Technology

Brain Gain

Companies still like to follow the crowd but are widening their scope when planning R&D locations.
Tony McAuleyFebruary 15, 2007

In the late 1970s, still the early years for Sophia Antipolis — France’s first “technopolis,” located near Nice on the Côte d’Azur — the science park’s founder, Pierre Laffitte, asked a top official of Chase Manhattan Bank in Chicago if he knew of any companies that might be interested in setting up their research and development centers there. The banker directed Laffitte to a pharmaceuticals company called GD Searle.

Laffitte, a senator for the Alpes-Maritimes region since 1985, managed to persuade its then CEO, former U.S. defense secretary Donald Rumsfeld, who already had a hardnut reputation, that Sophia Antipolis was a cost-effective and strategically attractive place for Searle’s R&D, which had achieved fame for developing the first oral contraceptive, Dramamine for motion sickness and NutraSweet, the controversial artificial sweetener. Searle was sold in 1985 to Monsanto, earning Rumsfeld a personal fortune reported to be $12 million, while the firm’s Sophia Antipolis facility helped build a reputation for the fledgling science park as a world-class centre of research in life sciences.

Thirty years on, Sophia Antipolis vies with Cambridge Science Park, which was developed on land owned by the U.K.’s Cambridge University, as Europe’s answer to California’s Silicon Valley, the technology world’s Mecca.

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Laffitte says the initial dream was audacious. “We had this idea of creating a Silicon Valley, though we only had sun and an international airport,” he recalls.

But just as Silicon Valley’s self-nurturing culture was built on early successes like Hewlett-Packard, early winners at Sophia Antipolis have had a snowball effect. “It’s become easier now to win R&D business for Sophia Antipolis,” as the international scientific culture has become entrenched, Laffitte says. “Already there are 30,000 people from 60 countries with some kind of scientific or management capabilities, and in the bars and bistros you mostly hear people speaking English.” In a reversal of the Silicon Valley phenomenon, the industrial research that has built up in Sophia Antipolis has filtered through to the University of Nice to make it a world leader in areas such as WiFi technology.

Like a Moth

One company drawn to Sophia Antipolis in the 1980s because of this culture was Amadeus, a €3 billion internet-based travel company that is now its sector’s top R&D spender in Europe, according to the European Commission’s annual scorecard.

“The decision where to locate was driven more by cultural factors and the kind of company we wanted to create than by financials,” says Philippe Chérèque, senior vice president of corporate strategy at Amadeus, which was bought in 2005 by private equity firms Cinven and BC Partners for €4.3 billion.

“Originally, when Amadeus was set up [in 1987, as the global distribution system for Air France, Lufthansa, Iberia and SAS], there was a clear intention that the company should be truly multinational,” he says. “This was hard-wired into the original structure by having the operational headquarters in Spain, the development centre in France and the data centre in Germany. Once we had decided to spread the main locations over three countries, France’s strong technical educational system made it a good candidate for the development centre [and] Sophia Antipolis — France’s Silicon Valley — was the obvious choice because it offered the right infrastructure, environment and a pool of highly skilled potential employees working in the area.”

Amadeus employs more than 2,500 people in Sophia Antipolis and spends nearly €300m annually on R&D, which rose by almost 20 percent in 2005. Apart from its direct spending, it also attracts firms that work in related technologies and want to be close to large customers.

The economic contribution per head of R&D centers such as Sophia Antipolis is vastly disproportionate to that of manufacturing or service centers. So it’s no wonder that competition has grown exponentially, within countries as well as between them, to win R&D-focused business. In France, for example, the number of local authorities marketing themselves as “technology clusters” has mushroomed over the past two years to nearly 70.

Similarly, in the U.K., the traditional rivalries between the regional development authorities of the constituent nations — England, Scotland, Wales and Northern Ireland — now also include nine regional-development authorities within England itself.

