Outsourcing Research And Development Essay

3563 words - 14 pages

Establishing business operations in far-flung corners of the world has become a routine challenge for many companies. The practice of locating production lines in developing markets where labor is cheap, and fast-growing markets easily accessible, is almost mundane. But manufacturing products globally is one thing: creating them is another. Until recently, much of the brainwork of the organization has been concentrated in the home market. This has been particularly true of research and development, that part of the business that is so integral to the creation of new products and innovative ideas. Now there are signs that companies are redistributing their product innovation, and in some cases even basic and applied research, across global networks.Research and development, often referred to as R&D, is a phrase that means different things in different applications. In the world of business, research and development is the phase in a product's life that might be considered the product's 'conception'. That is, basic science must exist to support the product's viability, and if the science is lacking, it must be discovered - this is considered the research phase. If the science exists, then turning it into a useful product is the development phase. Further terminology refinements might call it engineering to refine production so that the product can be made for a cost that appeals to consumers.Research and development is an investment in a company's future - companies that do not spend sufficiently in R&D are often said to be 'eating the seed corn'; that is, when their current product lines become outdated and overtaken by their competitors, they will not have viable successors in the pipeline. So how much is reasonable to spend on research and development? That is highly dependent both on the technology area and how fast the market is moving. Two percent of company revenue, not profit, might be enough in a fairly sedate market, but to keep up in rapidly changing markets, companies should expect to spend fifteen percent or more in research and development just to keep up with the rest of the pack.There are serious drawbacks to using the price mechanism; the costs of learning about available goods, the costs of learning prices, the costs of negotiating contracts, and so on. As communication, both electronic and physical, has become easier, these costs have declined, and this has led to a tremendous increase in outsourcing. Firms purchase cafeteria services as well as goods from outside suppliers. Why not R&D? It is much easier to outsource R&D than formerly. The technology area is much more competitive, with many willing suppliers among contract houses, universities, as well as large research institutes and other corporations. And indeed we do see R&D done under contract. However, that is happening in restricted domains, primarily when the product can be specified precisely. In those areas, it is sometimes even feasible to send the...

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