Offshoring R&D: More Popular, but is it Wiser?

The world’s largest CPG company has created 254 advanced-research laboratories in southeast Asia, making it an international focus of innovations in hair care, skin care, fragrances, fabric care, home care and health and grooming products that previously came almost all out of U.S. facilities. Other big western companies also are offshoring more of their R&D—even as many of them also are onshoring more manufacturing.

Ford, for instance, plans to expand its R&D operation in China, boosting its workforce by about half to roughly 2,000 people by 2018, helping the company anticipate and react more quickly to market changes in China and other growth markets in Pacific Rim.

Even the U.S. Department of Defense is looking to partner with foreign defense contractors,  exploring the offshoring of R&D as it faces new cost pressures from the Obama administration’s downsizing of the U.S. military.

Offshoring R&D can be beneficial, one new study says, but only up to a point. After studying a wide range of German companies, researchers at the Center for European Economic Research concluded that offshoring too much of a firm’s innovation is likely to be costly. There’s “a trade-off between global knowledge sourcing and a firm’s ability to use this knowledge effectively,” the research concluded, suggesting that offshoring more than 15 to 30 percent of a firm’s innovation activities “becomes challenging for maintaining the effectiveness of the organization.”

One part of this phenomenon deserves more study, and certainly consideration by corporate decision makers: The more a firm offshores R&D functions, the higher the ratio between low-paid and high-paid R&D jobs in America, according to a new study of offshoring by MIT and the University of Michigan. This is the opposite of the effect in all other corporate functions in the study, where the more companies offshored a particular function, the fewer low-paid jobs they had in the same function at home.

Additional reading:

Get a First Look at Our New Innovation Center in Singapore

Research: Don’t Offshore Your R&D

The Impact on Innovation Offshoring on Organizational Adaptability