The trend towards a global division of labour and specialisation is not bypassing the R&D departments of multinational firms according to a new report by Deutsche Bank Research.
Leading technology groups are increasingly considering emerging markets such as China and India as R&D locations in addition to industrial nations. The report says the driving forces are the proximity to other local production facilities, the dynamic progress in education and research as well as these countries’ ambitious industrial policies.
Labour costs are of minor importance.
The report (pdf) says R&D personnel in emerging markets do indeed earn far less on average than in rich countries. In China for example they receive €6,000 per year, whereas in western Europe personnel costs are about 10 times higher (with big regional differences). International companies do not, however, pay average wages in emerging markets, but search for the brightest and most talented minds. The salaries for these highest calibre specialists are already closer to those in industrial nations and the differences are steadily disappearing.
What is new is that a technology transfer is also taking place from emerging markets back into industrial nations - - China and India are net exporters of R&D to the EU; imports of R&D services from India into the EU have risen by 2 ½ times; and from China by 3 times.
The division of labour and specialisation are bringing down costs, fostering competition and leading to modularised work processes.
Deutsche Bank Research says R&D activities are no exception. Managing complex innovation networks and the commercial application of new ideas - - wherever they emerge - - is therefore becoming more important for companies.
Emerging markets are also becoming more competitive in high-tech goods and services -- but this also increases their demand for high-quality intermediate products and know-how.
The report says companies in Germany have become much more open in recent years.
Siemens now employs some 350 scientists and experts at facilities in BRIC countries. This represents nearly 19% of the company’s research team - - see our report on Reverse Innovation.
The share of the overall R&D budget spent on external research assignments has risen from 10% to 20% over the last 20 years - - with large sector-specific differences. The external R&D spending in 2009 came to roughly €11 bn. The majority (59%) of external R&D contracts goes to other companies (incl. affiliates), while 11% goes to universities and professors, 9% to other state research institutions and 20% to foreign facilities.
The contribution of foreign partners has trended up even faster than the total volume of external R&D contracts over the last 25 years. As a consequence the foreign share rose from less than 10% (in 1983) to nearly 20% (in 2007) of all external R&D expenditure. However, most of the foreign-based contractors are affiliates of the sourcing firm. These figures, nevertheless, graphically demonstrate the internationalisation of the R&D segment.
The report takes a closer look at the significance of global R&D locations for a modern innovation process. In so doing DBR also looks beyond the traditional R&D centres in Europe, Japan and the US.
Research intensity in emerging markets is, however, mostly lower than in industrial countries. The 1,000 biggest technology groups invest a total of 3.6% of their revenues in R&D. Among companies from emerging markets the figure is just 1.2%.
DBR says this year more people will start tertiary education in China than in the EU, the US and Japan put together. However, not all these graduates will be unreservedly suitable candidates for employment in international companies. Training is often criticised for lacking practical relevance, which makes additional, introductory on-the-job instruction necessary.
The number of R&D facilities belonging to international companies had risen from an estimated 50 in 2000 to about 1,000 in 2007. These companies include, for example, Intel, Microsoft, Bayer, GlaxoSmithKline, Volkswagen and Toyota.
The report concludes that the proximity to other local production facilities in emerging economies, the dynamic progress in education and research as well as an ambitious industrial policy are key factors in the attraction of the locations. A new development is that technology transfer is also taking place from emerging markets back into industrial nations: China and India are net exporters of R&D to the EU. The levels are still low, but the dynamism is impressive.
With the technological capacities the concern about larger global imbalances in external trade could grow, after all the emerging markets are expanding their range of exports. DBR says, with it, however, the need will also grow for advanced knowledge, higher-quality intermediate products and capital goods. The export opportunities for technology groups in industrial nations will thus also increase.
The net effect is by no means clear.
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