The New Idea Labs

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To be sure, research and development is still just a sliver of India's tech boom. The bulk of the more than $16 billion earned by India's tech outsourcers in 2004 came from call-center work and low-end programming. Worldwide, only 0.3% of the $180 billion spent each year on developing software products goes to India. But, as with the earlier wave of tech outsourcing, R. and D. in India may prove to be too good a bargain to ignore: the cost of developing a basic software product in India is about $2 million, or just 40% of the cost in the U.S., according to India's IT industry group Nasscom. "We're likely to see an explosion in R.-and-D. outsourcing in 2005 and 2006," says Partha Iyengar, an analyst at the research firm Gartner who is based in Pune. If that happens, India's tech sector could enter a new, more mature phase of growth. U.S. and European firms would have a fresh way to nurture innovation. But they will also face the risks of laying the building blocks of their technological future far from home. "I really worry about R. and D.," says Ralph Wyndrum, a former research executive at AT&T and president-elect of IEEE, a professional group for engineering. If outsourcing erodes opportunities for engineers in the U.S., he says, "then you're not going to have the innovation that gives you a competitive edge."

Giants like Intel and Microsoft are bellwethers for other technology firms, but the seeds of globalized R. and D. were planted decades earlier. "The old model of research was Bell Labs'," says Ronil Hira, a professor of public policy at the Rochester Institute of Technology. Working on everything from basic science to prototypes of new products, centralized labs produced landmarks like the transistor, and every major corporation had such incubators. That changed over the past 20 years, as businesses started to shift their R.-and-D. money away from basic science in centralized labs (they would rely on universities for that) and toward design-and-development work done elsewhere--closer to production sites, by private research companies and eventually overseas.

More recently, the digital revolution narrowed the focus of R. and D. to software. From cars to cell phones to toasters, "a large part of the value of a project becomes embedded in the software," Hira says. So countries like India, with strong capabilities in software development, have gained leverage in attracting the work. Joining the tech companies congregating in Bangalore is a diverse group of manufacturers developing software for their products. Philips, the Dutch consumer-electronics giant, develops and tests software for DVD players and flat-screen TVs. General Motors opened a research lab, its first outside the U.S. Others without wholly owned R.-and-D. labs are parceling out discrete pieces of research to Indian firms such as Wipro Technologies, which increased its R.-and-D. business 55% last year. "[Clients] are not doing their core-competency product engineering with us, but there's a lot of work around it," says Wipro Technologies' CEO, Vivek Paul. For example, Wipro might handle the documentation and testing of new software or create the foreign-language versions.