Standing Study

The Role of Offshore R&D in Strengthening Competitive Advantage: Chances and Challenges in India

[ Project leader: Dr. Rajnish Tiwari ]

[ Advisor: Prof. Dr.Cornelius Herstatt ]

1. Introduction

The ongoing integration of world economies (globalisation) has opened up an array of business opportunities and challenges for firms, e.g. in the form of access to new markets on the one hand and increased competition on the other; see for instance Bhagwati [2004] and Friedman [2005]. The intensified competition is forcing economists and business leaders to increasingly recognize the need to shift focus in business competition. Competitive advantage especially for firms from developed, industrialised nations is ever more, and almost compulsorily, innovation-driven [Tiwari, 2007], since they are at a disadvantage to compete with low-cost producers from emerging markets, see for instance EIU [2004], Marwaha et al [2005], Rammer et al [2005], Spielkamp et al [2006]. Innovations are however also necessary to cater to differing needs and/or demands of new markets [Beise, 2001; IBM, 2006].

This synopsis, titled “The Role of Offshore R&D in Strengthening Competitive Advantage: Chances and Challenges in India” (working title) lays the foundation work for a doctoral dissertation at the Hamburg University of Technology conducted by the author under guidance of Prof. Cornelius Herstatt at the Institute of Technology and Innovation Management. The dissertation is a part of “Research Project Global Innovation” at the above mentioned institute, which, co-led by the author, is aimed at understanding the impact of offshore research and development (R&D) work. This aim is sought to be achieved by observing and analysing and later forecasting developments in the field of globalisation of innovation.

The synopsis is structured on the following lines: A case is made for globalisation of innovations in section 2, after this short introduction. Section 3 deals with opportunities and challenges for global innovation in India. Section 4 shades light on the proposed methodology. Section 5 deals with industry sectors which are of interest to this project. The pursued objectives and expected results are discussed in section 6. A summarized draft of project proposal is attached in section 7.

2. Globalization of Innovation

One of the most prominent features of globalization has come to be known as Business Process Outsourcing (BPO), whereby firms outsource their routine, standardized activities to an outside firm that usually enjoys cost advantages e.g. on account of specialization and/or location. A logical extension of this trend has resulted in Knowledge Process Outsourcing (KPO), whereby knowledge-intensive research & development work (R&D) is outsourced either to an outside firm or an offshore-subsidiary. Primary motives of KPO are thought to be availability of highly-skilled, cheaper human capital, location of industry-specific clusters and/or the incentive to develop products designed to suit the specific needs of a target market, physically and culturally distant from the home market of a firm, see for instance Boutellier et al [2000], DIHK [2005], Arvanitis et al [2006], Blinder [2006], Ernst [2006], Fabian [2006] and Wyke et al [2006]. Incentives of global innovation can be summarized as illustrated in Figure 1:

Figure 1: Incentives of global R&D activities

The potential advantages of offshore R&D thus seem to be obvious. Many Fortune 500 firms have established R&D centres abroad; see for instance UNCTAD [2005a and 2005b]. More recently the emerging markets of India and China have attracted substantial foreign direct investment (FDI) in R&D sector. India alone had reportedly attracted over 100 of the Fortune 500 firms to conduct a part of their R&D activities by 2003 [GOI, 2003]. Between 1998 and 2003 India received R&D investment worth US$1.13 billion. Planned investments in the R&D sectors at the end of 2003 totalled to US$ 4.65 billion. The largest investing country was the USA followed by Germany [TIFAC, 2006]. Figure 2 shows the growing pattern of foreign investments, including foreign direct investment (FDI) in India:

Figure 2: Foreign Investments in India since 1991

India is even reputed to enjoy a considerable advantage vis-à-vis China in this field. The emergence of India as a leading R&D hub as against China is remarkable as the latter enjoys a far superior advantage in the manufacturing sector and generally possesses better infrastructural facilities. This fact throws up two interesting research issues:

1. Which are the factors, whose endowment is crucial or at least beneficial for an overseas R&D location?
2. And is the impact of these factors of universal nature or does it vary for particular in-dustries? If yes, which factors are of crucial importance for which industries?

