Inside American R&D – Part III: The China (and India) Syndrome

More than 4,000 engineers and scientists work at General Electric’s John F. Welch Technology Center, a gleaming research complex set amid impeccably landscaped grounds and named for the company’s legendary former CEO.

In busy, sun-filled labs, they develop new locomotives, airplane engines, and healthcare products, and have received no fewer than 1,000 patents after just 10 years in operation—an average of more than one every three days. It’s the Fairfield, Connecticut-based conglomerate’s largest multipurpose research center.

And it’s in Bangalore, India.

GE spent more than half a billion dollars on research last year at five facilities like this one. Four are outside the United States—in Bangalore, and in Shanghai, Munich, and Rio de Janeiro. It’s part of a dramatic shift in the amount of research and development being moved to economic-competitor countries, where there’s a steady supply of educated workers, who can be hired for less than in the U.S. IBM, Intel, Motorola and other companies, for example, all run labs in China.

This euphemistically named “reverse enterprise,” combined with vastly increased government and corporate investment in research in China, India, South Korea, Taiwan, and other fast-growing rivals, is yet another thing that’s making some American observers nervous about inertia in American R&D—and the long-term health of the knowledge economy it sustains.

“As America has been flattening out or not dramatically growing its R&D investments, the highly competitive nations of Asia have been very aggressively growing theirs,” says Jack Plunkett, CEO of Houston-based Plunkett Research, which follows research-and-development trends.

It doesn’t matter, these observers say, that research like GE’s in Bangalore appears to be controlled by parent companies in the U.S. “That is a ridiculous argument,” says Amit Mukherjee, an Indian-born business consultant and author who teaches technology, operations, and information at Babson College. “While we keep cutting R&D funding, Indian companies can look around and say, Hey, we can pick up a whole lot of really well-skilled people and have them work for us. They can really give GE a run for its money when they decide to flex their muscles.”

They’re already flexing.

The U.S. still accounts for more than a third of the $1 trillion a year worth of research and development conducted worldwide. But China has shot to third in this category, displacing Germany and coming close to passing second-place Japan. China already takes first place in the number of people employed in research and development, having doubled the size of that workforce in the last 15 years. Newly minted engineers are pouring out of its universities, and it’s offering incentives for homegrown engineers to return from the abroad. One Chinese company, Huawei Technologies, opened a $340 million research building last year in Shanghai where 8,000 scientists will eventually work.

China is not the only threat to U.S. supremacy in R&D. In the equally important measure of percentage of gross domestic product spent on R&D, America is now eighth, after Israel, Finland, Sweden, South Korea, Japan, Denmark, and Switzerland. (The amount of money being pumped into R&D by the Chinese government—$141 billion last year—will tie it with the U.S. in this competition, too, by 2020.)

Since tightening legal protections for foreign patent holders—long a major obstacle to R&D in Asia—India has also seen a vast increase in the amount of research under way, largely in the area of pharmaceuticals, attracting global companies including Eli Lilly and GlaxoSmithKline.

And while these relationships may seem symbiotic, writes Vivek Wadhwa, executive in residence at the Pratt School of Engineering at Duke University, “Indian and Chinese scientists are rapidly developing the ability to innovate and create their own intellectual property. Several firms in India and China are performing advanced R&D and are moving into the highest-value segments of the pharmaceutical global value chain.” Already, more than five percent of pharmaceutical patent applications to the World Intellectual Property Organization come from India and more than eight percent from China.

South Korea is building a new district in Seoul called Digital Media City, for researchers, developers, and entrepreneurs, which is envisioned to house 120,000 workers. South Korea’s Samsung now spends more on R&D than IBM, and is second only to IBM in the number of applications approved by the U.S. Patent Office. Even tiny Taiwan, with a population of 22 million, has more than 140 research labs, and its researchers alone account for more than 5,000 U.S. patent filings every year.

Not only is the U.S. losing momentum, says Babson’s Mukherjee. It’s losing talent as the balance of research and development moves east.

“We are reliant on people coming from abroad to do science and technology,” he says. “And when the momentum shifts and they start going back, then we have a serious problem that cannot be turned around in a hurry.”

Next Wednesday: Inside American R&D – Part IV: The Road Ahead

Photo Credit: Flickr (CC BY 2.0), Five-Starred Red Flag by Gene Zhang

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