The cost advantages of conducting R&D in rapidly developing economies (RDEs) such as China and India are well established. The Boston Consulting Group (BCG) has observed that MNCs based in developed countries typically can lower their R&D labor costs by 40 to 60 percent in RDEs, compared with their domestic R&D labor costs, according to a new BCG White Paper, "Taking R&D Global: Meeting the Challenge of Getting It Right."
Another important benefit of doing R&D in RDEs is gaining access to large pools of well-trained researchers and engineers. In 2007, RDEs accounted for two-thirds of the global engineering talent pool -- and that share is growing.
But for many leading companies an even greater benefit than lower costs and access to talent is the ability to design and develop products specific to RDEs' fast-growing markets. The IMF has forecast that these economies will drive the entire growth of global GDP in 2010. They are also home to many of the world's "next billion" consumers, who are commonly considered impossible or unprofitable to serve with current business models but who could become profitable to serve with new ones. In 2008 this group already numbered some 3.7 billion people, with earnings of $2.3 trillion -- and those earnings are expected to grow at 8 percent per year to reach $4 trillion in 2015.
Global companies that want to tap into this vast pool of new consumers must develop products and services that cater specifically to their needs, rather than merely tweak existing offerings. And the best way to do that is to be there, employing creative people who know those markets intimately.
A critical aspect of succeeding in globalizing R&D is setting the right objectives for the R&D organization. These include improving the cost-effectiveness and efficiency of R&D, and specifically avoiding the "hidden" costs of doing R&D offshore, which can amount to as much as 35 percent of overall R&D costs. Other critically important objectives are harnessing global talent and innovation, and localizing design and development to capture market growth.
Meeting these objectives generally entails adopting a different design for the R&D organization. R&D centers should end up playing one of three distinct roles: cost cutter / effectiveness master, innovation and talent seeker, or localization leader. Trying to achieve all three objectives at the same time in a new or still-maturing R&D center can jeopardize the center's effectiveness and growth.
A number of companies have failed in their efforts to reap the benefits of globalizing their R&D because they fell into the trap of "unreadiness." In this condition, there is a significant gap between the company's ambitions and its capabilities. This gap triggers a vicious cycle in which the company launches an RDE-based R&D center but fails to empower its people or give it interesting and rewarding projects, so the most highly skilled staff members leave, quality and effectiveness decline, and the center stagnates.
Companies that recognize their own unreadiness can take action by applying the four golden imperatives: globalize your research and innovation, not just your low-value engineering; establish a common language; implement a comprehensive global talent strategy; and leverage local partners without risking intellectual property leaks.
To succeed in globalizing R&D, companies usually must undertake a fundamental transformation of their current way of doing R&D. Often they must take an integrated approach by shifting part of the R&D responsibility away from the historical headquarters to multiple global centers. They may also need to make some tough tradeoffs between their ambition and the pace of transition. And in some cases they will need to shift management's attention away from the company's existing business, in order to focus on new opportunities in growing markets.
To order a copy of "Taking R&D Global: Meeting the Challenge of Getting It Right," or to arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.
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