An answer to these questions becomes even more critical as we consider that only a small number of companies involved in offshore R&D activities is able to actually generate advantages that are originally expected of their offshore operations, owing to several problems that arise in such an operation; see e.g. McKinsey [2003], Farrel [2004], and Fabian and Schmidli [2006]. As the globalisation process intensifies (e.g. the expected opening up of the services sector with the completion of Doha round of the WTO) and the pressure to rationalise (internal) cost-structures increases, more and more small and medium-sized enterprises (SMEs) that form the back-bone of the industry in many western countries such as Germany, will be confronted with the choice / opportunity / threat to make use of offshore R&D; see e.g. Herstatt et al [2007], Rammer at al [2005], and Spielkamp et al [2006]. Since SMEs generally do not enjoy same level of organizational slack as bigger corporations, their scope to make expensive experiments with uncertain outcomes is limited.

3. Opportunities in India

India has emerged as a prime location to conduct offshore R&D [Srinivasan, 2004]. A recent study conducted under the aegis of “PRO INNO Europe”, an initiative of the European Union, discovered that India has bagged most of the R&D projects offshored from EU-countries; followed by China and far ahead of US and other countries [LTT Research, 2007], as shown in Figure 3:

Figure 3: Number of R&D FDI projects from EU 25 by destination country, 2002–2006*
(* The 2006 figures refer to January; Graphic source: LTT Research, 2007)

Figure 4 illustrates India’s revenue generation through high-end IT services and the impressive growth it has generated in past few years:

Figure 4: India’s revenues with high-end IT services

India is even reputed to enjoy a considerable advantage vis-à-vis China in this field. The emergence of India as a leading R&D hub as against China is remarkable as the latter enjoys a far superior advantage in the manufacturing sector and generally possesses better infrastructural facilities. This fact throws up two interesting research issues:

According to World Trade Organization (WTO) India’s export of commercial services increased over six-fold from US$ 6.3 billion in 1994 to US$ 39.7 billion in 2004 [WTO, 2006]. This growth is also reflected in India’s accumulated foreign exchange reserves, which registered a phenomenal growth between 1991 and 2007: from US$ 5.8 billion to US$ 197.8 billion, see Figure 5:

Figure 5: Growth in India’s foreign exchange reserves since 1991
(India’s fiscal year runs from April of a given year to March of the following year)

Also India’s Gross Domestic Product (GDP) increased over three-fold in the same period, from US$ 281 billion in 1990-91 to US$ 854.5 billion in 2005-06, leading to a substantial increase in per capita income, which grew in absolute terms from US$ 335 in 1991 to an estimated US$ 829 in 2007.

Figure 6: Growth in India’s per capita income in absolute terms

This fact points out to opportunities presented by the large and growing Indian market, which is thought to comprise of the world’s largest middle class. Additionally, India is thought to have a large pool of English speaking high-skilled labour while at the same time possessing the cost advantage. These factors are supplemented by other advantages too, such as a vast number of institutions of higher education, some of them belonging to the best world-wide, an independent judiciary and a comparatively good situation of law & order under a democratic form of government. For India’s attractiveness as a R&D location, see Müller [2004], Hirschfeld [2005], UNCTAD [2005a/2005b], BCG [2006], Fabian [2006] and Kaufmann et al [2006].

4. Methodology

We make use of both quantitative and qualitative research. Since the phenomenon in question is constantly evolving, we often take recourse to case studies that allow generalization on the basis of thick description. The purpose is to not only observe the phenomenon (the "what" aspects) but also to explicate it (the "why" and "how" aspects). For this purpose, following means are applied:

• Identification of suitable candidates (via: literature review, industry contacts)
• Preliminary information (desk research)
• Interviews to ascertain motivation factors / induce cooperation
• questionnaires & empirical surverys

5. Industry Sectors in Focus

Following sectors, in which India is reported to possess strong capabilities, build the focus of this standing study:

• Aerospace Industries (Civil Aviation, Aeronautics, and Space)
• Automotive and Automotive Components
• Information and Communication Technologies (ICT)
• Life Sciences (Pharmaceuticals and Biotechnology)
• Mechanical Engineering and Machine Tools

6. Objectives and Expected Results

It is imperative to undertake a continuous and ongoing scientific evaluation of opportunities and problems related to offshore R&D activities. Further, an attempt is made to identify factors that potentially determine the success/failure of an offshore R&D project. A main objective of this research work is to ensure a high level of practical relevance for the industry sectors in question. Figure 7 illustrates the chances and risks of global innovation activities.

Figure 7: Chances and challenges of “global innovation”

A list of references used may be found in the PDF file attached here, which is a copy of the synopsis published in the proceedings of the Third Rexroth Doktoranden Kolloquium held by the firm Bosch Rexroth AG in Lohr am Main in Germany in Mai 2007. For any enquiries please contact Dr. Rajnish Tiwari.