Meanwhile, countries that used to be fairly sleepy about attracting R&D investment from multinationals have become more aggressive, says Roel Spee, co-head of IBM’s Plant Location International (PLI), which advises IBM and other companies on where to set up shop and monitors R&D and manufacturing FDI projects. Local German governments, for example, traditionally paid very little attention to this type of investment, largely because the country’s domestic firms were already so strong in R&D. But this is changing, partly because the economically struggling former east German states have been marketing themselves more aggressively. And while the U.K. and France have the lion’s share of R&D inward investment in Europe, former Soviet-bloc east European countries have been growing more quickly.

However, reaching the kind of critical mass needed to lure companies consistently is a long-term process, Spee says. Companies setting up R&D operations typically care less about cost and more about high-quality environments that will be attractive to the skilled labor they need. “That generally means proximity to the big metropolitan areas,” Spee explains. In the U.K., for example, there is a traditional advantage enjoyed by London and its surrounds. The southeastern region (which includes not only London but also Cambridge) has won 28 percent of the U.K.’s R&D FDI projects over the past three years, according to IBM-PLI. But Spee says that Scotland’s concerted effort means it’s gaining ground, winning 19 percent of inward R&D projects in the same period.

Talent Tide Pool

There are signs also that companies are taking a broader view when assessing their R&D needs. A recent survey by consulting firm Booz Allen Hamilton and the Fuqua Business School at Duke University in North Carolina found that the fastest-growing concern for companies looking to set up offshore facilities was their ability to tap into the widest available talent pool. “Our survey revealed that, increasingly, companies are offshoring to gain critical access to highly skilled scientific and engineering talent in China, India, eastern Europe and other emerging locations,” the Booz/Duke report found.

In a separate survey by Booz in December, the consulting firm found that companies which get the best value for their R&D spending aren’t necessarily those that spend the most in relation to sales but those that take a systematic approach to that spending.

This broader perspective and focus on value for money may have implications for the way companies choose their major R&D centers, and it may mean that the “cultural” pull of places such as Sophia Antipolis, Cambridge and even Silicon Valley will eventually diminish.

This is illustrated by a radical shift in the past few years in the way the Boeing Company looks at its R&D spending, according to Miller Adams, director of global technology ventures for the Phantom Works, the $55 billion aerospace company’s R&D arm, with an annual budget of about $2 billion (€1.5 billion), or 3.5 percent of annual revenue.

At the start of this decade, Adams says, the company was faced with an increasingly bewildering array of projects in which it wanted to participate at various levels. With no R&D facility outside of the U.S., the company reviewed its options in Europe. “We decided it was better not to focus on one physical location but to focus on skills available to us in different portions of the European landscape,” Adams says.

A lawyer by training, Adams brought a scheme to Boeing’s chief technology officer, Bob Kreiger, which would allow the company to take a systematic approach to its global R&D spending.

“We created a strategic partnership checklist, which we use on every assessment in order to make sure we have the same criteria under consideration for each potential relationship,” Adams explains. “The other thing is we’ve moved to a tiered level of technical engagement, from a simple technological transaction level to a full legal entity.”

An outcome of this process was the decision to set up its first fully fledged R&D facility outside of the U.S., the International Research and Technology Centre, which opened in Madrid in 2002. As Adams says, Madrid wasn’t a traditional hub for the aerospace and defense industries, but there were certain essentials when considering various sites — primarily the ability to attract and retain highly skilled people and to be within the EU in order to participate in certain programs.

Boeing weighed up incentive packages from Spain and other sites — tax breaks, land and property deals, and so on — but rejected them all, deciding instead on a site near Barajas International Airport in Madrid that had no special subsidies. Nonetheless, as Adams says, when it came to the final shortlist of three (Boeing won’t name the two that lost out), the overall cost of Madrid was as much as 50 percent lower.

Over the past three years, Boeing has organized its R&D into a series of layers, Adams says. The lowest level is consortium involvement, such as its participation in the Welding Institute in Cambridge, which has hundreds of companies across many industries delving into the latest in welding technology. The next level is strategic technology alliances, which are more expensive and are focused on a specific technology with a single entity, usually through a dedicated program at a university, but also, for example, Boeing’s involvement in the ING Renault Formula 1 racing team, which researches aerodynamics and composite materials. The level after that is a Boeing Technical Fellowship, where a Boeing scientist, typically, will concentrate on deeper relationships within a country. The final level is branded research and development centers, such as the Advanced Manufacturing Centre with Boeing, based in Sheffield, England, which develops advanced manufacturing equipment.

