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To bolster their research and development efforts and help foster innovation, a growing number of U.S. businesses are establishing R&D relationships with service providers in other countries or building facilities overseas to carry out R&D activities.

“Major U.S.-based multinational firms have, for many years, had R&D facilities and capabilities in other countries where they have also established manufacturing, marketing, distribution and sales organizations, generally bearing the name of the parent corporation,” says Jules Duga, a senior researcher at Battelle, an independent R&D organization that c onducts $3.8 billion in global R&D annually. “To this there have been added the capabilities to conduct R&D. The mode of operations has evolved from having more than just the input of physical materials to the final product: it has grown into having some of the intellectual input provided from the local ‘captive’ facilities.”

Many U.S. companies in different industries have also gone to independent, or noncaptive, entities such as universities, small and large companies, and national laboratories to leverage their resident R&D capabilities, Duga says. “While this practice started off relatively slowly in the mid-1980s, it has grown quite considerably in the most recent five to eight years,” he says.

Among the key drivers of offshore R&D in countries such as India and China is the growing demand for innovation that many U.S. businesses face. In-house capabilities are not always able to meet that demand. In addition, companies in some industries are under pressure to launch new products at a faster pace, putting more pressure on R&D operations.

Nearly any type of company can engage in off-shore R&D, Duga says. “There is almost no limit to the types of companies that would be receptive to the idea of going off-shore with their R&D,” he says. “This applies to any company that wishes to manufacture and/or market its products in other countries and [which] can benefit from the availability of local talent for product support.”

The potential benefits of offshore R&D include reduced labor costs, gaining access to IT-related, engineering and other skills not as readily available in the U.S., and the ability to establish a foothold in fast-growing markets overseas through an R&D presence.

On the other hand, offshore R&D, whether it’s internal or via an outsourcing arrangement, can be challenging. There might be language and cultural barriers to overcome, and security and regulatory issues to deal with. In addition, it might be difficult to find the specific technology skills needed for a given development project.

“Perhaps the biggest concern is the issue of the protection of intellectual property [IP],” Duga says. “There has been a long-standing reluctance to enter into agreements where IP was being developed or used, with the worry about reverse engineering, usurpation of — or disregard for — patent protection, and similar behavior.”

To help overcome the challenges and mitigate risks, any organization considering offshore R&D should develop a detailed strategy for the project, including setting clear goals for offshore R&D activities, preparing for the language and cultural differences, possible regulatory issues and protection of IP.

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