Economies such as China, India, and Brazil are emerging from the global recession with high expectations for growth, presenting global companies with new markets, ongoing access to lower costs, and unprecedented opportunities to broaden their research and development efforts in the coming years. Yet in our third annual McKinsey survey on R&D, fully one-third of executives around the world say their companies are not doing any R&D work in emerging economies.
Of the two-thirds of respondents whose companies pursue such efforts, the largest shares say their R&D is focused on either global product platforms or local innovation in emerging economies, as opposed to R&D for developed markets only, which respondents say is not a major focus of emerging-market R&D operations. Moreover, companies appear to be aligning their goals, whether it’s seeking lower development costs or gaining better access to customer insights, with their specific R&D focus in emerging economies.
That focus seems to matter more than whether or not companies are “high-performing innovators.” Indeed, there are few notable differences between the goals and practices reported by high performers and others, save one: every respondent among the high performers says his or her company conducts R&D in emerging economies.
Regardless of why companies conduct R&D in emerging economies, respondents broadly agree that the performance of managers for R&D in emerging economies tends to lag behind their counterparts in the developed world, that most decisions about R&D are made centrally, and that their companies struggle to share knowledge effectively.
Spending and goals
Four in ten respondents say their companies’ R&D budgets will be higher than last year’s—the same proportion that said so in our 2010 survey. And two-thirds of executives say their companies are spending part of their 2011 R&D budgets in emerging economies, with most focusing on the support of either product platforms sold in global markets, or innovation for products made and sold in local, emerging-economy markets. Fewer than one in ten say the main focus of their company’s emerging-economy R&D work is for developed economies.
Executives at companies based in either the Asia-Pacific region or North America are the likeliest to say their companies don’t pursue R&D in any emerging economy (Exhibit 1). Strikingly, among companies we define as “high-performing innovators,” 100 percent conduct some R&D in emerging economies.
Among respondents whose companies pursue emerging-economy R&D, the largest share of overall development spending remains in-house, followed by spending on collaborative R&D with suppliers (Exhibit 2). Broadly speaking, companies’ spending appears aligned with their goals. Companies that focus on local innovation in emerging economies, for example, spend significantly more of their in-house R&D budgets in those economies, and companies focusing on global product platforms spend more of their in-house budget in developed economies.
One size does not fit all
The reasons given for pursuing emerging-economy R&D depend on the companies’ goals. Among respondents who say their companies focus on R&D for global platforms, 44 percent say the reason for conducting R&D in emerging economies is lower costs; among those pursuing innovation for emerging markets, 39 percent cite access to customer insights (Exhibit 3).
Forty percent of respondents say their companies adjust product features to meet the needs of emerging-market consumers, while just 16 percent say their companies develop entirely new products for these customers (Exhibit 4). Companies focusing on R&D for innovation in emerging economies are somewhat more likely to develop new products (24 percent), while respondents at companies headquartered in some of the largest emerging economies—notably India—are likelier still to say they’re developing new products for emerging-market consumers. Perhaps this is because the companies originated in these locales with offerings aimed at local markets, and today enjoy privileged access to them.
China and India are the most common regional choices for R&D destinations, respondents indicate, and Shanghai and Beijing are the cities that respondents are most likely to cite as current destinations for R&D investment (Exhibit 5). Still, this survey uncovered no single geographic hot spot for R&D in emerging economies; indeed, one-quarter of executives say their companies put R&D resources in geographies outside the ten leading destinations our survey asked about.
Managing R&D in emerging economies
Retention is the dominant approach to talent management in emerging-economy R&D (cited by 37 percent of respondents), followed by aggressive hiring from top sources such as competitors, universities, or other industries (26 percent).
Nonetheless, executives are, on the whole, not very pleased with the skills of their R&D managers in emerging economies, regardless of those managers’ nationalities (Exhibit 6). To be sure, respondents rate their R&D managers in emerging economies higher than managers in developed economies on local knowledge and understanding of their business environment. Yet on all the other management skills the survey asked about—including the two that respondents say matter most, leadership and communication skills—managers in emerging economies are seen to lag, regardless of the company’s focus or the nationality of its R&D managers in emerging economies.
Executives at companies focusing on local innovation are more positive about the skills of R&D managers than other respondents—though not by much—and executives at companies headquartered in emerging markets are also more positive than other respondents.
Perhaps because of their local knowledge, companies focusing on local innovation tap more nationals to lead their R&D projects in emerging markets: nearly half of the executives at those companies say nationals manage the majority of company R&D projects, compared with about one-quarter of executives at companies focusing on R&D for global product platforms. Overall, though, just 34 percent of respondents say that nationals manage the majority of their companies’ R&D projects in emerging economies. Moreover, respondents don’t expect much of an increase over the next few years.
Respondents at companies with annual revenues of less than $1 billion are more likely than respondents at larger companies to say they rely on local R&D managers—perhaps by necessity, given that they have fewer resources and lack the scale necessary to establish extensive global R&D footprints.
Given the broad dissatisfaction with managers in emerging economies, it’s unsurprising that most companies take a centralized approach to R&D decision making: 23 percent say their companies’ local offices select criteria to evaluate project portfolios, compared with 72 percent who say their central offices decide. Still, companies defer to local knowledge in some circumstances: 49 percent of respondents say decisions about choosing local partnerships are made locally, versus 45 percent who say these choices are determined centrally.
Another area that respondents agree about is the difficulty of knowledge sharing: 64 percent say their companies are no better than “somewhat effective” at it. The most commonly used collaboration tools are relatively old-fashioned, such as frequent telephone and video conferences (65 percent) and travel for face-to-face meetings (62 percent). Respondents at companies that are high-performing innovators are somewhat more likely to use central knowledge databases and global communities of practice to share information, in addition to telephones, video, and travel.
For companies contemplating a more global R&D footprint, the perceived differences in skills between R&D managers in emerging economies and developed ones should underscore the importance of not overlooking talent and organizational development at the expense of operational best practices during expansion. In our experience, the best innovators in emerging economies excel at both.
All the companies defined as high-performing innovators in this survey conduct R&D in emerging economies. In addition, a higher proportion of respondents say their companies are seeking growth in emerging markets than actually conduct R&D there. Companies would likely benefit from doing more R&D work in emerging economies.
The high performers otherwise differ little from others, suggesting that companies will benefit most from pursuing the tactics best suited to their goals for emerging-market R&D.
The tendency toward centralized decision making observed in this survey makes sense given the reported differences between R&D managers in emerging and developed economies. However, centralized training to improve those managers’ skills would benefit many companies—particularly against the talent-management backdrop of retention and aggressive hiring highlighted in the survey.