The Future of Outsourcing
R&D Efforts
US companies right now are still testing the waters – many have begun to open offices in Bangalore and Hyderabad by sending employees from their US or European branches to oversee the operations and maintain quality control. Nevertheless, the progress towards innovation outsourcing and R&D operations continues.
A publication from Innovaro, a European consulting firm, sums the situation up quite nicely:
“The challenge for the developed economies is however perhaps greater than for the multinationals that are currently headquartered there. Although, for now, the profits that derive from most of these off-shore R&D facilities continue to flow to the shareholders ‘back home’ alongside the associated corporate tax into government coffers, this will not go on forever. As the research base in the US, Europe and Japan first stagnates and then enters into relative decline, the much-vaunted ‘value-add’ activities will disappear and the full economic balance of power will begin to switch. Moreover, as alumni of both found new start-ups and as companies like Acer, Lenovo, Tata and Infosys that have grown on the back of out-sourcing increase their own research credentials, the ownership of the next wave of innovation will also migrate in line with capability. With China fast approaching the US in terms of GDP PPP and India not too far behind, many Western hosts of the existing centers of innovation need to act now to develop coherent national innovation strategies that prioritize their future agenda and ambitions within the fast changing global context.”
Others hold a more grim view of India’s outsourcing industry. As wages rise, and Indian workers become more complacent, the minor advantage gained through lower salaries by moving offshore will outweigh the risk of intellectual property (IP) transfer. The monetary benefit of moving to India used to be 1:6 but is now 1:3. As this ratio increases and reaches 1:1, there will be no reason for western companies to move offshore. Forbes estimates that the cost advantage for India will completely disappear by 2015. India is therefore at a crossroads in its history. At this point, it will need to develop newer innovative proposals of its own by not remaining satisfied with the services outsourcing, which has contributed to its growth thus far. Otherwise, it stands to lose substantially in the future to smaller, more nimble countries like the Philippines.