It is through this process, as Adams says, “our internal customers within Boeing are able to get maximum leverage on their R&D dollars.”

It also illustrates the way companies are seeking to get maximum leverage from the growing competition between the centers vying for those R&D dollars. Boeing’s great competitor, EADS, is going through a rationalization process in the UK to create a single corporate research centre. EADS officials declined to discuss the process in detail while it is still under way, though one said, “Suffice to say that nine [regional development authorities] were interested and presented to us. We’re looking to reduce this to a shortlist of three.” The final decision will be made later this year.

The importance of winning the centre is clear. As EADS’s chief technical officer, Jean Botti, pointed out in a speech at the U.K. Science Museum in November, aerospace workers contribute about £135,000 (€204,300) a head in the U.K., nearly four times the national average. Airbus U.K. is among the top ten U.K. companies based on R&D spend, at about £349 million a year.

Companies are aware that arbitrage for talent is becoming an increasingly sophisticated game, with more and more countries entering the fray. Marcel de Meirleir, the founder of IBM’s PLI and now an independent adviser, says there is a danger of stagnation in R&D development in Europe. “There is insufficient co-operation between universities and private companies, insufficient allowances of money for R&D from governments — companies are the major stalling factors in further R&D development in Europe,” as they consider other options, de Meirleir says.

Looking back, Laffitte says that, despite the success in creating a culture of scientific innovation at Sophia Antipolis, it lacked a major ingredient of Silicon Valley — a risk-taking culture. For this reason, he says, the U.K. and Israel have surpassed France and other European countries in raising venture capital. (See chart below.) “The lack of the risk culture is the biggest problem we have,” Laffitte says. “So far, we have solved it only partially in Sophia Antipolis.”

SEZ Who?

Economist John Kenneth Galbraith called India “a functioning anarchy” and since it began setting up special economic zones (SEZs) in 2005, something like chaos has threatened to afflict the country’s environment for direct investment.

The confusion may damage India’s reputation for R&D foreign direct investment, the one investment category in which India handily beats China. India draws 48 percent of Asia’s R&D projects compared with China’s 29 percent, according to IBM/Plant Location International’s database. India attracts R&D investment with its supply of bright, English-speaking workers at comparatively low wages, a sound legal system, and clusters of entrepreneurial companies that have sprung up around urban areas with world-class universities.

SEZs were meant to encourage more of this. They range in size from ten-hectare zones that host information technology, biotech manufacturing and research centers, to a 12,000-hectare multi-product zone being set up by Reliance Industries, India’s largest business conglomerate.

They offer tax breaks to companies and promise consistent power, transport, housing and schools. But they’re hampered by an outsized ambition imposed by the government, which has failed to jump-start the infrastructure development needed. Instead, it has handed that job to the private sector in the belief that tax incentives for development in small enclaves will provide the necessary catalyst.

Opposition to the way the SEZs are being handled include members of Prime Minister Manmohan Singh’s Congress Party, his finance minister, Palaniappan Chidambaram, and officials at the State Bank of India. In January, the government decided to suspend its SEZ program pending further consultation.

So far, companies have a mixed view of SEZs. “For multinationals, there’s certainly an upside to the SEZs,” says Mohandas Pai, head of human resources, education and research at Infosys, an Indian outsourcing company. “Costs are slightly higher, yet tax incentives more than offset these. And if the developers keep their promises, infrastructure will be more reliable.” But, he says, “the SEZs favor big-company investment and will discourage clustering of entrepreneurial companies that drive India’s R&D engine.” Pai also points out that the pool of talent associated with these smaller companies — about 5,600 of India’s 7,000 software development firms employ under 100 people — is the primary reason that companies like Microsoft, HP, Intel, Motorola, Nokia and many others have set up R&D centers in India. —Tom Leander