Offshore Software R&D is provision of software development services by an external supplier positioned in a country that is geographically remote from the client enterprise; a type of offshore outsourcing. In this context, it refers to the offshore development phase of a software. The main reason behind the companies to use offshore software development services is the higher development cost of the local service providers. The global software R&D services market as contrasted to ITO and BPO is rather young and currently is at early stages of its development, but India is leading the world in this field.
India, Ireland, Canada and Israel are the four leading countries that currently control this business. According to Gartner Group, only these four countries are capable of scaling up enough to meet the demands of large-scale projects. Other offshore software development destinations include Eastern Europe (Armenia, Romania, Ukraine, Belarus, Serbia, Czech Republic, Poland, Hungary, Russia), Pakistan, Bangladesh, Nepal, Vietnam, Philippines, Egypt, Sri Lanka, Argentina and Bolivia.
Offshore R&D hubs
According to Gartner group's report, global cities are categorized into Tier I, Tier II and Tier III based on numerous factors such as the quality of infrastructure, global connectivity, and availability of human capital, in order to rank the best places to set up an offshore R&D location. The report concludes that cities like Yerevan, Bangalore, Mumbai, Bucharest, New Delhi, Hyderabad, Chennai, Pune, NOIDA, Gurgaon, Thiruvananthapuram, Greater Toronto Area, Ottawa, Montreal, Haifa, Tel Aviv, Dublin, Moscow and St.Petersburg would be the ideal places, and hence 'Tier I' cities to offshore R&D.
Outsourcing R&D has also become a solution to some issues facing certain Western countries, especially USA and Canada, even though they have traditionally tried not to lose their technological advantage to Asia. USA and Canada are producing little more than half the reasonable number of graduates in science and technology, a lot of the MS and PhD students in these countries are international students, North America has an aging population and lot of people in senior positions are either heading towards retirement or to renew their contracts with an R&D organization, both of these countries are falling behind in growth and business competitiveness, and the productivity gap between them and smaller industrialized nations continues to widen everyday. The solutions to these problems aren't possible in the short term in the Western countries, as even immigration is a long and cumbersome process, therefore it is beneficial for Western countries to outsource R&D to meet these challenges.
In 2003, a survey by Santa Clara University showed that R&D sector would be the next target of outsourcing. The same survey also mentioned that even as of 2003, many US-based companies were adapting to a new business model where they would have the ownership of the intellectual property, but the outsourcing vendor would be given the contract for development with well defined goals in a certain period of time. Outsourcing research operations is currently a small sector in the offshoring business; however, it is growing very rapidly. As of 2006, India alone was getting 25% of new global investments on research. Hundreds of major multinational corporations have set up R&D centers in India, the list of such companies include several big names such as Oracle Corporation, Intel, Adobe Systems, STM, SAP, IBM and Microsoft. For a lot of these companies, their facilities in India are their largest facilities outside USA or Europe.
India's software exports are growing by more than 30% per year, which has triggered protectionist measures on the part of US government, especially the IRS, which recently passed regulations to make outsourcing research harder. However, these regulations don't forbid outsourcing research, and many Western corporations like Eli Lilly, P&G, Henkel, Dow AgroSciences, Novartis and Indian scientists are using web as a forum to easily get around such regulations lawfully. Many R&D contracts have been given to Indian universities and labs in this way, and lot of research solutions are patented during this process.
At the same time, there is a shortage of PhD's in India, possibly due to brain drain or because of lack of financial resources. It is estimated that very soon there could be a 25-30% gap between supply and demand of PhD's in India. However, increased FDI and creation of lot of well paid job opportunities are encouraging enough to motivate more Indians to opt for pursuing PhD. Moreover, many Indians have recently moved to India from Silicon Valley, and a lot of them are technically specialized and hold advanced degrees from world's premier institutions, which considerably enrich India's workforce.
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