By Martin Grueber, Research Leader, Battelle, Cleveland, Ohio and Tim Studt, Editor in Chief, Advantage Business Media
Tuesday, December 22, 2009
As we have discussed in many recent forecasts, the concept, perception, and impact of R&D “outsourcing” is extremely complex, with ties to high-profile headlines, emotional concerns, bottom-line viability, and even patriotic banter. Depending on one’s perspective, outsourcing is negatively seen as the loss of jobs, R&D leadership, and competiveness, or positively seen as “open innovation,” support for industry/university collaborative research, and global market reach.
It is the sometimes overlapping concepts of outsourcing and offshoring, however, that cause the most significant, and often heated, debate in the U.S. Yet we rarely hear of similar debates from the perspectives of foreign countries. For example, was there a significant public outcry in Japan when Honda and Toyota made (and continue to make) significant R&D investments here in the U.S.?
As we complete our second combined U.S. and Global R&D report, however, one fact that the economic crises of the past two years has made clear is that the issues are beyond the often confusing definitions. of outsourcing. We are in a global economy, and the performance of R&D is intertwined with that global economy.
What has been, and indeed still is, missing, is good, concrete data on the subject to shed light on the true extent and impact of the globalization of R&D, and whether policy initiatives could (or should) do anything to address it. It is hoped that the recent revisions to the NSF industry R&D survey (now referred to as the Business R&D and Innovation Survey) will provide a much more robust and quantifiable picture of U.S. R&D performance both domestically and worldwide. The first revised survey is collecting data on 2008 R&D performance and will likely produce limited 2008 statistics in mid-2010 and produce full sets of 2008 and 2009 statistics in mid-2011. (For more information on the new survey, please see SRS InfoBrief: “NSF Announces New U.S. Business R&D and Innovation Survey” (NSF 09-304) at http://www.nsf.gov/statistics/infbrief/nsf09304 and the new survey’s website at http://www.nsf.gov/statistics/srvyindustry/about/brdis).
In the meantime, data from the R&D Magazine surveys provide some interesting perspectives, with suitable cautions regarding survey data, about the role of outsourcing and offshoring now and in the near future for U.S. firms. Our survey coverage is limited, however, with respect to our understanding of foreign R&D players.
From our surveys, more than 83% of U.S. industry respondents report using some type of outsourcing activity to perform part of their R&D functions. This reflects that looking externally for R&D connections and innovations is a now commonplace occurrence. Despite the broad usage of outsourcing, our industry respondents report that R&D outsourcing accounts for just 8.5% of their total R&D budgets, on average. Applying this share to our current forecast for 2010, U.S. industrial performance yields an estimate of “outsourcing” at slightly more than $24 billion. Readers may view this as a likely understated or vastly conservative estimate.
It is critical to note, that nearly all the U.S. industry respondents using some type of outsourcing activity also report outsourcing at least some of these R&D efforts to U.S.-based partners, e.g., suppliers, smaller R&D operations, universities, etc. Only in domestic R&D outsourcing was there a net increase foreseen for the near future.
Recognizing the continually changing nature of the outsourcing activities is also important. While more than 21% of the respondents believe their outsourcing would increase from 2009 to 2010, 17% of respondents felt their level of outsourcing would decrease in the next year.
At slightly more than $24 million, this estimated level of “outsourcing” is significantly different, however, from a Booz & Co. report from 2008 that indicated U.S. corporate R&D spenders deployed an estimated $80.1 billion of their $146 billion R&D funds overseas, or nearly 55% of these firms’ total R&D.
The significant difference between these two views of external R&D performance—one from the perspective of the company and other from a more national perspective—underlies critical points of clarification to be gained from the new NSF data. Exactly how much R&D spending by U.S. firms is performed by “outsourcing” partners, how much is performed in the companies’ own non-U.S. locations, and what is the true level of R&D performed by offshore non-U.S. partners? Until this data is available and the picture clearer, we risk the development of R&D-related policies that actually stifle the innovation process and the implementation of plans, including perhaps the Obama administration’s goal of devoting more than 3% of U.S. GDP to R&D (federal and private combined).
