Emerging Markets Are Magnet for Research and Development

Cost is not main factor when companies decide where to locate R&D projects

A survey of European and U.S. businesses conducting significant research and development (R&D) projects shows that the biggest factor in their decisions on where to locate is proximity to growing markets.

"R&D is growing everywhere, but it's growing faster in emerging countries," said Merrilea Mayo, of the National Academies, a sponsor of the survey, along with the E.M. Kauffman Foundation, Georgia Tech Research Corporation and Emory University.

The survey Here or There? was released September 22 and covers responses by more than 200 European and U.S. multinational firms in 15 industries. According to the survey's authors, the business press too often concentrates on the cost-basis for locating R&D facilities, but that criterion is not of first importance to multinational companies.

Mayo said an important reason companies do research in emerging markets is the ability to learn about those markets' customers while developing products. Countries like China and India, she said, offer companies "access to a whole bunch of people with money who can buy their stuff."

A representative from the Dow Chemical Company, which has headquarters in Michigan, said that, for instance, her company might develop furniture coatings in one country different from coatings it would develop in another country. By working in different regions, the company can adjust its formulas to work best for a particular market's preferences in wood or plastic furniture and can develop coatings to protect furniture from the temperature and humidity conditions of that market.

After proximity to fast-growing customer markets, the second most important driver of location decisions is the quality of a locality's work force, including the scientific expertise of its university faculty.

The survey says that many businesses enjoy the flexibility they find in negotiating intellectual property rights with universities in emerging markets, but then find that those same places have governments that may not protect those rights. Consequently, the U.S. and European-based companies tend to do their most cutting-edge research in their home countries or do pieces of research in emerging markets but bring them together to form a final product at home.

Only after considering nearby customer markets, the availability of workers, and the ease of negotiating ownership of intellectual property with university partners, does the cost of the research in a given country influence R&D decisions, companies reported.

Source: U.S. Department of State

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