States and Western Europe, finds that emerging countries such as China and India will continue to be major beneficiaries of R&D expansion over the next three years as companies seek new market opportunities, access to top scientists and engineers, and collaborative research relationships with leading universities.

The study was released at a meeting of the Government-University-Industry Research Roundtable (GUIRR) of the National Academies. It was conducted by Marie Thursby, Ph.D., Professor of Strategic Management, Georgia Tech College of Management, and Jerry Thursby, Chair of the Department of Economics, Emory University, with sponsorship by the Kauffman Foundation.

Designed to identify and rank the importance of different factors feeding into the corporate decision-making process as to where to locate R&D facilities, the study also tracked R&D work coming into the United States from abroad, as well as R&D work going in the reverse direction; addressed favored countries for locating R&D work and why; and outlined trends industry expects for R&D expansion in the future.

Among the top factors going into new R&D siting decisions in both developed and emerging countries are market growth potential, quality of R&D talent, collaboration with universities and IP protection. How these factors influence the decision, however, depend on whether the site is in a developed or emerging country. In neither emerging nor developed countries was cost consideration the most important factor, which runs contrary to what has been reported by the media (according to an analysis of media coverage over the past few years in The Wall Street Journal and New York Times on multinational R&D locations).

Among the study's more surprising findings, according to the researchers, was the role university collaboration plays in the decision-making process for locating R&D facilities. In fact, collaboration with universities was particularly prevalent as a factor for expanding to emerging countries, even though these countries provide lesser degrees of IP protection.

"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.

More than half of the corporate respondents who identify the United States as their home country report that they have either recently expanded or planned to locate R&D facilities in China and India vs. other developed countries. Of 63 Western European companies responding, 13 plan on expanding or locating new R&D facilities to the United States. The issue of collaborative research between universities and corporations has been a growing concern within the United States, with some observers saying legal wrangling over intellectual property rights is not only slowing the pace of innovation but also prompting companies to seek university research partners in other countries.

The study indicates, however, that while the trend toward R&D offshoring to Asia will continue despite concerns over IP protection, companies are keeping their most cutting-edge research in developed countries where IP protection is the strongest. According to the study, only 22 percent of the R&D effort in emerging countries is for new science.

"The United States would seem to have a comparative advantage in maintaining its innovative leadership through the high caliber of its scientists and its strong protection of IP," said Lesa Mitchell, vice president of Advancing Innovation at the Kauffman Foundation. "Industry and universities must be alert to removing obstacles to joint research, or emerging countries will overtake us in innovation breakthroughs, and the burst of discovery that has been driving our economy for the past half-century will be over."

Another public policy implication of the findings, say the researches, is that the United States must focus on highly skilled worker immigration.

"We are educating the best and the brightest, but make it impossible for them to stay in America and immigrate. We need major immigration reform that welcomes, instead of pushes out, highly skilled workers," said Dr. Marie Thursby.