The New Idea Labs

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But outsourcing R. and D. can bring significant risks. The usual drawbacks in any kind of outsourcing are magnified in the multi-layered process of research. Concerns about the security of sensitive research is the biggest potential obstacle, according to Gartner analyst Iyengar. "Indians tend to be less security sensitive than the clients," he says. "It's quite common for Indians to share salary information with each other. In the U.S., this is absolute heresy." At wholly owned research centers, like those run by Intel and Microsoft, security is less of a concern, says Stefan Spohr, a vice president at consulting firm A.T. Kearney. "You build firewalls. You educate your employees. It's really no different than in the U.S."

As R. and D. goes global, other countries are also attracting attention, most notably China. Of the more than 200 foreign companies with research facilities in China, a handful are doing substantive research. About a month before Microsoft made a splash with plans to expand its 170-person Beijing research center by 20%, France Telecom announced last June that it would open an R.-and-D. facility in Beijing. Cisco CEO John Chambers announced plans to hire 100 people for a new research center by early 2006. The push into China is driven by more than human resources. Like India, China has a large pool of skilled computer scientists and basic-science researchers. China offers something else too: an entry point to 1 billion Chinese consumers. Motorola's researchers in China, for example, adapted the Chinese-language version of its A760 mobile phone. Other companies are doing only basic research, biding their time until they figure out how to break into the consumer market.

As more U.S. companies shift more resources to India and China--even legendary Bell Labs has a research center in Bangalore--some observers are worried about what it means for the U.S. economy. With companies able to tap into the best talent all over the world, "that's a plus because it adds to innovation," Hira says. But when growth abroad is substituted for growth here, the U.S. loses the happy spillover of investing in research--all those new firms in Silicon Valley, around Austin, Texas, and along Boston's Route 128. If Bangalore and Beijing become the new cradles of innovation, is that where the next Google will be born? "If it turns out you're pushing some of the R. and D. away, it builds up the world's economy, but not your own," Hira says.

The one advantage the U.S. still maintains is its culture of innovation. "Most Indians in the IT industry are programmers," says B.R. Sheaker, a recruiter for outsourcing companies in Bangalore. "They are taught to follow the rules. They lack the analytical ability to think independently, to be bold." That creative thinking led the U.S. to its dominance in software, and India and China are looking for ways to re-create that spirit. It's a complicated puzzle, and one that probably will not be solved in a lab. --With reporting by Matthew Forney/Beijing