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

By JON MARCUS | Published: DECEMBER 7, 2011

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

Inside American R&D – Part I: Losing the Competitive Edge

By JON MARCUS | Published: NOVEMBER 23, 2011

Amid the hulks of abandoned steel mills in a part of the country that epitomizes the decline of American manufacturing is a worrying symbol of another sort.

It’s not a ruin. It’s a building owned by Lehigh University in Bethlehem, Pennsylvania, where an institute named for automotive icon Lee Iacocca teaches entrepreneurship and leadership to business students from around the world.

What once happened in this building is what helped make the United States preeminent in leadership and entrepreneurship, in more tangible ways than teaching case studies from business textbooks.

Before it was converted into classrooms and a cafeteria, this was the Homer Research Labs of the Bethlehem Steel Corporation, the largest steel research complex in the world, where hundreds of scientists made discoveries in such fields as metallurgy and thermodynamics, developing products still in use today—until the company went bust, the lab was shut down, and what was left was sold to Lehigh.

Research that was conducted in such places as this one, and the famous Bell Labs—now owned by the French company Alcatel-Lucent—has long propelled the American economy. But cuts in corporate, federal, and academic spending are triggering high-level unease about the health of U.S. research and development.

The U.S. still accounts for about a third of the $1 trillion a year worldwide that goes to R&D. But American R&D spending was flat in the first half of the last decade, while it soared by 23 percent in China and by double digits in other competitor economies. More recent figures won’t be out until January, but observers expect that the financial downturn has taken a further toll in U.S. research spending.

“The stagnation in industry support for its own basic research in this century, together with the current decrease in support of academic R&D and basic research by the federal government, could over time have severe implications for U.S. competitiveness in international markets and for highly skilled and manufacturing jobs at home,” the normally staid National Science Board warned in a largely overlooked report: Research and Development: Essential Foundation for U.S. Competitiveness  in a Global Economy.

Jack Plunkett, CEO of Houston-based Plunkett Research, which follows research-and-development trends, is less oblique. “This is a huge concern,” says Plunkett. “And that’s a vast understatement. R&D is absolutely and totally critical and vital for the future, even the near future, and unfortunately there are some counterproductive trends.”

These include the first multi-year declines in decades of support for academic research from the federal government—the source of nearly 30 percent of the money that goes to R&D in the U.S., second only to industry—which came even before Congress began the austerity kick that threatens further curbs in spending.

Meanwhile, state budget cuts and falling returns on endowments have taken a huge toll on universities, which carry out more than half of basic research in America—the kind of slow-paced, abstract, theoretical work that underpins most important scientific advances.

“Too many people in the U.S. are focusing on the short-term and not the long-term, at the corporate level, at the political level, and at the educational level,” says Amit Mukherjee, who teaches technology, operations and information at Babson College. “We’re in a situation in which the U.S. is so far ahead of even China that it doesn’t seem to matter, but I begin to wonder whether we’re going to hit a tipping point very soon.”

The U.S. may already have. It’s now eighth among the countries of the Organization for Economic Cooperation and Development in the proportion of its GDP it spends on research. The number of articles in scientific journals by authors who work in U.S. private industry has plummeted by 30 percent since 1995.

The share of applications to the U.S. patent office filed by U.S.-resident researchers is also falling. Nearly half of all patents granted in America today name at least one non-U.S. citizen as an inventor. And a report by Thomson Reuters concluded that the U.S. research based “has at best plateaued in performance and—on some estimates—is now in decline.”

Nor is it likely that this has turned around within the last few years, for which performance indicators won’t be out until January. “Industry tends to cut back on R&D when business is not good,” says Rolf Lehming, who compiles the statistics for the National Science Foundation. “And the federal government and others are pretty constrained about what they can afford over the next decade or longer. So I would imagine that, as in previous recessions, there will be some cutback in industrial R&D.”

Which means that someone else will have to do it. “There are no more Bell Labs,” says Sethuraman Panchanathan, chief research officer at Arizona State University. “What we need is not only more investment by corporations, but more partnerships with universities to do research. Because if the status quo continues we can’t assume we will remain competitive in the global marketplace.”