Outsourcing? What About Innovation?

This article from The Economist (which unfortunately requires registration) discusses the R&D efforts of Indian companies and subsidiaries.

UNDERSTANDABLY, many Indians take umbrage at the wave of protectionist rhetoric engulfing the American election campaign. Not only do they point to the endless lectures they have received from Americans in years past on the benefits of globalisation and open markets. They also resent an insinuation underlying the debate over "outsourcing": that all countries such as India have to offer is cheap labour and a telecommunications link. Just look, they say, at the extent of the high-end research and development (R&D) work being undertaken in India.

Or, rather, they say so in private. In public, conscious of western fears of the migration of ever more technically demanding and high-paid jobs, many Indians have recently concluded that the best strategy is not to draw attention to themselves. The ultimate American nightmare is not just about white-collar employment, but the loss of the country's great international advantage: the ability to innovate. So a veil of discretion is masking some of India's R&D achievements. Industry lobbyists are playing down this aspect of India's success. Some multinationals, such as IBM, are loth to discuss it at all. Others, such as Texas Instruments, boast that they "have increased design resources around the world", but make sure to add that "this has been accomplished without transferring significant numbers of jobs to India". Indian IT firms are stressing that, great as their contributions are, the real cutting-edge, innovative work is done in their clients' laboratories in America.

Some veterans of the Indian technology industry are truly sceptical about the potential of Indian R&D. Lakshmi Narayanan, chief executive of Cognizant, a New Jersey-based IT-services firm with big operations in India, argues that the country does not yet have the capability to develop its own intellectual property. So far, he says, R&D's contribution to overall growth is "minuscule", and where multinationals, such as Cisco Systems and Nortel, have contracted work out to Indian services firms it has been in upgrading old products, not developing new lines. Satyam Cherukuri of Sarnoff, an American R&D firm, argues that, of the three requirements for developing an innovation-driven industry, India has two: the technical skills and access to capital. What is missing is an indigenous business model.

This raises an interesting question. What happens if we do stop outsourcing to India, but Indian companies compete better, take more market share, and American companies still have to lay workers off? Same effect, different cause. What will the outcry be then – that we can't do business with Indian firms?