Even a profound slowdown in the West can't stop this juggernaut. As the developed world continues to struggle with recession and tight credit, companies in emerging markets continue to boost their research and development operations by exploiting cheap brainpower and bouncy consumer demand.
The seeds were sown decades ago but only started to blossom in the 1990s. This new frontier is crowded with a Who's Who of multinationals, from engineering giant ABB to telecoms upstart ZTE. One of the pioneers was Microsoft, which maintains an ever-expanding, wildly innovative research lab outside Beijing.
After 2000, this trickle of R&D globalization turned into a flood, descending on China and India and to a lesser extent Brazil, Russia, South Africa, and diverse up-and-comers. At the same time, emerging market companies are now R&D forces to be reckoned with. Chinese company Huawei, for instance, has sights on becoming the world's number one telecoms provider by 2020.
Polycentric innovation, meanwhile, is all the rage. For instance, GE opened an innovation centre in Bangalore, India - the same hub where Cisco set up a second headquarters for its "globally integrated" enterprise.
Conventional wisdom: When the developed world sneezes, emerging markets catch a cold. But how much have Western sniffles affected its R&D activity elsewhere? Not as much as you might think, according to Martin Grueber, lead researcher at the Ohio-based Battelle organization. Low costs and an abundance of market opportunities have outweighed economic hurdles.
"The economic downturn caused a deeper level of thought regarding R&D investment in general and its expected outcomes - whether it is from a corporate or government perspective," says Grueber. According to the 2012 Battelle/R&D Magazine Global Funding Forecast, an annual report on investment trends in the sector, US and European firms made significant investments in R&D activities in China, India, and other emerging markets even during the downturn.
For companies and national economies alike, the 2007 credit crunch stimulated an interest in developing an infrastructure of innovation, during and coming out of the global slump.
Wage growth, always a concern in hot-money areas of the emerging world, has been most rampant in China. Labour costs there have soared by 20 percent per year over the past four years, according to the International Labour Organization. Not surprisingly, when the American Chamber of Commerce in Shanghai asked members about their biggest challenges, nine-tenths put rising costs at the top of the list.
A case in point: some 230,000 people work at Foxconn, one of the largest factory complexes in China and the most important contract manufacturer for Apple. Earlier this year, Apple agreed to raise the salaries of its Foxconn employees by up to 25 percent. With the profit margins of the Shenzhen-based company at only 1.5 percent, and those at Apple around 30 percent, it is obvious who will shoulder most of the extra costs.
In India, meanwhile, salaries increased between 10 and 15 percent at the country's 700 R&D centres last year, while attrition among employees was as high as 20 percent, according to Zinnov Management Consulting. Although these factors fed into higher operational costs, "the mood at the R&D centres of global companies in India has not dampened," says C.S. Chandramouli, director of Zinnov's globalization advisory business in Bangalore. The running costs of multinational R&D centres in India were still 25 percent lower than those in China.
Thanks to ad hoc measures such as capital controls, and to a tightening in national interest rates, inflation has eased in most other emerging markets. Still, employers can expect to pay more for qualified R&D labour in countries such as Brazil, Mexico, Turkey, and Russia.
A handful of Chinese companies have been splashing out on R&D, sometimes with remarkable results. Huawei, the Shenzhen-based telecommunications company, is among the world's top five applicants for international patents, and may overtake Ericsson this year as the number one supplier of telecoms equipment worldwide.
Huawei has encountered opposition in its push to expand in the United States, amid allegations of shady business practices, patent infringements and national security concerns. Its founder and president, Ren Zhengfei, used to work for the Chinese People's Liberation Army. All this hasn't stopped Huawei from developing the fastest smartphone on the planet, or from pursuing its patent battles with neighbouring mobile-phone maker ZTE, which has muscled to the fore with sexy lines of consumer products.
Similar to other multinationals, these Chinese companies are generating and developing knowledge by means of a global R&D infrastructure. Another good example is Lenovo, which has leapfrogged Dell and Acer to become the world's second-largest PC maker. Originally incorporated in Hong Kong, Lenovo keeps its headquarters in North Carolina but maintains most of its production in China.
China appears to have become an R&D powerhouse. Last year the number of patents in China outpaced those in Japan, putting China in second place behind the US. Since 2000, the number of trademarks registered in China has jumped more than four-fold, according to a survey by Thomson Reuters.
Curiously, Chinese companies have been slow to register their patents globally, and a closer look suggests that many registrations are in fact small improvements on existing patents. Although the Chinese government pours money into R&D, much of it is wasted, according to the OECD.
The Industrial Research Institute, an R&D think tank in Arlington, Virginia, found in its latest annual survey of 104 multinationals that a full 70 percent have R&D facilities overseas. China topped the roster, and India and Brazil made the top ten. That list of R&D destinations is only getting longer, especially in Asia, South America, and eastern Europe.
The biggest concerns mentioned by R&D managers had to do with innovation: accelerating innovation, growing the business through innovation, and balancing short- and long-term R&D objectives. According to Richard Antcliff, chief technologist at NASA's Langley Research Centre, "These responses show a continued concern for getting innovation management right."
Managers, it seems, are feeling the pressure of markets and the need to tap a growing pool of local talent on a global scale. In-house diplomacy plays a growing part, as it has become vital to prove the value of innovation to senior managers, and then find the right balance of investments for technology and innovation, Antcliff adds.
Could this mean that the big outsourcing boom is over? Hardly. More mobile, more nuanced is the response of the multi-nationals. In markets where rising labour costs are testing corporate budgets, some companies have been opting for greener pastures in countries such as Bangladesh, Cambodia, Indonesia, and Vietnam. Nike used to make the bulk of its sports shoes in China, but has shifted most production to Vietnam, taking its local R&D along. Rather than expand product development in China, Samsung has decided to build a new R&D centre in Hanoi, where it will hire up to two thousand product engineers by 2015.
There are other companies now returning operations to their home countries, or refraining from relocating in the first place. A string of studies found that many American manufacturing executives are now planning or considering moving production out of China. Big names actively engaged in "reshoring" include Boeing, Ford, and GE.
Electronics giant Philips recently announced it would bring production of its top-line electric razors from China to the Dutch town of Drachten, citing wage costs and a nearness to its home R&D base. "A product engineer in Shanghai is now just as expensive as in Drachten," says Rob Karsmakers, a factory manager who spent four years working for Philips in Asia.
Some European companies remain cautious. As rising wages lifted demand for automated factory gear, KUKA, the largest European maker of industrial robots, decided to build a regional hub in China. Although this location will become its Asia centre of assembly, R&D and most production will remain in its native Germany, says Till Reuter, KUKA's chief executive.
Meanwhile, the R&D craze in India continues apace. Revenues from India's IT and outsourcing industries are expected to top US$100 billion this year, up 15 percent from 2011 and double the level of 2007, according to the National Association of Software and Services Companies (NASSCOM), India's technology industry association. Japan's Panasonic, Denmark's Vestas, and Red Hat of the US were but a few of the multinationals to open major technology R&D centres in India over the past 18 months.
"There has been consistent growth in the domestic IT market," says Rajendra Pawar, chairman of NASSCOM, which has 1,200 member companies. This trend was thanks to growth in India and expansion into new regions such as the Middle East and Africa, and comes despite weak economies in its key markets of the US and Europe. Pawar adds that crises stemming from the wobbly euro and Western banks had "affected governments more than companies," at least in their dealings with India. A recent survey by Duke University seems to confirm this view, showing that less than 5 percent of American companies are considering moving work from India to another country.